KEY POINTS:
Air New Zealand CEO Rob Fyfe's management revolution has paid results with a doubling of the airline's net profit to $214 million this year.
Fyfe won't be resting on his laurels.
Despite the strong returns that the airline has posted following Fyfe's lengthy restructuring (revenues are up 13 per cent to $4.3 billion) much of the gain is from the cost line.
With the fat already cut from Air New Zealand's operational budget - through a mixture of technology and staff efficiency gains - the upcoming fight against Pacific Blue in the domestic arena will be fought out on the revenue front.
Fyfe paid tribute yesterday to the "Air New Zealanders" - the staff who had put in plenty of hard work to "shape an airline the nation can be really proud of".
Andrew Little's EPMU also deserves a plaudit here for it worked with the airline to reach a competitive labour agreement which is clearly bearing fruit.
Air NZ Technical Operations has gone on to secure a $45 million contract to service widebody aircraft for Hawaiian Airlines, and, Safe Air has secured a $100 million contract with the RNZAF to services its craft.
The upshot of the labour revolution is that productivity has increased with operating expenditure increasing by 2 per cent against a backdrop of a capacity uplift of 3.1 per cent.
Labour costs as a percentage of revenue fell from 22.7 per cent to 20.6 per cent - an improvement of 9 per cent, a good platform to expand from.
But in reality it's the "Air New Zealanders" who fly the airline that Fyfe now needs to devote most of his attention to.
This is where Air NZ is vulnerable.
The unrelenting focus on profit drive - while necessary - has left Air NZ with an unfortunate reputation for being too tough on its domestic passengers: Too quick to hit them up with extra charges for even minimally overweight baggage; too quick to hit them up with extra charges when passengers run late to the airport - or when the technology that enables travellers to self-check at airport terminals doesn't work.
The change to a more commercial culture has alienated some customers - particularly on provincial routes where passengers still face stiff ticket prices as there is no real competition to get prices down.
The airline's Grab a Seat scheme - while it delivers one-off lower ticket prices for provincial passengers - is not the answer.
Air NZ will continue to alienate such customers from "our airline" if its main trunk passengers are perceived to be the only ones to benefit from the advent of a new competitor on the block.
It would be wise to ensure more benefits are spread that way to keep its feeder service customers loyal.
Sir Richard Branson will use extensive marketing to push his Virgin Blue subsidiary into the local domain. Most of the $39 fares for main trunk flights have already been grabbed.
Fyfe's response - to divide Air NZ's main trunk Boeing 737 aircraft into two classes, including a budget service - is smart.
Even Air NZ's loyal business travellers and frequent flyers are not immune from cost pressures.
Ensuring extra comforts such as greater legroom in the "front of the bus" and complementary drinks and snacks on some fights may offset the cheaper flights they could get on the competition.
Qantas already offers such a service within New Zealand and has managed to keep a loyal clientele by cosseting its frequent flyers.
The big competition will be with the budget travellers. It is here that Air NZ is vulnerable.
Branson's $39 flights have proved popular with the cost conscious and will take traffic off Air NZ in the short-term.
By offering "back of the bus" cheap seats on the Boeing 737s - rather than launching a new domestic budget airline - Fyfe is taking a calculated risk that Air New Zealanders will stay with the national carrier rather than taste the competition.
The trick will be how Fyfe manages to satisfy the demands of his high-value business travellers for efficient services against the demands of the holidaying low-cost travellers who might prefer a more informal service.
It will not be an easy balancing act.
But Air NZ has demonstrated it can perform well when it meets competition head on.
When he took over the top job from his predecessor Ralph Norris some investors had doubts over how quickly Fyfe would be able to strengthen the airline's competitive position and increase profits.
Norris was in the CEO's job when Air NZ and Qantas pulled together a strategic alliance which was supposed to make it easier for both airlines to maximise profits on the Tasman by operating in a more efficient fashion and fill spare capacity.
That was knocked back legally.
A second crack at forming a joint alliance - this time through a code share arrangement - was also knocked back as anti-competitive.
But Fyfe didn't stand around bleating about the defeat.
He simply developed a strategy to achieve the results without moving down the monopolist route.
The airline is stronger for it.
Air New Zealand has improved load factors on Tasman and Pacific Island routes from 70.9 per cent in 2006 to 75.3 per cent in 2007 through a mixture of rationalising capacity and reviewing flight schedules.
The company maintains these load factors are still modest by international standards - but there has been a significant positive impact on profitability on the Tasman.
Investors - including the Government - will chalk up yesterday's results.
Consumers will look forward to cheaper fares and better service.
