Air NZ puts up Tasman fares to stamp out five years of losses

Graeme Kennedy, Travel writer

Friday 18th January 2002

Air New Zealand's fare increases on the Tasman this week are designed to end more than five years of losses on the vitally important routes as part of the company's business recovery programme to return to financial health.

The rises are a major phase of the recovery efforts to increase revenues after the government financial bail-out of the ailing carrier late last year and follow a on-going cost-cutting campaign which includes staff and debt reduction and the sale of non-core assets such as the South Island ski fields and the Australian Jetset Business Travel.

The carrier has had no returns on the Tasman since the mid-1990s despite huge capital investment and a 48% market share of the annual 1.3 million passenger traffic between Australia and New Zealand.

Senior vice-president for sales and distribution Norm Thompson said the Tasman was traditionally Air New Zealand's "bread and butter," providing 30% of the airline's total international flying compared with single-digit figures for other carriers on the route. Air New Zealand operates 110 return Tasman services a week including 49 from Auckland, Wellington and Christchurch into Sydney.

Yields and profitability fell as average load factors slumped to about 65% - when the operation needed to be in the mid to high 70% range to make money - as the routes were opened with fifth-freedom rights to mainly Asian carriers including Thai International and China Airlines into Sydney and Garuda to Brisbane.

Mr Thompson said the increased competition, operating from four times a week to daily, flew the Tasman routes as "tag sectors" added to their Australian services and kept fares low.

"A big part of our business has been running at a loss," he said. "It's all been about whether the competition will allow you to increase prices - we have to make sure we remain competitive but someone has got to take the lead and bring the fares up.

"And now is the right time with the state of the international aviation market, the length of time we have sustained losses on the Tasman and the company's financial fragility."

The rises, which took effect from last weekend, follow a round of increases in early November in response to higher landing fees and terminal costs at Sydney and increased security charges and hull insurance following the September 11 terrorist attacks. Lowest fares then rose $20 and others $50.

This time, to reach a level where fares start providing economic returns, all economy leisure rates have risen $50 with the Auckland-Sydney 14-day advance purchase return rising from $599 to $649 and the unrestricted economy fare increasing $150 from $1199 to $1349.

"We have been putting a big investment into our Tasman operation despite fares being so low," Mr Thompson said. "We have lounges at both ends, Frequent Flyer points, quality service, a young fleet - and with all that we can afford to charge a premium although we have got to be mindful of the tag sector fares from some of the competition.

"Our costs on the Tasman are high. Fuel prices have come down but they and insurances are paid in US dollars while having a young fleet means higher leases, also paid in American currency.

"But even with the higher fares from January 12, passengers are still getting a very good deal compared with similar sectors overseas."

Air New Zealand increased frequency in 1998 to attract passengers with more choice and worked with Tourism New Zealand to build the market out of Australia. Wellington and Christchurch were served by narrow-body 737s while Auckland had some 737s but predominately wide-body 767s and 747s.

However, with the new November schedule, the carrier has taken some capacity out of Auckland in a bid to improve load factors and profitability - "We are continually looking at the situation in terms of demand and will add more capacity as demand warrants it," Mr Thompson said.

"We are trying to provide what New Zealanders want and promote inbound tourism. New Zealand with its 3.5 million population had 700,000 passengers to Australia last year while Australia, with 18 million, sent 600,000 this way - there is huge potential there.

"But with the work we are doing with Tourism New Zealand we are increasing the numbers out of Australia. We had been promoting New Zealand as rolling green hills and sheep but we are now marketing activities, the meetings market and a great destination for short four- to five-day breaks."

The advance-purchase domestic Super Thrifty fares have also increased, by 5%, although Mr Thompson concedes that Air New Zealand's home operation is "doing pretty well."

"But we are seeing yields coming down a bit due to more competition and the market becoming more familiar with the various fare types we offer," he said. "Some of the cheaper fares have become more popular so, rather than apply an across the board rise, we have just tweaked the lower ones.

"People have become smarter in the way they are purchasing air travel - and good on them - but we needed that tweak to return to higher yield levels."

And more competition appears likely with Qantas, which moved into the market after its franchised namesake Qantas New Zealand collapsed last year, indicating it plans to increase its presence on domestic routes and Virgin Blue still talking about wanting to move in.

We have been putting a big investment into our Tasman operation despite fares being so low... We have lounges at both ends, Frequent Flyer points, quality service, a young fleet - and with all that we can afford to charge a premium although we have got to be mindful of the tag sector fares from some of the competition.

- Senior vice-president for sales and distribution Norm Thompson

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