Air New Zealand lacks the grunt to catch up to its fleeter foes

Thursday 28th March 2002

Air New Zealand has reported a new two-year plan to return to profitability (NBR, Mar 22). This may or may not be good news to long-suffering shareholders, whose ranks have now swollen to include New Zealand taxpayers due to the government's rescue package.

The struggling airline's strategy is to cut costs on domestic routes and upgrade services in first class and business class on international routes. This strategy is not rocket science as it is being pursued by any number of airlines, according to the March 19 Bulletin.

The magazine reports on a number of matters pertinent to Air New Zealand's hopes for revival and therefore the chances of a rebound in its share price. Airlines worldwide are scrambling to regain competitive advantage in service levels in first and business classes.

They recognise that the consumer is now king in higher classes of air travel and that it is necessary to invest heavily to recapture market share that dropped off after September 11. Expensive service differentiation is necessary to capture high-margin passengers.

The scale of investment is staggering. In an article entitled "Flights of Fancy," Bulletin columnist Tom Ballantyne reports large sums of money are being earmarked to fit out the upper air travel classes with all the luxuries likely to bring the higher-paying traveller back. These initiatives include installing seat beds - "flat seats" - in both first class and upper class, new ergonomic seating and the beginnings of in-flight mobile phone and internet access.

British Airways, for example, introduced seats that fold down into horizontal beds into its international business class last year. Singapore Airlines is reported to be following suit, with $A200 million earmarked to invest in its Nasa-sourced SpaceBed seats for upper-class travel on all its long-haul flights.

Cathay Pacific has announced it is offering the largest business class "flat seats" along with an exclusive onboard bar and reception area, plus a dressing room. Japan Airlines has commissioned ergonomic "Skyluxe" flat seats for its first-class passengers from London designer Ross Lovegrove.

The battle of the stratobeds is heating up and it looks as if Air New Zealand is left out in the cold. It sounds like a virtue is being made of necessity when new airline chief executive Ralph Norris says Air New Zealand could benefit from coming in later on advances in seating and entertainment technology. That technology is here now and being installed.

Air New Zealand lacks the wherewithal at present to keep up with the Joneses. That is the rub and is probably why the airline is taking the risky strategy of stripping staff and shifting resources from domestic to international routes at a time when by Mr Norris' own claims Qantas can undercut on New Zealand domestic routes and afford to lose $45-50 million this year alone on building market share here.

In-flight entertainment (IFE) is another area commanding huge airline budgets, with a total of $A4.3 billion expected to be spent on it this year. Thai Airlines - not financially strong - will spend $A220 million over the next two years on IFE upgrades. Qantas is spending $300 million.

Singapore Airlines has allocated $A320 million for IFE this year, including in-flight email. Internet services at 9000m are still in their rudimentary stages but it is believed that within two years broadband will allow allow travellers real-time inflight access to email and internet services.

Aircraft manufacturers Airbus and Boeing are investing huge amounts on inflight web and email capabilities and airlines that can afford to do so are likely to rush to get these onboard. Air New Zealand is just not in the league of these big-spending competitors and risks slipping further behind as a poor cousin. The loss of rich uncle Singapore Airlines as an ally will cost our flag carrier dearly as it slips into second- or third-tier rating.

The Bulletin reports on some other intriguing matters. It speculates that within 12 months Air New Zealand will enter the Australian domestic market to plug the gap for Star Alliance left by its collapsed subsidiary Ansett, an irony considering the obsessive aim of owning 100% of Ansett was the cause of our flag carrier's ruin. It says Ansett's loyalty scheme members - owed $A140 million in free air travel - are being fought for by both Star Alliance and its rival Oneworld.

Qantas belongs to Oneworld and Air New Zealand to Star Alliance, which adds piquancy to the scrap for bilked Ansett passengers.

The greatest risk, however, rests with the government's bailout of Air New Zealand. Taking into account the capital expenditure that other airlines are committing to, it is difficult to see how the government's contribution thus far will be enough or that investors will be much tempted to recapitalise the airline.

For the government it now looks like a case of "in for a penny, in for a pound" as it finds itself tied to pouring more money into the flag carrier, unless, of course, it decides to write off what it has spent already - electoral suicide -- or do what it should have done in the first place and sell the airline to a carrier with deep pockets.

The government does not seem to have known what it was getting into when it wrote out the cheque for Air New Zealand.

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