Express ticket out of penury

By DANIEL RIORDAN

Air New Zealand is confident its stripped-down domestic look will hasten its return to profitability, but the acid test will be how many flyers seeking meals and business class switch to Qantas.

Chief executive Ralph Norris said the cost savings from the changes, which include 200 redundancies and simplified booking and purchase procedures, would outweigh any revenue reduction from lower fares.

Norris said in March that he expected the airline to break even in two years, but yesterday brought that target forward, without saying by how much.

The airline is also expanding its transtasman and short-haul international services in a three-phase plan to be implemented over the next 18 months.

The first part involves the removal of business class and meals on all domestic flights in return for lower fares.

The Boeing B737-300s that ply the main trunk route will carry 136 passengers instead of 122.

The new service, which has the working title of Air NZ Express, starts on October 27. The airline is keeping mum about the size of the fare reductions until July.

Part two of the plan involves the expansion of budget subsidiary Freedom Air's transtasman operations to provide services to Queensland from Auckland, Wellington and Christchurch.

These services will also begin on October 27, but seat sales will start in July.

An additional Boeing B737-300 will be bought. Freedom's domestic operations will be unchanged.

In the third part of the restructuring, Air NZ's international short-haul services across the Tasman and to the Pacific Islands, and its international long-haul services (Asia, Japan, the Americas and Europe), will be expanded from November.

Other international airlines are also expanding their services as world travel picks up.

The removal of business class will not be as big a revenue loss as may be thought at first blush.

Air NZ says on average only 25 per cent of the 14 business class seats on each plane are paid for - the rest are filled by forced upgrades caused by economy class overspill and the redemption of frequent flyer points.

The loss of meals might be more off-putting for travellers who could already take advantage of cheaper main trunk fares from Qantas, said Macquarie Equities analyst Arthur Lim.

It will be interesting to see how Air NZ markets its Express services compared to Freedom, as well as how closely the two are priced.

Chief operating officer Andrew Miller said Freedom was "value-based" and Express would be "value-based plus".

Tea, coffee and water would be available, but Miller was unsure about the airline's much-loved hard-boiled lollies.

JBWere aviation analyst Peter Sigley said the changes were expected and logical, and represented a sustainable and flexible business model.

The airline could easily manage the execution risk of the strategy, he said.

"As a corporate response, it's a great way to keep Qantas out."

Lim said the acid test would be the response of competitors such as Qantas and, potentially, Virgin Blue and Jump Airlines.

It made sense to postpone final decisions on transtasman services as it gave Air NZ room to respond to those competitors, he said.

Shares in the airline bounced 4c to 62c - their highest level since September last year - before the announcement, which was made just after the market's close.

* Air NZ's average load factor for April was 77 per cent, compared with 73 per cent a year earlier. The increase was largely the result of lower capacity, down 9 per cent, compared with passenger numbers that were 4 per cent lower.

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