Air NZ fare move seen as a long shot

By CHRIS DANIELS aviation writer

Aviation experts are casting a sceptical eye over Air New Zealand's plans to stimulate a 20 per cent increase in the national aviation market with its new low fares.

It hopes the revenue drop caused by the lower fares will be offset by having more people in each plane, along with savings such as no inflight meals and no airpoints for the cheapest ticket classes.

An aviation analyst with JBWere, Peter Sigley, said Air New Zealand had looked at other international airlines, including Air Canada, that had combined budget models with full-service fares.

"I don't think them migrating to this sort of model was a choice thing at the end of the day," he said. "Ultimately, in a competitive sense, they had to go there."

Sigley said very few airlines around the world generated an adequate return on capital invested, and Air New Zealand's domestic service was lucky to be one of them.

Since last year's demise of Qantas New Zealand, it was probably earning excess returns and had now come up with a more "sustainable and stable business model".

"Air New Zealand is all about its domestic business. The first thing you do is look after the most valuable part of your business, and that is domestic," said Sigley.

Ian Thomas, one of the directors of the Sydney-based Centre for Asia Pacific Aviation, said Air New Zealand would have to keep a very tight rein on costs if it wanted the new Express model to succeed.

The Air Canada business model of having a budget service running alongside a full-service airline had not been a success. Its system had been slightly different, with a proportion of seats on each plane set aside for the budget ticket-holders.

"There's an assumption built in that everyone can grow their market the same way that Southwest or Ryanair have. I think that assumption is presuming too much for certain markets, particularly the smaller markets."

He said one problem for full-service airlines that had tried to set up their own budget service was the loss of premium business customers to the new service. What was originally set up to compete with rivals ended up destroying the most lucrative part of an airline's own business.

Thomas said the growth in travel that Air New Zealand expected was very ambitious. Much growth stimulated by low-cost airlines was once-only travel by first-time flyers.

He was sceptical about the possibility of a 20 per cent stimulation of the New Zealand domestic market.

"You may get that on some routes, but whether you'll get it across the network is highly unlikely ... I really don't believe there is 20 per cent growth in the New Zealand market, certainly not as it stands."

One industry player agreed that only extremely aggressive cost cutting by Air New Zealand could make the new Express model work.

Passengers noticed the removal of a meal - but this was small beer when it came to overall cost cutting.

Budget airlines succeeded by having a low ratio of staff members to planes, something that Air New Zealand would find difficult.

It earned mostly budget-priced fares from passengers, but needed money to keep the high staff numbers necessary for the full service to be part of the airline.

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