Air NZ makes big leap into South America

The route is a commitment worth hundreds of millions of dollars.

Air NZ's first South American route has been years in the planning, reports Grant Bradley.

Air New Zealand will early next month take a big leap into what has long been a tempting blank spot on the map.

It begins flights to Buenos Aires after five years of scouting South America, a service it says will make money from the get-go, but one that has been its most challenging long-haul route to set up. The route is a commitment worth hundreds of millions of dollars.

Argentina lived up to its reputation as a notoriously difficult place to do business. The World Bank ease of doing business ranking for the past year puts the country in 121st place out of 189 countries (New Zealand is second) and for the airline, the masses of red tape took some getting used to.

Stephen Jones, Air New Zealand's chief strategy, networks and alliances officer, says it also took some persuasion to get his fellow executives to get the flights over the line.

"The internal business case was interesting," he says. "If you don't know much about Argentina you look at it as a high risk place, a volatile government and currency -- why would we even bother with it?"

There were doubters among the airline's eight-member executive who were worried about the risk.

"We had two holdouts so we just had to understand their concerns in a lot more depth and brought them back more evidence around those. Risk management would be particularly around the financial aspects -- how do you get your money?"

Rather than leaving a "big pile of cash there" the airline will repatriate money made in Argentina weekly.

"Other than what we spend in pesos in Argentina, we have no use for that so we need to convert that out and we might as well do that quickly -- it just is good practice."

As part of the risk assessment, the airline had to consider risk around its main financial asset in the country -- a $260 million Boeing 777.

"We've got mobile assets so it's not like putting a dairy factory over there. If the worst comes to the worst you just fly the plane home."

It sounds dramatic, but Jones says he never lost sleep about the route, which planners first started assessing in 2009 before getting serious about it in August last year.

We've got mobile assets so it's not like putting a dairy factory over there. If the worst comes to the worst you just fly the plane home.

While the airline had dipped into Argentina with a one-off rugby charter flight three years ago, the direct flights which start on December 1 are the first scheduled services to any point in South America in its 75-year history. It will initially fly three times a week to the Argentine capital of close to 13 million people but Jones is confident it will quickly build up frequency.

He says planning for Argentina began in the same way as all its route development -- studying movements of people and the type of traveller who would potentially fly with it.

Potential new routes are ranked once a month by the airline, which is hungry for growth and will expand its international business by 15 per cent over the next year. This includes opening up a new route in the United States, Houston, where five-times-a-week flights begin on December 15.

While it is focused on the Pacific Rim, Argentina, just the other side of the Andes, broadly fitted within that strategy. And with its population concentrated in the capital, it met another of the criteria.

"With Buenos Aires it's one big city that makes up most of Argentina -- whereas in India you've got 11 or 12 different cities that people want to go to. If they go to a concentrated place that's better -- the market size has to be big enough to get a minimum of three services for a wide body aircraft per week," says Jones.

There is a bigger picture in play -- New Zealand becoming something of a mini hub to link Australia and Asia to the southern part of South America.

"Historically the company thought of itself as being at the end of the world, you don't go through New Zealand to get to anywhere, but South America was one place that could change that paradigm," he says.

"There is a big unserved flow of passengers from Australasia and Southeast Asia to South America and New Zealand is uniquely positioned geographically for that because it sits better than Australia -- it is a more intermediate point."

New Zealand-based traffic will make up 40 per cent of demand, but just over a third of passengers will come from Australia.

The Argentine outbound market also has big potential. There is old farming wealth and a high propensity to travel among Argentine people with a "live for now" spirit.

"They like to travel and always have done," says Jones. "Because the currency is so volatile and depreciates a lot, there are incentives to spend now."

For route planning, competitors' behaviour is crucial. Direct flights between Auckland and Argentina finished more than two years ago after state-owned Aerolineas Argentinas spent years struggling with the route. The airline quit flying to Australia this year. Chile's LAN and Qantas are in partnership and cover the route to the Chilean capital of Santiago and beyond, so Chile was dismissed as an option.

My sense is that we'll be flying this [route] in 20 years from now.

Air NZ's Stephen Jones

Brazil was considered but turned out to be operationally challenging. While prevailing tailwinds would make it easy enough to fly there, coming back could be tricky. About 20 per cent of the time, the airline would be quite severely constrained by the load it could carry.

Buenos Aires is well with the range of Air New Zealand's 777-200ER, although as with all over-ocean flying there are contingency stops, including Rarotonga and Easter Island.

A shortage of planes had crimped long-haul growth a few years ago, but with Dreamliners added regularly to the fleet and the refurbishment of 777-200s it is now expanding quickly.

Jones says the other key part of the equation is having a strong relationship with a local partner airline. Without that, nowadays it won't fly into a country.

Aerolineas is a member of the SkyTeam grouping of airlines and Air New Zealand is a member of the Star Alliance, and while airlines find it easier to work within their alliances, they make exceptions for commercial reasons.

Last year Jones went to Aerolineas with a proposition: "We would like to work with you to allow you to serve that market but using Air New Zealand metal and in return we would like your support to come into your market."

He says the Aerolineas executives "took a bit of talking around" but they could see the opportunity.

The Argentine airline has suffered more than its fair share of volatility in a volatile industry, has high labour costs and after being renationalised in 2008 has been subject to political interference. However it is revamping its fleet and Jones says it has "good commercial people who are easy to work with so we've developed that relationship.

"But it's a lot of face-to-face time -- you can't do it over the phone or email. You go over there and build trust and explain to them the business case and ultimately being prepared to commit to go and fly there."

The air services agreement between New Zealand and Argentina had to be extended and Air New Zealand had to satisfy safety and financial regulators.

Jones says Aerolineas' support has been crucial in helping Air New Zealand negotiate the bureaucracy in Argentina, where much commerce is still paper-based. All Air New Zealand documents had to be translated into Spanish, notarised and stamped by both governments.

Under the code share deal, Air New Zealand passengers will be able to be booked on Aerolineas flights throughout South America.

Air New Zealand is building up a team of as many as 15 people in Argentina -- much larger than would normally serve a three-times-a-week service -- because of the complexity. It is led by locals with wide airline experience.

Route planning

How airlines decide where to fly next:
• There has to be a growing market -- preferably a large population concentrated in one city and one which can fill the lucrative premium cabins.
• They can't survive where the existing competition is too dominant.
• They have to have the right planes -- for Air New Zealand the arrival of its Dreamliners and refurbishment of 777s has finally freed up long-haul capacity.
• They like to work with a local partner; an amenable Aerolineas Argentinas in a rebuilding phase made this possible for Air NZ.

"It's important to have people who know their way through the system there -- we could blunder around [by] sending well-meaning Kiwis over there," says Jones.

He says airlines which have gone in without local partnerships had found air bridges missing and gates changed at short notice.

Air New Zealand's chief sales and commercial officer Cam Wallace says there was strong support for the service here and in other countries.

"We're getting strong support from Australia, particularly New South Wales and Victoria, good penetration out of the South American market because New Zealand is a hot market."

But there is still a lot of work to do in Argentina. In a listing of the places Argentines want to visit, New Zealand ranks 48th.

Because the currency is so volatile and depreciates a lot, there are incentives to spend now.

Wallace says the rugby link could be cultivated, particularly among school or club rugby teams which have traditionally tended to visit South Africa.

The managing director of Flight Centre, Chris Grieve, says agents welcome the new service, which has been popular and has already led to lower fares. LAN has had the route to South America through Auckland to itself since Aerolineas pulled out.

"Competition is a good thing and that was evident at our travel expo in August where we had Air New Zealand and LAN offering return airfares to Buenos Aires for $1200, where previously they had been more than $2000 and up to $3000," he says.

Not all fares are going to be sold at that level but it opens up a lot of opportunities for our travellers to get to South America.

The area has been popular with younger travellers but is growing in popularity among baby boomers who can use Argentina as a launchpad for Antarctic excursions or going to Machu Picchu in Peru.

Jones says Air New Zealand is committed to the route.

"I would say three years is a reasonable sort of time. By that stage you've given it a lot of effort. You've got to know the market quite well -- if you're not well on track to being profitable by then there's a problem," he says.

"My sense is that we'll be flying this in 20 years from now and it will be a long term profitable business."