Back to the future as Air NZ returns to NAC style services

Rachel Boddy of NZPA

Friday 31st May 2002

It was "back to the future" for national carrier Air New Zealand this week as it revealed plans to return its domestic operations to a no-frills, single class service.

But will the cost-cutting move return the ailing flag carrier to profitability, or will customers turn their noses up at what looks like a backslide towards the pre-competition days of the old National Airways Corp?

The local aviation market was turned upside down in 1987 when Ansett New Zealand swept on to the scene offering a dual-class domestic service and inflight meals. Air NZ soon discovered its trademark cheese and crackers and boiled lollies wouldn't cut it in the brave new aviation world.

But in an industry that has seen more airlines collapse in the last decade than it has lukewarm airline dinners, nothing lasts forever. The trend now in Europe and the United States is towards no-frills "pretzel and cola" carriers.

Forsyth Barr research manager Rob Mercer said Air NZ's new strategy will make it more competitive .

"It's a far better plan for them to go mean and lean so they can compete on their target routes from a position of strength, than follow a strategy that's been proven to be a little bit outdated -- very service-oriented, high cost."

Ditching a full meal in favour of a tea and cracker-style service, shouldn't be an issue, he said.

"People don't mind driving to work for half an hour, or sitting on a train or a bus (without a meal) ... whereas on a plane you've got this expectation that all of a sudden you're in it for 40 minutes and you need to be looked after like you're in a restaurant.

"Most people that travel just want to be on a service that gets you there on time. "

As for cutting the business class section, Air NZ chief executive Ralph Norris hastened to point out that on average only one in four domestic business class seats is booked. The rest are filled by upgrades or frequent flyer customers and domestic business class travellers account for a mere 2 percent of revenue.

Perhaps of bigger concern to Air NZ than losing corporate customers miffed at missing out on their extra legroom, glass of chardonnay or smoked salmon bagels, is the reaction of travel agents to the cost-saving plans.

The country's biggest travel agency Flight Centre has threatened to withdraw millions of dollars of business if Air NZ stops paying 4 percent commission for domestic bookings from October, when the new low-cost service starts.

Flight Centre chief executive Graham Turner said the move would leave his company little option but to switch the $205 million domestic and international business it did with Air NZ each year to other carriers.

"We expect that other travel agency groups will be compelled to do likewise," Mr Turner said.

"To say this is a brave move on Air NZ's part is a gross understatement."

Air NZ spokesman Mark Champion moved to quell those concerns, saying the airline had yet to roll out the incentives it would offer in place of the commissions. The airline's sales executive Norm Thompson said agents would be paid a commission for reaching target sales.

Another risk for Air NZ is that by choosing to take the middle ground -- as neither a budget nor a full service carrier -- it runs the risk of being squeezed at both ends by rival operators.

Macquarie Equities senior analyst Arthur Lim said the state-owned carrier could be crunched from the top by Qantas, if Qantas continued to offer a full inflight product, and from the bottom by potential new budget entrants like Virgin Blue or Jump Airlines.

"It is a very dangerous strategy unless the fare reductions are substantial," he said.

Air NZ is promising to enhance its Koru Club lounges as a sweetener to the business set, but it's hard to ignore the fact that its Australian rival Qantas already charges less than Air NZ on the same routes while offering full inflight services -- and probably has deep enough pockets to continue to do so.

Then there's the issue of the kangaroo carrier being keen to take a place on the Air NZ share register.

It emerged this week that the pair have resumed talks on the matter. But while linking with Qantas would provide Air NZ with a vital feed into the Australian market which it lost with the collapse of its Ansett subsidiary last year, the partnership is less than ideal.

For starters, Qantas' previous relationship with Air NZ, when it owned 19.9 percent of the carrier between 1989 and 1997, was marred by acrimonious boardroom bustups over Qantas' conflict of interest as both shareholder and nemesis.

It is difficult to see how the situation would be any different now, especially given that Air NZ was ready to sue Qantas earlier this year for its underarm tactics -- offering below-cost seats on domestic flights in an attempt to take a bigger slice of the New Zealand market.

Such a bid would also face massive regulatory and political hurdles on both sides of the Tasman -- particularly in an election year.

National and ACT -- who last year chastised the Government for bailing out Air NZ, describing the move as "throwing good money after bad" -- this week baulked at the idea of allowing Qantas back onto the Air NZ register.

"Qantas is interested in only one thing -- relegating Air NZ as a small-bit regional airline," National's transport spokeswoman Belinda Vernon said.

"They want to swallow Air NZ. A cornerstone shareholding is the first bite."

ACT leader Richard Prebble said if Qantas took control of Air NZ it would be a return to "Soviet-style, one-size-fits-all, inefficient, monopoly aviation".

"Air NZ's decision to return to NAC-type services makes no sense unless management also believes the Government will collude with the airline to take out Qantas as a domestic competitor," he added.

Tim Brown, an executive at Wellington Airport's 66 percent owner Infratil, said the idea of the Commerce Commission allowing Qantas to take a major stake in Air NZ was "inconceivable".

He said it appeared that Qantas was attempting to divide and rule and trying to stop Air NZ from tying up with Virgin Blue.

"It's so difficult to see the benefit for New Zealand Inc ... we can't even begin to imagine how it can get to first base."

The acid test for Air NZ's revamp will come in October when the first no-frills flight takes to the sky.

Retail investors at least are betting the scheme will work, with Air NZ shares hitting a high of 72 cents this week -- almost triple the 24 cents the Government paid for its 82 percent stake late last year. They ended the week at 71 cents .

Anything can happen in the volatile aviation industry, however, and Air NZ will be hoping that "anni horribili", unlike bad luck, don't come in threes.

Comments from our readers

No comments yet