Air NZ told full service time is up

By CHRIS DANIELS

Air NZ should try to work out an "exit strategy" for its domestic and Tasman air services, one of its former top executives has told the Commerce Commission.

Ray Webster, now chief executive of easyJet - Europe's biggest low-fare airline - told the commission yesterday that the days of big, full-service network airlines such as Qantas and Air NZ were numbered.

The commission is holding a conference as part of its investigation into whether Qantas can buy up to 22.5 per cent of Air NZ's shares, and the airlines together set up a joint venture which would control all their flights to, from and within New Zealand.

Speaking via a video link from the UK, Webster told the commission that low-cost airlines such as easyJet would soon dominate the short and medium-haul air routes.

The best an airline such as Air NZ could hope for was to find a way to succeed in the long-haul "point-to-point" business.

Air NZ's "express" service would never be an effective competitor to a true value-based airline, he said, as it had too much "baggage".

Instead of trying to compete on a domestic service with such airlines, it should concentrate on a "slow retreat in about 10 years" and work out how to make money in the long-haul aviation market.

Commissioners asked Webster about the sort of barriers easyJet had faced when trying to compete in Europe against full-service airlines. Apart from one example of Dutch airline KLM "dumping" capacity, Webster said there had been none.

The big airlines could, by heavily discounting fares, delay the full expansion of a value-based airline, but stood no chance in the long term against a well-funded, value-based airline. "You can slow down the rate at which you're depleting shareholders' wealth, but you will not stop it - you cannot stop a low-cost airline," he said.

A big part of the argument being put forward by the two airlines is that any anti-competitive features of their alliance would be diminished by the arrival of a low-cost airline, such as Virgin Blue, which is expected to start flying across the Tasman and domestically this year.

Paul Edwards, general manager of strategy and planning for Qantas, said the airline would have to match Virgin's fares on the Tasman and on domestic New Zealand routes.

Air NZ's chief operating officer, Andrew Miller, said the Tasman and New Zealand domestic routes were ideal for a value-based airline. Anywhere that had a population of around 50,000 was suitable.

There was a strong customer acceptance of such airlines, said Miller, who told the commission that the idea "played to the Kiwi psyche". Companies such as The Warehouse and Briscoe's captured retail growth at the expense of established players.

The acting chairwoman of the commission, Paula Rebstock, said she wanted to know not only if another airline could set up operations in New Zealand, but if it could survive in the face of what would be "stiff competition" from existing players.

Denese Bates, QC, another commissioner, asked Miller if Air NZ, by introducing its low-fare "express" model, had pre-empted the arrival of an airline such as Virgin Blue.

Miller said that Air NZ had delivered what its customers wanted. It now understood the market better.



The commission, which in April issued a draft rejection of the airlines' alliance plan, is hearing submissions on the scheme for the rest of this week. It is due to make a final decision by the end of next month.