An acrimonious split is looming after Air New Zealand pulled the plug on a seven-year relationship with Virgin Australia.

In the latest move in a worsening relationship, the New Zealand carrier announced it would not reapply to continue an alliance from October.

This prompted Virgin to warn that it too may expand across the Tasman and possibly use its budget arm, Tigerair, in this country.

The announcement surprised Virgin Australia whose chief executive and managing director John Borghetti said his airline has had a strong presence in the New Zealand and transtasman market since 2004 and would continue to enhance its offering to suit both the business and leisure markets.

''Virgin Australia will continue its strong focus on providing competition.''

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He told the Herald Tigerair was building up its fleet of Boeing 737s which he said would give it the flexibility to fly the Tasman and within the New Zealand domestic market.

''Our willingness and strength is to be as competitive as possible on any route whether it be on the Tasman or anywhere else. We were we thought with a good alliance partner and now we won't be. When we're not we will compete very vigorously.''

Through Pacific Blue, Virgin has flown domestically in New Zealand before.

Borghetti said Tiger, which has a low cost base, could play a very ''important role.''

Air New Zealand executives delivered the news to counterparts in Brisbane today.

Cam Wallace, Air New Zealand's chief revenue officer, said existing arrangements where passengers can fly on each others' aircraft would continue until October 27.

''We want to have a constructive separation and we've been very focused on talking through with them our commercial rationale.''

However, Air New Zealand's strategic imperatives and objectives on the transtasman had changed.

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''Ultimately we do believe that we service our customers better in an adjacent market with our own aircraft, our own staff, our own product.''

Australia was the largest source of inbound visitors to New Zealand and Air New Zealand had built up a significant presence in the Australian market.

''We are working through some of the network opportunities to increase our capacity,'' said Wallace.

During the next months the airline would talk to customers and trade partners about what extra capacity it could bring into the market.

New A321s were due at the end of the year and the airline had flexibility with A320s and more widebody planes such as Boeing 777s and 787 Dreamliners.

The relationship led to Air New Zealand spending $480 million on a 24 per cent equity stake in Virgin which it quit two years ago as relations soured.

There had been tension as a result of competition on long-haul routes across the Pacific to the United States. There was also friction at the top between Borghetti and Air New Zealand chief executive Christopher Luxon.

Wallace said his airline had pulled the pin for ''purely commercial reasons''.

Other alliances would not change.

"We remain fully committed to our other alliance relationships and our overall global airline alliance strategy as a critical success factor in other markets."

Current transtasman alliance arrangements with Virgin would remain in place until October 27 and customers travelling before this date will be unaffected.

Customers booked with Air New Zealand to travel on a Virgin Australia service (or vice versa) after that would be contacted by their booking airline.