Jetstar will begin a daily direct service between Auckland and Dunedin on July 14, in a move that will break Air New Zealand's monopoly on the route.
The Australian airline says its everyday fares for the service - which is subject to regulatory approval - will be 40 per cent
cheaper than those offered by the national carrier.
Group chief executive Bruce Buchanan said the new route would grow the Dunedin-Auckland air travel market by 46 per cent and link Dunedin with its Auckland hub, offering daily connections to Australia and Asia.
He expected the Aussie airline's announcement of the service to prompt "a fairly aggressive response" from Air New Zealand, which he said would be forced to lower prices.
"Normally what happens is [Air New Zealand] realise they can no longer gouge the market," he said.
The southern city will be Jetstar's fifth destination in New Zealand.
"As a leading South Island tourism destination and lively university city, Dunedin is a great fit for Jetstar's growing New Zealand network," said David Hall, the airline's Australia and New Zealand chief executive.
Dunedin Airport boss John McCall said Jetstar's new A320 service would increase visitor numbers to the Otago and Southland regions.
Buchanan said the airline was also exploring "further possibilities" around the Queenstown market.
Jetstar expected Australian skiers to make more use of its direct transtasman service to Queenstown this winter as they avoided stopping in quake-hit Christchurch, he said.
