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Air New Zealand chief executive Rob Fyfe says the airline's move to cut fares is partly a move to deflect the threat posed by Pacific Blue owner Sir Richard Branson, who wants to set up a domestic service in New Zealand.
The airline said yesterday that it would cut its cheapest domestic airfares by as much as 26 per cent to entice more travellers.
Fyfe said Sir Richard appeared "vague about his commitment" to set up a domestic service in the next year, but Air New Zealand still needed to be one step ahead of the competition.
"If we are not offering a top product with competitive fares, we are equally putting out the welcome mat to a new competitor."
Deutsche Bank analyst Jason Bloom said the fare reductions sent a clear message to potential competitors that Air New Zealand was willing to drop fares "and it won't be easy to come in and compete against it".
It was also a timely message to the public that the airline was continually willing to make travel more affordable.
The cheapest flights between Auckland and Wellington will drop 23 per cent and the most expensive fares, usually bought at short notice after all cheaper seats have been sold, will fall 4 per cent.
Domestic tickets account for 8 to 10 per cent of Air New Zealand's fare revenue.
Fyfe said the airline would make further reductions if it had underestimated demand. He did not want to comment on how the price cuts would affect profits.
A review of prices on Tasman, Pacific Islands and long-haul routes would be completed by early March.
The airline did not expect to set the same percentage fare scale reductions on the transtasman routes which remained a "brutal" aviation market.
"The long-haul routes also present their own set of challenges as airlines globally struggle to turn a profit on them, which is not surprising given that fares have hardly changed over the past 30 years," said Fyfe.
Long-haul flights were most susceptible to the effect of fuel prices, as they were 50 per cent of the cost of the flight compared with 25 per cent of domestic aircraft flights.
Fyfe expected the airline's fuel bill to increase $150 million from $1.1 billion in the current financial year.
The airline had been working for three months on pricing, branding, inflight products and online sales initiatives.
"We believe this will benefit customers and shareholders," Fyfe said.
Air New Zealand shares closed down 1c at $1.99 yesterday.
