Air NZ gains fleet bargain after suppliers fight out fierce battle

By Graeme Kennedy

Friday 19th July 2002

RALPH NORRIS: 'They were both very good products'

Air New Zealand paid 40% below list price for its fleet of new Airbus jets in the aviation deal of the century rival Boeing could not match.

Air New Zealand chief executive Ralph Norris said there could not have been a better time to buy new aircraft and pointed out that the carrier's $400 million acquisition of 15 Airbus A320 twinjets and support equipment was decided only after fierce competition between the two builders.

The deal was further enhanced by locking in options for 20 more aircraft over the next 10 years at prices based on current depressed market conditions - an offer unheard of in the good times.

Both manufacturers have been heavily discounting their products and offering huge sweeteners to move dozens of jets ordered before September 11 but cancelled in the ensuing industry downturn.

While those aircraft are being picked up as airlines slowly recover, they have created substantial future production capacity Airbus and Boeing are keen to fill as they battle for supremacy in the world commercial aviation market.

The Air New Zealand A320s have been allotted production line slots in Toulouse from next year.

"This was a fantastic opportunity to buy aircraft at prices which would not have otherwise been possible," Mr Norris said. "We were very fortunate as in the next four years there will be a number of leases rolling over and there will be a need to retire other aircraft as they reach the end of their commercial life with us."

The first 160-seat A320 will be delivered in October next year and the 15th late in 2006 to replace four Boeing 767-200s being retired and nine Boeing 737s that will be progressively phased out from next year until 2006.

They will operate on the Tasman and short-haul Pacific services while the optioned aircraft are expected to replace 737s on domestic routes and further increase regional international flying.

Under the Airbus deal, Air New Zealand can switch the A320s for 145-seat A319s or 190-seat A321s to meet specific route demand and flexibility. The Airbus family won the contest against Boeing's 737-700 and 737-800, similar jetliners with only small differences in operating economics, pricing and other enhancements to swing it the Europeans' way.

"They are both very good products to give us the opportunity to expand in line with our new short-haul strategy," Mr Norris said. "Air New Zealand has a very strong relationship with Boeing and has been solely a Boeing customer for 20 years.

"Even now, with our domestic and long-haul international operations, 65% of our available seat kilometres (ASKs) will be flown with Boeing aircraft.

"The decision to go with Airbus came down to the last 24 hours after a three-and-a-half month technical evaluation programme headed by [vice-president technical operations] Mike Flanagan and [fleet manager] Mike Hawkins.

"Both companies were very sharp on pricing and Airbus had also to overcome the costs of our transition to their aircraft, such as engineering, tooling, pilot training, a simulator to move on to their product - we needed those costs to be neutral."

Mr Norris said the team's recommendation to go with Airbus had been unanimous.

Mr Norris said the operating cost advantage of the A320 over the 737s and 767s they would replace was about 15% - a substantial saving when spread over 35 aircraft flying for 15 to 20 years.

The A320 had "slightly better" economics than the Boeing product and had a containerised freight capability the 737 lacked.

"And from a passenger comfort perspective, the A320 is a little more desirable," Mr Norris said. "The Airbus fuselage is slightly wider than the Boeing to allow more comfort and give a more spacious ambience to the cabin."

With the A320, Air New Zealand would also have a point of difference on the predominately Boeing services on the Tasman.

Mr Norris said a decision on engine type for the new aircraft would be made in the next few weeks and a battle between manufacturers CFM and IAE to supply a potential 70 power plants and spares was expected to be as aggressive as the Airbus-Boeing contest.

Boeing offers only the General Electric-Snecma CFM for its 737s while the A320 is operated with either the CFM or Rolls- Royce-Pratt & Whitney IAE V2500.

Mr Norris said both were "very good, well-proven engines," although 60% of recent A320s had the V2500.

Air New Zealand is familiar with the CFM, which powers its 737-300 fleet, and knows General Electric well while also having a joint engine overhaul venture with V2500 co-producer Pratt & Whitney in Christchurch.

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