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Some Air New Zealand fares across the Tasman will drop by an average of 15 per cent as cut-throat competition on the route heats up.
Internet fares will drop by more than $100 on Air NZ flights from the middle of next month.
Pacific Blue, soon to begin new services from Auckland to Sydney and Melbourne, said yesterday that it "would probably" drop its fares even further in response.
The fare cuts announced yesterday are on top of reductions of up to 25 per cent on selected flights introduced by Air NZ early last month. They are long-term fares that could remain for up to a year.
The airline's profits have been badly hit by soaring fuel prices and the Tasman route is becoming increasingly important in the face of aggressive rivals.
Rocketing fuel prices and falling consumer spending around the world have forced airlines to pull back from long-haul routes and slash the number of seats, but there remains a surplus of seats across the Tasman.
Air NZ chief executive Rob Fyfe said when announcing the airline's financial results last month that he expected about a 10 per cent increase in transtasman capacity during the next six to nine months, "which will very quickly become a bloodbath" for competing airlines.
Early last month, Emirates announced online fares as low as $198 one-way from Auckland and Christchurch to Sydney and said yesterday the offer had been extended.
Besides Pacific Blue's new services, Royal Brunei has increased flights from three a week to daily, Thai Airways may drop direct flights to Thailand in favour of flying via Australia and Emirates will add capacity from next February with its superjumbo A380.
Air NZ Tasman Pacific manager Glen Sowry said the airline wanted to remain the market leader on the Tasman routes, which with Pacific Island sales make up about a third of its revenue.
Air NZ planes had been around 75 per cent full across the Tasman for the last year and the airline was looking to improve this after a $60 million refit of its A320 and Boeing 767 aircraft that fly to Australia and the Pacific Islands.
Mr Sowry said the number of seats available at the new low fares was commercially sensitive but would be "significantly" above the 5 per cent required by law when the promotion is advertised.
The first of the refitted aircraft are now in service, and the fleet upgrade is expected to be completed by the end of the year.
Pacific Blue's commercial general manager, Adrian Hamilton-Manns, welcomed his competitor's move.
"They've been crying foul and now they find they can lower fares. We will probably go down further ourselves."
A Qantas spokesman said the airline "will always remain competitive on the trans-tasman route". Transtasman bookings make up 40 per cent of Flight Centre's business and product general manager Andrew Stark has said this could rise as long-haul travel for New Zealanders and Australians becomes more expensive.
"This is the start of the bloodbath on the Tasman and the customer is definitely going to win in this episode. The question is whether it's episode one, two or three."
Air NZ fare reductions announced last month were targeted at Pacific Blue's new routes out of Auckland; yesterday's cuts apply to all routes to eastern Australia.
