Between the lines: Air NZ's middle way risks squeeze at both ends

By DANIEL RIORDAN

Air New Zealand is in good company with its slimmed-down look, but that won't guarantee it success.

Clearly chief executive Ralph Norris and his team took a good look around the world before scrapping meals and business class. They almost certainly took a peek across the Tasman, where arch-rival Qantas has been flying its own budget operation.

Qantas in January started up a no-frills, one-class offshoot operating largely outside peak hours, and aimed at the leisure and casual business market.

By all accounts, the initiative has been successful, and will eventually operate about 40 aircraft.

Ian Thomas, a senior consultant with the Sydney-based Centre for Asia Pacific Aviation, won't be surprised if Qantas introduces a similar no-frills model here to really put the heat on Air NZ.

He says Air NZ has essentially dropped the ante in the market and now Qantas will be trying to gauge how much it has to gain from continuing to operate its full service flights, designed originally to stop Air NZ taking up all the space left by the demise of Qantas New Zealand 14 months ago.

Now Air NZ has settled for less, Qantas will be wondering it it can get away with the same thing.

"It's going to be interesting over the next six months or so - working out which model is best for the domestic market.

"Given the global developments, you'd have to say what Air NZ is doing is probably right, at least for 2002."

Certainly the market likes what it sees.

Air NZ shares surged another 6c yesterday to 68c (touching 72c at one stage), meaning the Government had on paper almost tripled the value of its $892 million investment in the airline, made at 24c in January.

Air NZ isn't saying how much it will save from the change, but one industry source estimated the savings in meals and fewer cabin crew at $25 million to $30 million a year.

Thomas says business travellers around the world have become more elastic in the way they respond to airline prices, and that's encouraged the growth of discount carriers.

In Europe, easyJet has been picking up 50 per cent of its trade from business travellers.

The granddad of the discount carriers is US-based Southwest Airlines, which has made a profit in all but one of its 30 years.

While it's a proven model, it hasn't always transferred well from market to market.

One of the dangers for Air NZ Express - the new operation's working title - is getting too close in the market to Freedom Air, Air NZ's existing budget arm.

Freedom - which offers less legroom and doesn't allow its passengers access to Koru Club lounges - has so far picked up little business traffic, because Air NZ has rightfully been concerned at its higher paying customers moving downstream.

Thomas says that's always been the risk faced by big carriers which start up low-cost subsidiaries, then find them competing with their mainstream services.

British Airways, Continental and United have abolished their low-cost arms and Delta has cut back its discount subsidiary's capacity by 43 per cent.

Tending to go hand in hand with the low-cost model is more ticket selling over the internet and through call centres, as witnessed by Air NZ's moves to beef up its online operations and cut the commission it pays travel agents - provoking howls of outrage from some in the industry.

Whatever happens domestically - and Air NZ runs a real risk of being squeezed by rival discount services at the bottom and Qantas full-service at the top - huge challenges face the airline internationally.

Uppermost is securing a feeder partner in the vital Australian market.

Talks with Virgin Blue - the only viable candidate - are bogged down. Even then, the budget carrier doesn't provide the frequency or consistency of services Air NZ ideally needs.

Thomas isn't ruling out the chances of Air NZ starting its own limited Australian operation, perhaps serving the high revenue capital cities on the east coast.

nzherald.co.nz/aviation

nzherald.co.nz/travel