Billion-dollar payoff: New Zealand’s place in Southern Link between Asia and South America

A new report finds New Zealand’s key strategic role in a Southern Link global air trade route that could be worth billions of dollars – and the pandemic has helped prove the concept.

Rapid growth in trade between Asia and South America is opening the door for this country as an aviation hub for travel and e-commerce trade as the world recovers from Covid-19.

An NZIER report for the New Zealand China Council (NZCC) says the need for special flights during the pandemic has helped prove the concept of the Southern Link.

The link was proposed by the NZCC in 2019 as a way for New Zealand to capitalise on the growing air trade links by making New Zealand a major conduit for the flow of people and goods between Asia and South America.

Transiting via New Zealand offers the shortest air route between many major cities on the two continents, along with time zone advantages and efficient hubbing and servicing.

The report identifies direct benefits of $1.87 billion for New Zealand’s e-commerce, tourism and education sectors over a decade, and indirect benefits through new employment and construction of hubbing infrastructure.

NZ China Council executive director Rachel Maidment says the Southern Link places New Zealand in the middle of a global value chain for the first time, generating growth in trade, tourism and export opportunities.

“Fully realising these benefits will require close co-ordination between business and Government, but the value is clear and the foundation of the opportunity is already being built,” Maidment says.

Last year, the route was used by Latam Airlines and Aerolineas Argentinas to transport emergency medical equipment and PPE, and other businesses are now planning to leverage the competitive advantages of routing e-commerce traffic from Asia to South America via New Zealand.This is the first time that Latam has touched down in Shanghai.

French and Swiss Post e-commerce and mail carrier Asendia has been trialling the Southern Link route.

Its Oceania managing director Dene Green says the route offers clear time advantages, with less congestion and smoother logistics.

“There’s been huge growth in demand from cross border e-commerce between China and South America in the past couple of years. Moving goods through New Zealand has allowed us to exceed our KPIs and ensure faster and easier shipping to our customers.

“The Southern Link places New Zealand in the middle of a global value chain for the first time, bringing businesses closer to market and unlocking opportunities,” Green said.

Maidment said while the Southern Link is still in its infancy, the route illustrates how New Zealand can help the economic recovery of the wider region in the post-pandemic world.

“Increased interconnectivity will generate real value and growth for Asian, South American and New Zealand businesses. The Southern Link is exactly the kind of initiative we need to help build a positive economic environment in the post-Covid era,” Maidment says.

The Covid-19 pandemic has clouded the ambition and opportunity for the development of the interconnections required for the Southern Link to fully operate.

Pre-pandemic most airfreight was typically carried in the bellies of passenger aircraft supplemented by dedicated air freighters on high-value routes (mostly one-off flights).

With very few passenger planes flying internationally due to border closures and lockdowns, air freighters are the main source of airfreight. This has had the impact of increasing the volumes and prices of freight going by air freighters. Prices increased by three times early in 2020 but have since declined somewhat over the course of the year.

Despite air passenger services being in disarray, the air freighter business has been booming.

This demonstration effect of flying the Southern Link plus trial runs by logistics companies before Covid-19 lockdowns suggest that the speed and the price per kilogram are competitive with alternative routes.

Tourism

The report says that before the pandemic visitor numbers to New Zealand were expected to grow significantly.

Nationally, visitor numbers were forecast to continue to grow to approximately 5.1 million by 2025 (from 3.8 million in 2018).

The Covid-19 reset will change these forecasts dramatically.

And there is huge uncertainty about:

• Who will travel? What countries will connect with New Zealand? This will depend on the appetite of the sending and receiving nations and the assessment of Covid-19 related information in each country.

• When will travel occur? Issues around “smart” quarantine, vaccine effectiveness, and attitudes to risk are clearly important. This is hugely uncertain and will depend in no small way on the ability of public health institutions to develop efficient solutions to mitigate these issues.

• What airline services will return to the market? Again, it is uncertain as to how airlines will respond, given that profitability of airlines has been questionable for decades.

Potential responses are:

• Airlines will shrink, and consequently, services will as well. Issues around climate change and not fully pricing in airline externalities will ensure that shrinkage will become permanent. There was some evidence of switching to other forms of transport in Europe prior to Covid-19.

• Airlines will respond by cutting fares and enticing customers back into the market. While airlines will suffer significant short-term losses, they will be back to business as usual. There is some evidence that this is occurring in China.32

• Airlines will more resemble shipping companies that, through government-owned banks, support national carriers. In this situation, airline companies will fiercely compete for market share. Also, route selection will become more overtly political (although many would argue that this has been the case since the signing of the first air services agreements).

• A degree of irrational behaviour by airlines, particularly state-owned airlines. They may use predatory pricing to ensure they grab market share in the short run. This occurred after the Global Financial Crisis (GFC).

• A good time to enter the airline business. With planes, airline crew, executives, and all other activities associated with airlines being under-employed, the barriers to entry to the airline industry have never been lower.

The report touches on a big caveat about certainty and timing of a pathway for growth.

”More clarity on the Covid-19 situation in South America and further understanding of how the Covid transmission risks can be mitigated is vital. Until these issues can be further understood, it is difficult to see progress in establishing a regular passenger air service link between New Zealand and South America.”

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