KEY POINTS:
One sure bet in the turbulent airline sector, for the first part of this year at least, is that passengers will be the big winners.
Aviation experts say the uncertainty airlines face is unprecedented but in New Zealand at least consumers are already winning with heavy promotional fare discounting.
Air New Zealand dropped return fares to destinations in Asia to less than $1200 - half the list price - and Emirates is offering Sydney return including taxes for less than $300.
Flight Centre says an Air New Zealand offer of 2000 seats to London return for $2000 sold out in less than 24 hours, proving that if the price is right people will fly.
One airline executive says this year will be a big knock-down-drag-out fight between carriers with the consumers the only sure victors.
Last year turned from being a fuel price horror show to one of plunging demand.
Latest International Air Transport Association figures show a collapse in demand for premium cabins from last August was followed by an almost double-digit slump in economy class travel in November.
The organisation represents almost all scheduled carriers and says this year will be the most challenging for airlines.
"The low point for air travel has not yet been reached since the economic environment is still deteriorating. With yields now falling this is adding up to be the most difficult revenue environment the industry has faced."
The Centre for Asia Pacific Aviation says most airlines will report losses and some unexpected collapses or rescue packages are likely.
But because of volatile costs, supply and demand it is almost impossible to get a handle on how low the sector could go after estimated global losses approaching $10 billion last year.
The picture is likely to get worse before it gets better and that could possibly lead to capacity being slashed around the world, and ultimately, higher fares.
The head of research at Forsyth Barr in Wellington, Rob Mercer, says it's hard to read the tea leaves.
"We're in a flip-flop market. It's hard to predict what's around the corner. All the airlines are facing the issue around filling the plane now but thankfully the fuel price has come back."
Fuel hedges being put in place now will start to roll off in the second half of the year.
"Now it's all about yield management. Airlines like Air New Zealand that have been quite quickly able to adjust their fleet will have less pressure than those that have less flexibility."
The airline, which has said it will reduce mainly long-haul capacity by up to 13 per cent by the end of the financial year, has no big capital projects, a strong balance sheet and a well regarded product, says Mercer.
"They've got the strength to get through and actually benefit when they're through the downturn. They're in pretty good shape to weather this."
Mercer says more promotional deals are likely to be offered but although they are good for load factors, they put pressure on yield.
"The savvy consumer who sits back and waits for a promotion around the time they want to travel will probably get good flights. If they want to book ahead the prices are relatively high."
Up to 200 staff were made redundant towards the end of the year as part of a package aimed at saving $20 million a year.
While falling fuel prices will provide some relief, particularly later this year, he says, Air New Zealand prefers slightly higher fuel prices because they deter low-cost carriers from expanding.
Cathay Pacific's country manager for New Zealand and the Pacific Islands, David Figgins, has been with the airline for 35 years and sees a rough year ahead.
"We're doing okay here at the moment but it's very difficult to predict six months out, nobody has any idea really."
The airline is offering a voluntary unpaid leave scheme and has just introduced a range of new services, including mobile phone check-in.
"Everyone is trying to work harder and smarter. There's a lot of gains being made with technology. The big costs are in planes, fuel and staff and that's where you've got to make sure you are efficient."
Flight Centre product manager Andrew Stark says that now full-service airlines are offering cheaper fares, demand has been surprisingly strong.
"It suggests that the traditional airlines are going to compete quite heavily with low-cost carriers with their pricing. Cathay Pacific, Qantas and Air New Zealand have been coming out and taking on the low-cost carriers with some remarkable fares."
Cuts in capacity are close to tipping point though.
"We've seen traditional carriers cut capacity but they can't cut any more. It means they don't take off then they lose market share."
Stark says the economic climate is best for low-cost carriers. "I don't think travel will stop but people will be inclined to spend less."
Qantas low-cost carrier Jetstar is due to add Tasman flights from Auckland at the end of April. Chief executive Bruce Buchanan said the New Zealand market suited the Jetstar model. Other low-cost operators, notably Southwest airlines in the United States, had prospered during economic slumps.
"You get the downtrading which offsets any downturn in demand. Our load factors and our performance stays fairly constant during the downturn."
In spite of a recession here the airline is committed to this country and is spending $20 million on expansion, although it is picking up some slack from its parent airline. In April it will have three aircraft here and Buchanan says that could more than double.
"We're trying to get a feel for what the network structure is and I'm not going to reveal anything just yet but in the not so distant future we'll be back with announcements."
He says volatility in the market has got people a bit shaky.
"For us it's good for Jetstar because we're quick and nimble. You move around the capacity quickly and you react to the underlying economic environment."
Pacific Blue commercial manager Adrian Hamilton-Manns says it will be a knock-down-drag-out fight.
"There'll still be high loads - it's the person with the lowest cost base who will win this one."
Pacific Blue has been flying domestic routes for more than a year and has extended its international network around the Pacific.
"Jetstar will shake up the market, particularly if they rapidly expand beyond three planes - everyone is going in for a large fight," Hamilton-Manns said.
"They'll hurt their big brother [Qantas], they'll hurt Air New Zealand, they will compete with ourselves but as we've always said on these things it's great because the consumer will always win."
