Air NZ gains from cutting fares to bone but Qantas won't

By Graeme Kennedy

Friday 23rd August 2002

Air New Zealand will maintain profitability with its reduced domestic pricing based on a lower-cost product and higher capacity but it is difficult to see rival Qantas making money from the same fares for its full-service offering.

And if Air New Zealand CEO Ralph Norris' estimate early this year that the Australian carrier was then being subsidised by around $40 million for its operation here, that figure must rise substantially after the new fare regime begins on November 1.

Qantas said it would meet Air New Zealand's cheapest prices in a move widely hailed as the start of a domestic fare war but which it is not, as the rates have been matched rather than lowered and they are expected to be as low as they will ever get.

The question is how sustainable Qantas' pricing will be successful low-fare carriers are also low-cost but Qantas says it will continue a full meal service and business class cabins in its fleet of four Boeing 737s.

But the airline had no choice but to follow Air New Zealand regardless of the economics of the move. With about 20% market share it is still building its domestic presence and passenger base and is expected to increase its jet fleet to seven aircraft by the end of this year.

The additional 737s will be used to increase frequency on the Auckland-Wellington Christchurch routes where Qantas operates 36 daily sectors. Nelson-based Origin Pacific flies into seven other ports as the carrier's code-share partner.

Well-established Air New Zealand, with a share around 70-75%, has increased passenger capacity 11% in its 10 737s by removing business class for an all-economy service and ended meals and other frills for a low-cost operation.

The carrier says it will earn profits from margins generated by the higher capacity and lower costs advantages Qantas does not have although a spokesman conceded full service would be reviewed in the future.

Neither carrier will be happy about the launch today of agency House of Travel's new internet-based service giving consumers access to all air fares, enabling them to identify the lowest prices of the day offered by all airlines.

Commercial director Tony Moffatt said the programme, SearchFlight, would provide real-time comparisons which were unavailable on the airlines' own systems and would result in travellers shopping around and mixing carriers to obtain the best prices.

He said the service was a locally designed and developed world-first innovation although travel aggregation had become a growing and popular trend internationally.

Meanwhile, Air New Zealand and Qantas are continuing negotiations toward the Australian carrier acquiring a strategic stake of around 25% in the national carrier for an estimated $400 million, with a final proposal expected to go before the Air New Zealand board in a few weeks.

Qantas chief executive Geoff Dixon said at the announcement of the company's $A428 million profit this week the carrier planned an $A800 million rights issue for a capital expenditure programme which included the planned Air New Zealand stake.

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