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Air New Zealand, facing falling passenger numbers, says it will "compete vigorously" with low fares and a high level of service against its newest domestic main trunk competitor, budget airline Jetstar.

Jetstar, a subsidiary of Qantas, yesterday announced it would replace the Qantas-liveried Jetconnect services in New Zealand and operate on routes between Auckland, Wellington, Christchurch and Queenstown. Fares would be offered from as low as $29 one-way.

In its monthly investor update today, Air New Zealand said it had so far led in the low fare market, with grabaseat domestic and international fares as low as $1.

"Frequency is a critical factor for domestic travellers and Air New Zealand offered more than 400 return services a week between Auckland, Wellington, Christchurch and Queenstown."

Air New Zealand had also invested in its domestic operation with a fast and simple check-in procedures.

Meanwhile, the number of passengers Air New Zealand carried in January was down 8 per cent on the same month last year, to 923,000.

The airline's capacity was reduced by 6.6 per cent on January 2008.

The percentage of seats occupied, or load factor, dropped from 85.1 per cent to 83.4 per cent.

The short haul passenger load factor was 80.9 per cent to 77.8 per cent as passenger numbers declined by 7.2 per cent to 763,000.

Air New Zealand responded by reducing capacity by 2 per cent and announced the suspension of international services from Hamilton and reduced Tasman services from Dunedin.

In the long haul market passenger numbers decreased by 11 per cent from 181,000 to 161,000.

On North America and UK routes, passenger numbers fell by 12.7 per cent to 89,000 and Asia/Japan/UK by 8.9 per cent to 72,000.

However, the airline reduced available seats 9.3 per cent by using smaller aeroplanes and reducing flight frequency.

That meant yields for the year-to-date were up 8.1 per cent on the comparable period last financial year.

Short haul and long haul yields were up by 3.8 per cent and 13.4 per cent respectively.

The last of two Q300 turbo prop aircraft are due to enter the operating fleet in May and July, which will bring the number of aircraft to 100.

Air New Zealand will announce its interim results for the six months ending December 31, 2008 prior to the share market opening on Thursday February 26.