At an invitation-only event at Sydney's Art Gallery of New South Wales, an odd mix of guests at some of the tables gave a glimpse of the future.

About 350 people were there in March to listen to former President Barack Obama, who had been in Auckland the night before.

Air New Zealand was a big backer of Obama's tour Downunder and its staff were out in force at the Sydney event, where eyebrows were raised at the seating arrangements. As well as executives from joint venture partner Virgin Australia — as would have been expected, given a deep seven-year relationship — there were also top bosses from arch-rival Qantas.

Former Air New Zealand executives Lesley Grant and Andrew David were among the Qantas team, there with Air NZ's chief revenue officer Cam Wallace.


''I saw them sitting down and thought this was cosy, we had a bit of a giggle and didn't think too much more of it,'' says Jayson Westbury, chief executive of the Australian Federation of Travel Agents.

He knows Wallace, who used to be based in Australia for Air NZ, as well as the Qantas execs, and the Obama event was the forerunner to some meaningful speed dating not long afterwards.

''Cam was well known in Australia. He would have known a lot of these Qantas people and he'd been in Australia for some time.''

While he didn't realise it at the time, Westbury was witness to something of a Last Supper for Virgin and Air NZ. Twelve days later, Air New Zealand delivered a bombshell at Virgin's Brisbane office: the joint venture would not be renewed.

Virgin's group executive officer Rob Sharp was on the receiving end of the bad news, delivered on a Wednesday afternoon by Wallace and Air NZ's chief strategy and alliances officer Nick Judd.

Air New Zealand had hoped to give some early warning to Sharp, who was held up by a flight delay. The affable former boss of Virgin's budget arm, Tiger, is given to understatement and called Air New Zealand's news a surprise. One analyst was much stronger, calling the severing of such deep ties ''unheard of in joint venture relationships".

It was a case of making an enemy out of a friend and creating more competition on the Tasman - something that one observer said at first appearance defied the basic rules of economics.

Eight weeks later, Air New Zealand delivered the second in the one-two punch combination after discreetly parking an Airbus A320 outside a Sydney Airport hangar.


It was there, with much fanfare, that Air New Zealand chief executive Christopher Luxon and his Qantas counterpart, Alan Joyce, told a windblown media pack they had just signed a domestic codeshare deal which gave each reciprocal access to networks around their home countries. Frequent flyer points were also part of the mix, as were lounges and a commitment to co-operate in other ways such as biofuel development.

Co-operation on the Tasman was out of bounds: even if they wanted to, that wouldn't get past regulators on either side of the Tasman. But in the words of their bosses, the airlines were now frenemies.

Airline sources on both sides of the Tasman say these agreements usually take months to hammer out, but this deal - built on those personal relationships on display at Sydney and over some good food and wine - was finalised in weeks.

And the deal was made between two airlines where there had been real enmity just a few years ago. Air New Zealand was pouring hundreds of millions of dollars into Virgin, lifting its equity stake to 26 per cent, and answered the call for more cash five years ago at a time when it was fighting a brutal domestic capacity war with Qantas, then on its knees because of international losses.

Luxon was always fond of pointing out that ''we don't lose to the Aussies at home'' when Qantas began to flex its muscles in competition with his airline. Apart from the Obama dinner - and some Air NZ-Qantas mingling at a transtasman prime ministerial lunch early in March - there were few public signs that the next Aussies Luxon wanted to beat would be Virgin.

And to judge from snippets of discussion around the edges of an aviation summit in Auckland this month, he wants to beat them badly.

About seven million passengers last year crossed the Tasman, regarded as one of the most hotly contested airline routes in the world.

For Virgin, the Tasman represents about 5 per cent of its capacity - it makes its money flying the dense eastern Australian domestic routes. But for Air NZ, the Tasman is where it has around 22 per cent of its seats. It has to get it right.

Peter Harbison is executive chairman of CAPA Centre for Aviation, which ran this month's New Zealand Aviation & Corporate Travel Summit, and says deals between airlines start at the top.

All partnerships are all about people relationships and they're done at CEO level

''All partnerships are all about people relationships and they're done at CEO level," he says. Christopher gets on well with Alan [Joyce] and Alan gets on well with Chris.''

Luxon sent Joyce a message of support after the Qantas boss copped a pie in the face over his support for same-sex marriage, and the transtasman jibes, usually based on Bledisloe Cup clashes, have softened recently in the spirit of mateship.

The same can't be said for Luxon and Virgin Australia's chief executive John Borghetti, who by one account haven't spoken in two years.

Harbison points out that Borghetti - who missed out on the top job at Qantas in 2010 -and Luxon are polar opposites.

Both has their own style: Borghetti, with his tailored Italian suits and fast cars, is different to Luxon, a non-drinking Christian (and someone who has previously talked of his interest in a decidedly un-flashy car - a 1966 Riley Elf). The pair clashed when Luxon sat on the Virgin board.

Qantas boss Alan Joyce and Air NZ boss Christopher Luxon flanked by crew at the tie-up announcement. Photo / Supplied
Qantas boss Alan Joyce and Air NZ boss Christopher Luxon flanked by crew at the tie-up announcement. Photo / Supplied

Air New Zealand executives have looked askance at the money being paid at Virgin. While Luxon has now jumped up the pay scale, Air NZ has consistently made big to bumper profits on his watch whereas Borghetti's soaring pay was for several years the subject of media headlines at a time when his airline was making record losses.

Virgin is now in improving financial shape, in August posting its best underlying result in 10 years, and Borghetti is due to leave the airline within the next year.

The Air NZ-Virgin deal was done when Rob Fyfe was in charge at the Kiwi airline and it's not only at the very top where personnel changes have altered the chemistry.

Judd's predecessor at Air NZ, Stephen Jones, has gone to Hungarian carrier Wizz Air, while his counterpart at Virgin, Judith Crompton, has gone to insurer Cover-More Group.

There was also a flashpoint over Air New Zealand's push to pick up more Australians and fly them through Auckland and across the Pacific. This became far more obvious when the Kiwi airline put on Dreamliners to Adelaide - something that Virgin's Sharp saw as a potential problem soon after taking up his current role last year.

''It's indicative of the challenge that was arising - Air New Zealand does move Australian passengers over New Zealand into the US and we fly to Los Angeles and that was becoming a bit of a tension in the background,'' says Sharp.

He says there were good, ''open'' discussions.

Cartoonist Rod Emmerson's take on transtasman airline changes.
Cartoonist Rod Emmerson's take on transtasman airline changes.

But Air New Zealand says there were simpler and more compelling reasons to ditch Virgin.

Wallace was at the CAPA summit, where he said the aspiration was for a ''metal neutral'' approach - one where airlines manage capacity and share revenue, and passengers should scarcely notice which airline's planes they're flying in.

Air NZ says its research found passengers who were surveyed regularly didn't think Virgin's food and entertainment was up to scratch.

Virgin Australia will include meals and bags with all fares in what's shaping up as an intensifying fight with Air New Zealand and other airlines across the Tasman. / Video by Greg Bowker

But in what has become an acrimonious tit for tat, Virgin has since said it was Air NZ that was holding it back - and its recent decision to lay on food and bags as part of standard tickets in planes that are all equipped with Wi-fi is proof of that.

Wallace says Air New Zealand felt it was doing more of the heavy lifting in Australia, selling a disproportionate volume of tickets on Virgin there, where it had set up a comprehensive state-by-state sales network.

''We largely thought that Virgin, with their presence in Australia, would largely look after sales and distribution and similarly at Air NZ, we would look after our side. [But] both commercially and for our customers, it didn't meet our expectations.''

In March, when Emirates stopped flying the Tasman from Auckland with its superjumbos, the market dynamics changed.

''We wondered whether we should continue with this [Virgin deal] or use our own planes to serve our own customers,'' says Wallace.

Air NZ will increase capacity by about 15 per cent, with more flights to Brisbane, and with just over half of its total transtasman services on widebody planes that are generally more popular with passengers.

Virgin responded within weeks to the Air New Zealand announcement, with a similar increase in capacity and new routes, including a seasonal Auckland-Newcastle service.
Sharp says Virgin has expanded its network to deliver the frequency it needs, but says his airline is picking where it wants to fight.

Peter Harbison, executive chairman of CAPA Centre for Aviation. Photo / Supplied
Peter Harbison, executive chairman of CAPA Centre for Aviation. Photo / Supplied

"The competition will be about product and service, not throwing a whole bunch of capacity at it and getting into pricing wars - that's not our intention here.''

He also warns again that the Air NZ-Qantas deal may have a sting on the tail.

''You've got two major players. In New Zealand it means that there is no competition; having Qantas feed on to both Air New Zealand and Jetstar does raise a number of questions. We've raised this with competition authorities in both countries.''

Although it was put together in a hurry, the Qantas-Air NZ deal was scrutinised to the nth degree by company lawyers, and after it was announced, regulators on both side of the Tasman said they saw no problems with it - although in response to inquiries by the Herald, the regulators did give themselves room to have another look at it.

At the CAPA summit, Wallace and Qantas executive manager of sales and distribution, Igor Kwiatkowski, were at pains to play down just how far-reaching the deal was. stressing that it was just a domestic codeshare.

Kwiatkowski said it was not a "centrepiece of what will happen across the Tasman", while Wallace said his airline had had considerable industry collaboration with Qantas for some time in the areas of safety and security, where there were joint objectives.

Forsyth Barr head of research Andrew Bowley says that in retrospect the breakdown in the relationship wasn't a surprise, given Air NZ's growth in Australia and unhappiness with the joint venture.

I think it's going to be hard for Virgin," he says. "They're investing in product now - why weren't they doing that a year ago

''I think it's going to be hard for Virgin," he says. "They're investing in new product now - why weren't they doing that a year agobecause JVs are win-wins. For any company, to pull out of a JV like this is unheard of in airline relationships.''

Harbison has another take on why Air NZ turned to Qantas after dumping Virgin - which has a messy mix of airline owners including Etihad and a Chinese conglomerate, HNA, which have their own problems.

''It's so nice having big rich mates," he says. "Instead of a poor little mate who's got all sorts of board problems."