Air New Zealand has bowed to public pressure by changing its regional fare structure and faced up to financial reality by shutting its loss-making Eagle Airways, pulling back from several towns.

Air New Zealand is also stepping up spending on bigger aircraft to be used on regional routes, buying four extra ATR72 planes to bolster its fleet on more heavily patronised regional routes. The airline will spend an extra $100 million on the changes over the next four years taking the total to $300 million.

The airline's chief executive Christopher Luxon said Eagle had been losing $1 million a month during the past two years and the losses had become unsustainable.

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Luxon, who pulled out of loss-making long haul routes in his first role at Air New Zealand, said it was tough shutting down Eagle, which has been flying for almost half a century.

"It's a really hard call. We're now in a conversation about the wind down of Eagle Air."

Unions fear for their members but Luxon said he was confident the 232 staff of the regional airline could be re-deployed to other parts of Air New Zealand which has about 11,000 staff in total.

Luxon said the decision to close Eagle Air and revamp its fleet and fare structure came after a 10-month review of the regional operation.

The airline has long faced criticism of high fares on regional routes and scrutiny intensified when Prime Minister John Key questioned prices in the lead-up to the last election.

Luxon went to some lengths at a media briefing yesterday to explain Air New Zealand's pricing policy in the regions, saying the economics of 19-seater aircraft operated by Eagle don't stack up compared to jets used on its main trunk routes.

11 Nov, 2014 4:21pm
3 minutes to read

Air New Zealand boss Christopher Luxon says the economics of 19-seater aircraft operated by Eagle don't stack up compared to jets. Photo / Clive Wilkinson

"The 19-seat aircraft is the smallest in the Air New Zealand fleet but has the highest cost per seat to operate because the fixed costs of operation are distributed across fewer passengers," he said.

Profitability had been falling in the regions for the past five years and were now a smaller percentage of group profit than ever, Luxon said.

He said that while average prices had fallen 2 per cent during that time the cost of fuel was up 14 per cent, air navigation fees up 23 per cent and airport charges up 46 per cent. Those three items made up 40 per cent of the cost base on regional routes.

"The purpose of the review had been to find a way through all those challenges and find a way of building sustainable regional air connectivity in the future."

While Air New Zealand has a history of playing hard-ball when competitors threaten its routes, Luxon said he was happy to work with any small airline that wanted to set up in towns where it was pulling out - Kaitaia, Whakatane and Westport. It could offer operations information such as passenger numbers.

Fares could also fall.

Using bigger aircraft on the surviving regional routes would allow it to cut fares by up to 15 per cent, Luxon said.

The airline was offering more, lower last-minute fares - Regional Gotta Go fares - aimed at leisure travellers and revised its compassionate domestic fare structure to make it simpler for passengers. Luxon said the changes were made after "feedback" over the past 18 months.

"We believe we can stimulate the market by putting larger planes in - if we can get more people travelling at a lower cost we might get a better [financial] configuration that way," he said.

Managing director of Salt Funds, Matt Goodson, said the airline's move was logical given thin profitability on the Eagle Air network.

"It is a business they have to run. The difficulty is getting the scale on a route - they're clearly responding with some of those fares to give people some certainty."

The impact of the changes was unlikely to be that material to the business.

Shares in Air New Zealand closed up 1.5c at $2.095.

Cuts to services

What's Air New Zealand doing?

Shutting down Eagle Airways, which means pulling back on services to a number of centres and quitting three towns - Kaitaia, Whakatane and Westport. Services to other centres will be boosted by using bigger planes. Its fares are being revamped.

How much will this cost?

The airline is spending an extra $100 million on bigger planes but could face redundancy costs if Eagle staff are not redeployed.

Why is it making changes?

It simplifies its fleet, smaller planes are dearer to run per passenger and it's been under public and political pressure to offer better fare deals to the regions.