Airline fights back on transtasman route with Virgin alliance

It was once a financial bloodbath for Air New Zealand - the 2150km stretch of water between here and Australia.

The airline was losing tens of millions of dollars a year at one stage last decade as low-cost carriers, including Jetstar and Pacific Blue, ate into margins.

Air New Zealand was going backwards on capacity while it was losing out in the leisure market and the high-value business market remained stagnant.

Carriers came in with plenty of capacity and rock bottom fares, dragged down margins - or yield - and then exited leaving those still operating battered and bruised.


About three years ago, Air New Zealand said enough was enough.

"What you really want to do is put a game-changing process in play," said the airline's general manager Australasia, Bruce Parton.

"There have been times when the Tasman has made money and everyone made money," Parton said.

"Everyone makes money and so one of the players puts a whole lot more capacity in and everybody starts losing money again. That's the process that the Tasman's gone through traditionally."

Parton said the game-changer turned out to be one of the most successful products in the company's history - "Seats to Suit" introduced at the end of 2010.

In effect, this allowed the airline to match low-cost carriers on headline fares by price by cutting back the standard offering and getting them to pay at different levels for bags, entertainment and food.

It gave Air New Zealand the chance to be noticed in Australia, a faster-growing leisure and budget airline market than here.

"It's very hard to get heard in a market where you're not strong and a lot of people were choosing Jetstar," he said.

This led to a dramatic turnaround in load factors - how full the plane is - and as most bookings are done online customers found it easy to opt for extras, improving the yield.

The next step to recovery on the Tasman was structural.

Air New Zealand considered a number of options to fortify its Australasian position but opted in 2010 for what has grown to be a 20 per cent stake in Virgin Australia.

The buy-in was then relatively cheap but at a time when the airline was on the turn for the better. The equity stake led to a formal alliance and code-sharing.

Air New Zealand was no longer at the mercy of aggressive pricing by Jetstar and the higher fares Qantas could charge by being part of a wider network.

In turn, the alliance with Virgin Australia also increased Air New Zealand's reach into the Australian domestic market and as of last week its Grabaseat website started selling Virgin domestic flights throughout Australia.

"That ability to provide customers with seamless experience has been really well picked up and on top of that you've got Virgin making inroads into the corporate market in Australia and being seen as a viable alternative to Qantas," Parton said.

There have been complaints from passengers surprised at finding themselves on a Virgin flight and Parton said the airlines have since standardised food. Travel agents say travellers are becoming familiar with the pricing structure of "Seats to Suit".

Parton said Virgin comprises about one-third of the 4.1 million seats of the alliance's transtasman capacity - more than half of the total - and load factors would be around 80 per cent this year. Once both airlines had become used to each other, the alliance had worked well.

"We don't always have the same views but we'll get to a really good perspective on it," he said.

This year, Air New Zealand has started using Boeing 777s on the Perth route with a premium service to cater for miners with money to spend and had started direct services to the Sunshine Coast. It was also working with Tourism New Zealand on targeted campaigns and brought one-time Australian tourism poster girl Lara Bingle to Queenstown.

Parton said there had been a spike in bookings since her promo clip on YouTube and the country featured in her reality show in Australia.

Parton said getting access to Virgin's database allowed Air New Zealand to directly push more deals into the market, which remains tough.

"It's no longer a bloodbath," he said. "It's not great but we're no longer losing money."

Landing soon
* Emirates will use an Airbus A380 superjumbo on its daily Auckland-Melbourne route from next week - its second across the Tasman.
* Taiwan's China Airlines begins a new four-times-a-week service to Sydney from Auckland beginning on October 28.
* Jetstar will redeploy its Australia-Christchurch services to Queenstown from November 15.
* Qantas is investigating new routes: Adelaide and Perth.