KEY POINTS:
Air New Zealand is still considering whether to launch its own cut-price domestic airline as Australia's discount airline Virgin Blue today announces details of its entry into the market.
Next Tuesday Air New Zealand will deliver its annual result but it is not expected to have made a decision on whether to launch a rival cut-price carrier by then.
Air New Zealand management would not comment yesterday.
But it is understood that the airline has had a project team in place for several months to assess the viability of a cut-price airline.
That team is likely to want to digest the extent of Pacific Blue's ambition and factor that into its calculations before making a final decision.
News of Virgin Blue subsidiary Pacific Blue's entry has put a big dent in the Air NZ share price. Shares were down as much as 19c yesterday - falling below the $2 mark for the first time since February. That followed a 21c drop on Tuesday.
Air NZ eventually closed down 14c at $2 after strong monthly operating statistics prompted a minor rebound.
Aviation analysts described the sell-off as an overreaction.
"Yes, [Pacific Blue] is a negative for Air New Zealand but the market reaction looks a bit overdone," said Jason Bloom at Deutsche Bank.
"Virgin is not going to come in with a whole heap of capacity because there just isn't that much capacity around."
Pacific Blue targeted the leisure market while Air NZ made most of its profits from business travellers on the Auckland to Wellington and Christchurch routes.
Those were the travellers who were prepared to pay full price for tickets but expected seats to be available at short notice.
Virgin would not be able to compete with Air NZ on the frequency of its flights, Bloom said.
That was one of the reasons Qantas had not done well in the New Zealand market, he said. The Australian airline has been scaling back its New Zealand operations for the past year.
"Virgin clearly see an opportunity but it's not going to have a significant impact on Air New Zealand's [financial] numbers," he said. "There is some negative sentiment. A third player in a market is never great. But they're going to come in at the low end of the market and target a niche."
The percentage of profit made by Air NZ in the low end of the market would be small, Bloom said.
Air NZ does not disclose how much of its revenue comes from the domestic part of its business.
Forsyth Barr analyst Rob Mercer said he thought the share sell-off was a symptom of the jittery market environment where any sign of bad news was spooking investors.
Because the Government holds about 80 per cent of the stock it is thinly traded and can rise or fall quickly on relatively low volumes.
Mercer agreed that the arrival of Pacific Blue would not be material to Air NZ's earnings.
"You can't just win the game on a price point," he said.
Frequency and the ability to offer a wide range of pricing options were going to remain in Air NZ's favour, he said.
"There is already a complex arrangement of promotions and deals."
Both analysts believed Air NZ remained in good shape to deliver strong profit growth in the next few years.
Monthly trading results for July released yesterday showed another month of strong passenger growth for the airline.
There was 6.7 per cent growth in passenger numbers compared to the same month last year. Long-haul operations experienced a 10.8 per cent jump on the same month a year earlier.
Passenger load factor, a measure of how full planes are, was 82.2 per cent.
"Air New Zealand is in a good space - they're going to announce a good profit, the new product is working for them and they are getting good yields," Bloom said.
Unlike Qantas and Virgin they also had their capital expenditure for the next five years in place, he said.
THE GOOD NEWS
* Air New Zealand last month:
* Passenger numbers up 6.7 per cent growth compared to the same month last year.
* Long-haul operations up 10.8 per cent.
* Passenger kilometres up 11.4 per cent.
* Passenger load factor of 82.2 per cent.
