Buckle your seatbelts for airfare war

The arrival of Qantas successor Jetstar will add extra heat to the fierce battle for domestic travellers. Photo / Simon Baker

The last big shakeup in domestic aviation was marked by a waiata and haka.

Air New Zealand staff throughout the country laid out the welcome and issued the challenge to newcomer Pacific Blue on a warm early summer day two years ago in what was a friendly reminder of who was here first.

Within a fortnight, the incumbent's ground crew loaned an aircraft towing tug to help out the new rival for a couple of days.

But times have changed. The launch of budget airline Jetstar's domestic services next Wednesday has created a far frostier feel. With airlines around the world facing their deepest slump and reporting yesterday that revenue is still shrinking fast, the stakes are high.

Among competitors in this market the rhetoric has stepped up a gear, multimillion-dollar advertising campaigns are more pointed and the "knock-down-drag-out fight" one airline executive forecast this year is about to start.

The only sure winners are travellers - fares stay low as long as the intense competition remains.

Fast-growing Jetstar takes over from its parent, Qantas, which is concentrating on its revamped transtasman service after eight years of flying New Zealand domestic routes.

While there are signs Jetstar's revenue contribution to the Qantas group is slowing, the low-cost carrier is the stellar performer, growing four times its size in the past five years. It is now flying to more than 50 destinations throughout Australasia and Asia.

It has sold seats for as low as A5c in Australia, launched its New Zealand domestic services with $1 fares and started its own transtasman flights from Auckland in April.

For its domestic services, it will start with two 177-seat Airbus A320 aircraft from Wednesday before introducing a third aircraft from June 24. The operation will employ about 250 people and increase the number of seats offered on domestic routes from around 20,000 to about 29,000 weekly. But because Rotorua is being cut from the network the number of services will fall from 89 to 85.

While fellow budget and Australian-owned airline Pacific Blue has most to fear from the brash, bright orange new arrival, Air New Zealand with an estimated 80 per cent market share, is not about to surrender any of it.

Adverts in which staff stripped down to body paint were designed to highlight its view that, unlike low-cost carriers, Air NZ has no hidden fees to hide. Qantas frequent fliers were implored to cut up membership cards and it made a cutting viral campaign lampooning budget airlines.

Jetstar chief executive Bruce Buchanan reckons he's getting under Air NZ's skin. "I think they're worried - we're very competitive, we're very aggressive. I think it's great that we're getting them all riled up if the outcome for New Zealand is a better air transport service, cheaper fares in a more competitive environment."

He is supported by Statistics NZ consumer price index figures comparing quarters between years. In the leadup to Pacific Blue starting up, domestic airfares fell by almost 3 per cent and at the height of an aggressive fare war last year, falls of 9.4 per cent were recorded.

Jetstar boasts that its costs are as much as 40 per cent lower than those of full-service carriers such as Air New Zealand and Qantas. Costs are kept down by running a homogeneous fleet on most routes, quick aircraft turnaround, low head-office costs and charging passengers for extras such as food and earphones.

It also has a reputation for playing industrial hardball and finds itself in an industrial skirmish after Qantas domestic pilots were redeployed to fly transtasman instead of being hired by Jetstar to fly around New Zealand.

The Airline Pilots Association accuses Qantas of using Jetstar to force down wages and says new pilots it wants to recruit from around the world will not have sufficient experience for this country's difficult flying conditions.

About 20 pilots were being forced to relocate from Christchurch to Auckland, which was highly disruptive and the redeployment was being challenged in court.

Buchanan says the association will create "a lot of noise" but says safety is paramount and the best pilots from across the Jetstar group will be in the captain's seat to start the operation.

"When people have change in their lives it's upsetting, but given the turmoil that's going on around the globe at the moment, people have to be realistic and say 'at least I've got an economically viable way of holding my job'."

Buchanan has been with Jetstar since its inception and seen its expansion into the Australian domestic market, Singapore, Vietnam, Japan, transtasman (starting with flights to Christchurch three years ago) and now New Zealand domestic.

"We're slowly ramping up, we're looking at future options but this gets us firmly into the domestic market and gives us a good feel for how the market reacts."

In spite of a bleak environment for aviation worldwide, he views retail trends which have seen budget brands such as Wal-Mart prosper as a good guide to low-cost carriers' fortunes.

"We're seeing a complete shift in spending patterns. That's unfolding in airlines, people are shifting to value brands so we're thinking 'is it a better time to be starting up?' In my mind the stars are aligning.

"I don't think there's going to be losers - the big winners are going to be the consumers. At the end of the day we'll stimulate a new market and there's room for everyone."

Sydney-based Centre for Asia Pacific Aviation executive chairman Peter Harbison says there is "no doubt" the lowest-cost operators are best placed in this market, given the powerful tendency for passengers to trade down on short-haul point-to-point flights.

But Jetstar is up against Air New Zealand with its dominant frequency on business markets and connecting regional routes.

Between them, main-trunk-flying Pacific Blue and Jetstar offer less than a tenth of services Air New Zealand does, including its regional link services. Harbison says that for the moment this gives the national carrier a huge advantage.

"It can cross-subsidise its lower fares with the higher-yielding business traffic. In some cases it can therefore actually match the lower fares of a lower-cost operator while still being profitable on the route."

But, if things stay negative for an extended period, Air New Zealand risks losing that edge, he says.

House of Travel retail director Brent Thomas says the arrival of Jetstar will be good for all airlines at least in the short term as it will stimulate demand.

"It's going to be good for the consumer. While the capacity may not change significantly it's the number of seats available at those lower [fare] classes. There is a recession but if you get good value out there customers will buy."

Air New Zealand's lucrative business market is not immune to shifting demand patterns. Full fares have been dropping and smaller businesses in particular are looking hard at all costs, he says.

"Some corporates are looking at options beyond the full-service carrier and that's something that we weren't seeing 12 months ago."

For its part, Air New Zealand hopes to fly above what could develop into a skirmish between the Australian-owned budget carriers.

Its shorthaul airlines general manager, Bruce Parton, says: "The entry of Jetstar is not really an issue for us - it's more of an issue for Pacific Blue. We now see two low-cost carriers in this market."

He's confident frequency and service will allow his airline to increase its stranglehold over the corporate market - where Qantas had a smaller but loyal clientele - but he does concede that "there's no doubt times are tough and people are looking for options".

His airline has hammered the hidden costs line in its adverts.

"Both of them try to have loss-leading prices and then charge a whole lot of things in the end. We don't see anything wrong with that as long as the public knows what they are getting."

This irks Jetstar's Buchanan, who points to his airline's lowest-fare guarantee.

"When you've got the lowest fares you don't want people to play tricks. They're trying to create a myth there are hidden costs. We do it very transparently on our fare select page."

It's at the low-fare end of the market that Air New Zealand has been busy since the beginning of the year amidst flattening domestic demand.

Parton says the number of low-end tickets, including loss-leading grabaseat and savings of $10 to $20 on Smart Saver fares, has doubled in the past six months.

He's upfront about what's in it for the airline - even though passengers can pick up a $5 fare, they are willing to pay the full return fare.

"We do quite well out of that, the customer does well."

The airline was targeting those at the lower end of the market who do not have credit cards with a bank-to-bank payment system.

Air New Zealand has long maintained three's a crowd in this domestic market and says difficult times facing Pacific Blue's parent, Virgin Blue, could change the landscape by this time next year.

"We'll still be here. Jetstar will still be here but there's question marks over Pac Blue."

His sparring partner at Pacific Blue, commercial general manager Adrian Hamilton-Manns, says he's heard it all before and counters with a dig at Air New Zealand's near-collapse in 2001 before it was bailed out by the taxpayer.

His airline's Australian owners are committed to Pacific Blue, he says, citing this week's announcement of transtasman flights from Hamilton and a scoping study of flights between regional destinations.

"Our view is that it will probably place more pressure on the established carrier than ourselves. 'We saw Qantas off - they're replacing one with the other and the change in seat volume is not significant."

Pacific Blue was not about to change tack and compete in the super low fares market.

"There's more people who have won first division Lotto than got $1 fares - we don't go in for gimmicks like that. We make sure we keep fares down consistently."

While travellers can savour a fresh round of fare cutting, the ground-level welcome for Jetstar on its launch flight will prove telling.

Amid looming staff cuts at Air New Zealand, workers are worried about competitors denting their job prospects.

If there is another haka, expect it to be done with even more feeling.