Air NZ last year reported its second-best ever profit and high airfares have driven revenue. Domestic fares are going up agan. Video / NZ Herald
Domestic airfares are heading up on Air New Zealand with the airline’s boss saying it’s time for what is traditionally been a powerhouse of its business to perform better.
The airline’s chief executive Greg Foran said there was no percentage figure target set and revenue managers would take a “surgicalapproach” to increasing prices. He also rejected suggestions it was a bad look a day after calling out Auckland Airport for soaring aeronautical charges.
After steep airfare increases as the country emerged from the depths of the pandemic Foran said domestic fares were down slightly on this time last year.
“Our domestic fares versus a year ago are actually fractionally down when you look at the forward booking curve, but our costs are up considerably,” he said following the release of the airline’s interim result which showed pre-tax earnings tumbling by 38 per cent to $185 million.
The outlook for the remainder of the financial year is gloomier with a total pre-tax earnings between $200m and $240m, meaning at the lower end the airline would make only $15m in the current six months.
On fares, Foran told the Herald the airline made the decision “to ensure that, what we didn’t do was penalise customers, and keep them on board, but now it’s time to start moving away from absorbing all those costs to sharing them.”
The airline is also looking ways of increasing ancillary revenue on domestic flights.
For the six months to December 31, operating costs across the business rose form $2.4b to $2.9b. As flying increased (capacity was 29 per cent up on the same time last year) the airline’s fuel bill was up form $754m to $879m and labour costs were up from $687m to $801m as staff numbers increased about 14 per cent to 11,650.
Inflation had “challenged productivity efforts”, with approximately $100m of additional non-fuel operating costs. This represented an increase of around 5 per cent for the half and is on top of an increase totalling 15 to 20 per cent across the past four years
Foran said the airline had faced increased landing charges of about 31 per cent in the past four years, air navigation services up about 25 per cent and parts and materials up 26 per cent.
The airline had sacrificed more than $40m in profit by improving customer service, including boosting call centre resources, leasing aircraft to cover for engine maintenance, improving bag tracing and food and beverage on planes.
“We’ve made a deliberate decision to ensure that we completely nailed our customer experience. And give and take - we have.”
The airline’s own surveys showed customer satisfaction had increased to 84 per cent from 80 per cent and contact centre wait times had fallen from 24 minutes a year ago to five minutes. On time performance had increased from 74 per cent to 79 per cent and the number of lost bags had fallen from five to three per 1000 pieces of luggage.
“There’s a whole series of decisions here (to) give our customers a good run (and) our staff a chance to win and that’s what we’ve done. And now we’re going to have to pass, not all of these costs on, but a few of them on.”
Engine problems on Air NZ A321NEOs will ground up to five planes at a time during the next 18 months.
He said pricing was a balancing act, especially as domestic business and particularly government demand had softened for some time.
“What you don’t want is you don’t want to take your demand off,” he said.
The airline couldn’t charge what it liked for domestic fares even though it has around more than 80 per cent of the market as it faced competition from cars and on some routes, Jetstar.
Asked if the optics of increasing fares at a time when it was criticising fees at Auckland Airport were wrong, Foran said unlike that company Air New Zealand did face competition or the prospect of competition and that’s why fares went up and down.
“We know that what we’re going to get from Auckland Airport is that they only going to go in one direction.”
Stats NZ data shows after high-demand pricing around the Christmas break, domestic travel prices fell 12.2 per cent in January but they were also down by 5.2 per cent across the year.
International air travel prices fell even more dramatically - off by 21.6 per cent monthly and by 31.5 per cent across the year.
Where the airline is hurting
Foran said that Air NZ was facing an onslaught of competition on its North American routes.
He said on an analysts’ call that while the Pacific Islands and Tasman were performing well for the airline and Singapore and Hong Kong, Bali were strong, North America is much tougher.
This summer there were 28 flights a week between Auckland and Los Angeles, the most ever.
Premium cabin prices had held up but economy prices are bordering on a “bit ridiculous,” he said.
“Were not going to play that game but we’ll wait everybody out. The US is our North Star, we’re committed, we’ll just take a breath.”
The competition environment may change later this year as American carriers rethought their networks and flights to China built up.
Air New Zealand also revealed today it is facing another delay in the first of its eight new Boeing 787 Dreamliners. It delayed the order for a year in 2022 but had hoped for the first of them to be delivered late last year, then late this year. They are not due to arrive until mid-2025.
But the retrofit of the first of its existing 14 Boeing 787s will begin in the middle of this year and it planned to have the aircraft in service from the end of the year.
Shares in the airline were trading at 81c a year ago and this afternoon edged up 1c to 62c.
Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.
