Air New Zealand says increasing no-frills service an option

9.15am

Air New Zealand is considering introducing more cut-price services in its bid to tackle competition and return to profit.

However, unions are warning that the airline will run into problems if it tries to do so, alienating business travellers and disadvantaging its workers.

Air NZ chief executive Ralph Norris told Radio New Zealand today that it was considering the budget airline option, offering a no-frills service, among other ideas.

Air NZ already runs a budget trans-Tasman subsidiary, Freedom Air, which it created to counter the threat from Virgin Blue when it first arrived in Australia.

"The low-cost option is one that is under consideration," Mr Norris said.

"Certainly this is not an easy decision to make, there's a lot of complexity and no decision has been made in regard to the strategy going forward. We're very much building the airline, not destroying it."

Analysts believe Air NZ will need extra cash to head off Qantas from increasing its share of the profitable domestic market that has sustained the struggling airline.

"We're very conscious of the fact that it's not only a short-haul airline we're operating, we're operating a long-haul airline as well, and both of those have to dovetail together.

"At this stage ... it's very important we don't signal exactly what our strategy is to our rivals. At this point we haven't brought to the board a recommendation."

Mr Norris said he agreed with International Air Transport Association chief economist Peter Morris that slashing seat prices rather than cutting back flights would exacerbate the airline's problems.

"I think that one of the problems we have at the moment is that yields are too low, because fares are much lower than they really should be," he said.

"There's been a drop-off in travel of all sorts post-September 11. We are seeing a rise in traveller numbers again, so our worse fears about how long it will take to recover are probably not going to be realised.

"I think the recovery will be quicker than anybody anticipated. But there is the issue that a lot more capacity is suddenly coming back into the marketplace.

"We've got to make sure we don't end up in a situation such as happened at Ansett -- locked in a high cost structure, not able to move very quickly, because of union arrangements etc that saw it unable to move its cost base down fast enough to compete in a very competitive environment.

"We have to make sure that Air NZ has the flexibility to enable us to respond to competition."

Air NZ was in talks with Virgin Blue about linking up to feed its passengers into Virgin's Australian routes, and vice versa.

Mr Norris said in the National Business Review today that a new short-haul strategy, including domestic and southwest Pacific services, would be in place within eight weeks, aiming to make those operations more efficient, cost-effective and appropriate to customer needs.

He said it was difficult to compete with Qantas in New Zealand, which had generally lower fares, because its rival was "prepared to lose money while being subsidised to gain market share".

Earlier this month the 82 per cent government-owned airline reported it was still haemorrhaging following a US$376 million December half year loss and it admitted its balance sheet remains shaky.

Air NZ is still mulling an option of a further US$150 million government injection on top of the US$885 million already paid and that would be in conjunction with a rights issue.

The board was confident the airline would return to a profit within 24 months and it would survive that period of loss.

The airline planned to cut its staff to 8800 from 9600, and raise cash from the sale of non-core and non-performing assets such as Jetset and nski.com, the company's South Island skifields.

Council of Trade Unions secretary Paul Goulter said it would be a mistake for Air NZ to turn itself into a budget carrier. He told National Radio that such a move would probably hurt the Air NZ brand and send business passengers packing.

The union advocated expanding the Freedom Air subsidiary instead.

Air NZ shares closed yesterday at 33c.

- NZPA