KEY POINTS:
Air New Zealand's plan to spend $50 million putting personalised inflight entertainment systems in all its A320 and 767 planes is a sign the once-troubled Tasman route is now profitable, analysts say.
The airline said yesterday it would upgrade the entertainment systems in 13 A320 and five Boeing 767 aircraft.
That means all passengers on the Tasman and Pacific Island flights will now have back-of-seat systems.
Chief executive Rob Fyfe said the upgrade was the first initiative sparked by the review of domestic and Tasman operations - which was a response to the failure of the proposed Tasman code-share agreement with Qantas to get regulatory approval.
When the code share was being debated last year both Qantas and Air New Zealand indicated that the Tasman route was unprofitable.
Forsyth Barr analyst Rob Mercer said the planned upgrade was an indication that "they are actually making a reasonable return now".
The move would give Air New Zealand an edge over Qantas and could potentially grow its market share, he said. Emirates offers full entertainment services but its flights are less frequent.
"Qantas is obviously going to have to upgrade its service," Mercer said. "It still operates big screens in the middle of the aisle."
Deutsche Bank analyst Jason Bloom agreed the upgrade indicated the route was now profitable.
"It is certainly break-even at least and it's changed around from where it was a few years ago."
But the whole airline sector was now doing much better, Bloom said. "It's very hard to lose money in the current operating environment."
Air New Zealand shares have soared from a record low of $1.08 last August to highs above $3.10 this month. They closed down 3c yesterday at $2.90.
One of the issues Air New Zealand needed to grapple with as part of its Tasman review was whether to move up to offer a full-service product on all flights or cut back towards being a low-cost carrier.
Bloom said yesterday's announcement suggested the former.
Currently there were inconsistencies because the airline operated full service 777s on the Tasman as well as the A320s, he said.
"So people who book an Auckland-Sydney return may have back-of-seat entertainment and fabulous product for one leg of the journey, and then they come back on the A320, which is quite a different experience."
It was better to be either consistently low-cost or consistently full-service, Bloom said. "They've obviously taken the decision to add frills and hopefully increase yields and hold a competitive position over Qantas."
Fyfe said a wider review process was continuing.
Set for completion before Christmas, it would "determine what the airline needs to do to continue to improve and stay ahead of its competitors over the next three to five years".
Bloom said he was not expecting anything too dramatic.
"It's likely to be more of an evolution ," he said. "A few years ago they were in trouble and they had to trim costs. Now they are likely to be focused on the revenue end. Less cost cutting, more increasing yield."
In April, Air New Zealand completed a four-year programme of cost cutting and restructuring that is expected to save the airline about $320 million a year. Analysts believe that Qantas will look to expand its low-cost Jetstar service on the Tasman.
"Air NZ appears to have decided it wants to lift itself a little bit above the low-cost carriers," Bloom said.
There has also been speculation that Air New Zealand could offer premium services under its own brand and expand its low-cost Freedom brand on the Tasman.
Bloom said he was not convinced that there was much scope for that.
"New Zealand's probably too small a market to have two brands. Freedom is run from secondary ports; it doesn't go head to head."
HAPPY FLYERS
* Personalised entertainment systems for all passengers on Tasman and Pacific flights.
* $50 million will be spent upgrading A320 and 767 planes.
* Long-haul 747s and 777 planes already have similar systems.
