Gaynor: Virgin ready to give us a fare go

By BRIAN GAYNOR

The sudden demise of Qantas New Zealand should be the catalyst for a radical change in domestic aviation.

Although the industry has been progressively deregulated over the past 16 years, domestic fares are extremely high by international standards. This is because of the absence of a low-fare operator, particularly on the main trunk routes.

The entry of Sir Richard Branson's Virgin Blue, or any other low-fare carrier - even Freedom Air - would have a big impact on airfares, Air New Zealand and the airport companies.

The aggressive pricing policies of Impulse Airlines and Virgin Blue in Australia are a bonanza for the travelling public and are one of the main reasons Air New Zealand's fully owned subsidiary, Ansett Australia, is struggling.

In simple terms, there are two types of airline operator: the full-service company trying to attract high-paying customers, particularly business people; and the low-fare provider competing on price.

Qantas NZ (formerly known as Ansett NZ) was set up as a full-service operator in 1987, taking on Air New Zealand at the top end of the market. It offered plush terminal facilities, a business class section, meals, frequent flyer points and valet parking.

By comparison, a low-fare operator offers none of these services. Its main objective is to charge substantially less than existing carriers, win market share and create new demand. Costs are ruthlessly contained, particularly labour costs, and maintenance and safety are the only areas where expenditure restraints are not optional.

(Maintenance is highly regulated and low-fare carriers are subjected to a greater level of external supervision. Small operators in Australia have consistently complained about their harsh treatment by safety regulators, whereas Ansett and Qantas have been leniently treated. The recent suspension of Ansett's Boeing fleet by the Civil Aviation Safety Authority has quashed these complaints.)

The equation changes with flights longer than four hours, when passenger comfort and needs, particularly food, become more important. The economics change as well, as fuel becomes an increasing proportion of the total cost and the advantages of efficient labour and ground operations diminish.

The doyen of the low-fare companies is Texas-based Southwest Airlines. It was set up in 1971 with an offbeat culture to fly between Dallas, Houston and San Antonio. Its New York Stock Exchange code is LUV and among its early attractions were female flight attendants in hot pants who jumped out of overhead bins to welcome passengers and sing to them.

Meals were not offered but the company handed out peanuts to symbolise its cheap fares.

Southwest took advantage of the deregulation of the United States airline industry in 1978 and now has the world's eighth largest fleet with 332 Boeing 737 aircraft, the highest airline operating margin in North America and a sharemarket value of $US13.9 billion ($33.7 billion).

Ryanair is the leading low-fare airline in Europe. It was set up in 1985 with a 15-seater turboprop flying just one route between southeast Ireland and London Gatwick.

After four years of losses, present chief executive Michael O'Leary overhauled its business strategy and the company adopted Southwest Airlines' business model. When Ryanair was floated on the Dublin and New York Stock Exchanges in 1997 the issue was 18 times oversubscribed and it now has a market value of €4.1 billion ($9 billion). By comparison, Air New Zealand has a market capitalisation of just $1 billion.

Ryanair serves Ireland, the United Kingdom and most of Western Europe from its hub at London Stansted. It is a classic no-frills operation with no seat allocation, drinks and snacks for sale on board, no refunds on missed flights and 189 passengers, two pilots and two flight attendants are crammed into its Boeing 737-800s.

Full service operators promise first-class food and drink but don't always deliver, whereas Ryanair promises nothing. But there is a great deal of satisfaction arriving on time with Ryanair at less than half the cost of the big carriers. In retrospect, Qantas NZ and the country's travellers would have been much better off with the company as a low-fare operator. Although it managed to gain market share from Air New Zealand as a full service operator, its cumulative financial losses are well over $200 million.

Before the 1999 pilot strike, Qantas had a market share of 50 per cent on the main trunk routes. This fell to 40 per cent after the dispute and has been as low as 29 per cent recently.

Business customers who shifted back to Air New Zealand during the strike were pleasantly surprised with the improved service and Qantas was not able to win them back. Instead of cutting provincial services, it cancelled flights on the main trunk routes and lost more and more business customers.

It also tried to cut costs but it is almost impossible for a full-service operator to become a low-cost carrier.

The loss of business customers is confirmed by figures obtained by the Business Herald. They show that 100,400 passengers travelled with Qantas NZ on the main trunk routes in March compared with 120,000 in March 1999. On the provincial routes it had 43,100 in March compared with 40,900 two years ago.

The entry of Australian Qantas to the domestic market will be welcomed, but it will only be as a full-service operator on the main trunk routes. This will not reduce the high domestic fare structure.

On the other hand the entry of Virgin Blue, the low-fare Australian operator, would be great news for local travellers, the tourism industry and airport companies.

Air New Zealand and Qantas will vigorously oppose Virgin Blue on the basis that it is UK-owned and does not have an automatic right to operate here and across the Tasman.

But the Crown has the ability to allow Virgin Blue to operate here because its principal place of business and incorporation is in Australia. It would be a serious setback if Government ministers were so determined to accommodate Australian Qantas that they agreed to bar Virgin Blue from our airways.

As far as the Australian market is concerned, a number of share analysts have taken the naive view that Ansett's problems have only delayed the demise of Impulse and Virgin Blue, the two low-fare carriers.

Several low-fare operators have fallen by the wayside across the Tasman but Southwest Airlines, Ryanair and New Zealand's retail operator The Warehouse have shown that well-run discount operators can be very successful.

Australians are now enjoying the huge benefits of low-fare air travel. Impulse Airways and Virgin Blue offer between eight and 10 flights a day between Sydney and Brisbane at very low prices.

For example, a Sydney resident who wants to spend the night of Wednesday, May 16, in Brisbane can buy non-refundable return tickets for between $137 and $164. The fully flexible return fare on Virgin Blue is $415.

By comparison, the lowest fare on Air New Zealand for the shorter Auckland-Wellington return flight is a whopping $588 for the same night. Air New Zealand's fully flexible return fare is $718.

No firm figures are yet available from Freedom Air.

(Origin Pacific offers a return fare of $218 between Auckland and Wellington, but the Wellington-Auckland leg takes 3 hours 15 minutes and stops in Nelson and Hamilton.)

No matter how one looks at it, the arrival of Virgin Blue, or any other low-fare operator, in New Zealand would offer huge opportunities for the travelling public and airport companies.

* bgaynor@xtra.co.nz