Plotting 2004 course tough task for Air NZ

By CHRIS DANIELS, Aviation Writer


Aviation's centenary year, 2003, was never going to be a quiet one in New Zealand skies. The national flag carrier, Air New Zealand, spent the entire 12 months on an expensive, ambitious and, to many, foolhardy scheme to join an alliance with rival Qantas.

As it continued the long climb back from the dark days of near-bankruptcy in 2001, the competitive landscape around it changed dramatically as airlines such as Emirates and Virgin Blue spread their wings to start flying here.

The next 12 months will be tough for Air New Zealand, as it struggles to keep its place as a profitable regional airline.

The successful deployment of its "express" budget model in domestic aviation has not been matched by the November launch of its Tasman Express cousin.

Within weeks the airline was forced into a series of embarrassing climbdowns, prompted by the screams of business customers, who made it clear that they expect better than cold food and coffee in a take-away cup.

Personnel changes at the top echelon of Air New Zealand - particularly the departure of chief operating officer Andrew Miller - are seen by some in the industry as sign of a softening of the airline's no-frills, no-nonsense approach.

For surely it was more than Yuletide goodwill that prompted Air New Zealand to relax its strict 'use it or lose it' ticket conditions just before Christmas.

Perhaps uncoincidentally, the next 12 months mark the debut of Pacific Blue, the international wing of Australia's Virgin Blue.

Fans of cheap air travel will be keeping a close eye on the new airline as it slowly rolls out a business plan, starting first with a careful selection of city-to-city pairs with perceived room for growth (for example, Christchurch-Brisbane), then perhaps a domestic service linking them together.

A full-scale main trunk service linking Auckland, Wellington and Christchurch seems unlikely soon, but if Pacific Blue can keep its costs down and do more friendly deals with airports and eager local authorities, the prospects of even more competitive pressures are good. This aggressive approach to costs may mean that the accuracy of the long-established market adage - that New Zealand's population can sustain no more than one-and-a-half airlines - will be tested.

The long-term effect of Pacific Blue was talked to death in front of the Commerce Commission this year. Air New Zealand's lawyers said the budget airline's arrival would make it possible to join up with Qantas without any damage to consumers. Its bid was rejected then and seems doomed to fail again in the High Court during the coming year. Qantas, always well connected politically, may have to call in some favours in Canberra if it wants the deal to stand any chance of success in Australia.

Threats to Air New Zealand and Qantas in the months ahead are coming not only from the budget 'nuts n' cola' carriers, but also from the posh nosh and frills of the likes of Emirates, the Dubai-based airline that went from zero to hero in New Zealand this year.

Spending lashings of money on gala dinners, advertising and marketing, the airline set out to make a big splash. Now it is the number three airline flying the Tasman, luring business travellers as well as the leisure market with its prices and service.

It is big wealthy airlines like Emirates - with its new planes and ever-expanding list of destinations - that means airlines like Air New Zealand have to keep running just to stand still. Air New Zealand is about to start a $150 million to $200 million upgrade of its fleet of eight Boeing 747-400 aircraft, installing new entertainment systems and lie-flat seats for business class.

This upgrade will begin next year, with the first of the refurbished planes expected to be in the air by early 2005. If Emirates keeps expanding through this year as much as it has in the past, then the prospects of some competition on the routes between New Zealand and North America (currently a cosy duopoly of Qantas and Air NZ) are looking good.

But, for all the competitive pressures it faces, prospects for Air New Zealand next year are generally good, especially if the New Zealand dollar remains high. A high dollar will also make it easier for chief executive Ralph Norris when he comes to put his name to what could be the most expensive deal of his business career - buying new long-haul jets.

Partway through the year, Air New Zealand will have to make this very big and very expensive decision: specifically whether to opt for Airbus or Boeing aircraft. While the refurbished 747-400s will have another 10 years life in them, the airline needs to replace its ageing fleet of Boeing 767 planes.

Boeing chose Auckland as a destination for the test flight of its new 777-300ER (extended range) aircraft, which it will start delivering next year to world airlines.

There are only two big commercial aircraft manufacturers left in world aviation - Boeing and Airbus. Air New Zealand will have to choose between either four-engined Airbus A340, twin-engined A330s, or stick with the Americans and buy new Boeing 777s.

In any case the planes will cost many hundreds of millions of dollars, which could dictate a fresh round of capital raising. The Government will then have to decide whether to take part in any rights issue. By all accounts it has been a model shareholder, leaving Norris and the team to run the show with no political interference. But will they be keen to open the taxpayer's wallet again, and this time not to save it from bankruptcy, but to buy flash new planes?

The risk of having a political master may be felt during 2004, as the airline embarks on its programme of shrinking its workforce by 15 per cent (with up to 400 compulsory redundancies). Union displeasure with the process is clear and any hint of a union-busting agenda from Norris and top managers will be unwelcome at the Beehive.

Air traffic is slowly heading back to the growth levels before the September 11 terrorist attacks.

Barring anything like that happening again soon, aviation in 2004, the first year of the second century of commercial flight, is looking good.