Business class a casualty of new strategy by Air New Zealand

By Graeme Kennedy

Friday 3rd May 2002

Business class will be withdrawn from Air New Zealand domestic and some regional services in the carrier's new lower-cost, short-haul format aimed at returning the airline to sustainable profitability.

Meals and in-flight entertainment will also go in a fewer-frills strategy considered by the airline board yesterday to lower the carrier's overall cost base and offer a product better suited to today's price-driven markets.

Some services will be reduced or larger aircraft such as 767s will be replaced with smaller and less costly 737s - a move the carrier has already put in place on trans-tasman services from the South Island and Wellington.

However, full-service operations will continue with a business shuttle from Auckland to Sydney and Melbourne.

The air points loyalty programme will be restructured to give frequent flyers better rewards in a strategy which trades off a loss of traditional services against price. The carrier will also offer lower fares for online bookings.

The sharemarket reacted positively this week to news of the changes, with Air New Zealand's share price rising 5c to 43c.

While the loss of the premium class on domestic services was expected to initially upset many business travellers, the airline will be able to remove the costs of the higher-standard service and install more lower-priced seats in its 737 cabins to generate higher revenues.

Like most other full service carriers, Air New Zealand has suffered from low premium-class yields since the post-September 11 industry downturn and needs to emulate the highly successful low-cost airlines which are enjoying boom times as passengers are increasingly attracted by their lower fares, despite a lack of familiar in-flight amenities.

The changes to domestic, Tasman and Southwest Pacific destinations will force a repositioning of low-cost subsidiary Freedom Air, which will become even more focused as a leisure carrier.

Air New Zealand CEO Ralph Norris signalled the new strategy a month ago when he said the airline needed to make short-haul operations "more efficient, cost-effective and appropriate to customer needs."

"There have been big changes in the aviation industry and these have been crystallised by the events of September 11," Mr Norris said. "The mystique of aviation in the past has gone and it is now more a commodity type of product which customers want to be value-driven.

"We will meet these requirements through our product - what's in the aircraft, the meals and entertainment. We are looking at the network, frequency and the most appropriate aircraft to match our customers' needs."

Meanwhile, Air New Zealand's new long-haul strategy is also being developed for a major launch later this year. Plans include an upgrade of premium-class cabins, which have fallen behind the carrier's competitors' products over the past five years.

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