Air New Zealand chief executive Greg Foran explains why fares are going up. Video / Supplied
Air New Zealand is enjoying what analysts describe a "yield bonanza" with reduced competition and strong demand.
This has been helped by an increase in domestic airfares of up to 20 per cent in the past month, exacerbating the scenario where prices for relatively short hops around the countryare more expensive than international airfares on sale.
While there's a long list of reasons why this is the case, travellers can get from Auckland to Honolulu on October 16 for $497 on an all-inclusive, tactical fare on Hawaiian Airlines while a one-stop flight to Timaru on Air NZ the same day starts at $622.
If you opt for a fully flexible flight to the South Canterbury city, this adds another $60, although fares fall the following week after the school holidays.
And a passenger flying to Gisborne this week at short notice said she was surprised at the $797 (fully flexible) return fare, far higher than what the frequent flier to Tūranganui-a-Kiwa says she had paid before.
Meanwhile, Air New Zealand is selling fares to Niue and New Caledonia for as little as $249 one-way and its all-inclusive fares on sale now start at $553 to Honolulu. A spokeswoman said some lead-in fares are even less.
Waikiki Beach in Honolulu is a popular spot with NZ holidaymakers. Photo / Grant Bradley
Yield measures the average fare per passenger per kilometre and Air New Zealand generally enjoys healthier yields on its domestic network where it has less competition than on its international routes.
It competes against Jetstar on key main trunk jet routes but the Australian low-cost carrier is operating at only about 60 per cent of its pre-Covid capacity.
Besides that, Air NZ competes against some small regional carriers and for shorter journeys, cars.
The airline has said the steep increases in domestic prices was to cover rising wage, fuel and supplier costs.
Chief executive Greg Foran has said it wasn't a matter of making up for steep losses during the pandemic.
It has turned those around now and is operating profitably, last month announcing a pre-tax earnings forecast between $200 million and $275m for the current half year.
An Air NZ spokeswoman says comparing one seat on a particular day or flight isn't reflective of the whole route.
As an example, the lead-in fare for those booking early on an Air New Zealand domestic flight is between $59 and $99 depending on the route. A lead-in fare with Air New Zealand from Auckland to Honolulu is $378.
Prices reflect both higher costs and huge demand for travel, she said. The lead-in fares are selling out quickly, so for close-in travel passengers see the price of the last seats on a flight.
Airlines price the last seats at a higher rate to make sure there are still a few seats available for customers requiring urgent travel.
The cost of operating a smaller aircraft on a short route is proportionately higher than a larger aircraft on a longer route and there are fewer seats to sell and spread the cost.
''Our advice to customers is to book early to get the best possible fares.''
A phenomenal start
Forsyth Barr analysts Andy Bowley and Paul Koraua said in a research note that the airline has had a ''phenomenal'' start to the current financial year, with elevated passenger yields and strong forward bookings accelerating its return to above-average levels of profitability.
''The guidance implies Air (NZ) will achieve its fourth highest first half PBT (profit before tax) in its entire history, one year on from its worst first half underlying result!''
The airline's management cautions against extrapolating its first-half earnings guidance into the whole of the financial year as yields are likely to fall as industry capacity returns.
On North American routes Air New Zealand faces a surge of competition this summer including American Airlines, Air Canada and United Airlines.
The analysts say near-term earnings risk is to the upside from the prospect of higher for longer yields, though warn that fuel prices, which have come down from near record highs earlier this year, could go up again and remain a risk.
Stafford Street, Timaru. Airfares have soared around the country. Photo / Mark Mitchell
''Robust demand and constrained supply have created an enviable yield backdrop for airlines. So much so that Air (NZ's) current revenue generation is back to pre-Covid-19 levels on reduced capacity.
The airline's revenue per available seat km (Rask) is up 40 per cent for long-haul services in July/August as compared to the same months in 2019, before the pandemic. Rask is up 31 per cent for short haul.
The analysts say Rask is particularly strong on Tasman and North American routes, where its market positions have been temporarily strengthened and industry capacity is constrained.
While Virgin Australia remains off the Tasman, Air New Zealand and Qantas face only competition from fifth freedom carriers such as Latam and China Airlines.
The analysts say airline yields are heavily influenced by industry capacity.
They expect overall industry capacity, on both short and long-haul international services, to remain constrained through the current financial year but should gradually increase through the year and into the 2024 financial year.
This means the airline will be exposed to increasing yield pressure over the next 18 months and Rask will trend back towards pre-Covid levels over this timeframe.
