COMMENT:

The price war between Air New Zealand and Jetstar can only be great news for consumers, with cheaper flights popping up around the country.

But this isn't necessarily the case for the airlines involved in the stoush, particularly Air New Zealand.

Jetstar might be Australian-owned, but this fight is definitely playing out on its home turf, with the airline long having carved out its position as New Zealand's budget airline, specialising in a stripped-back service devoid of any frills.

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At the same time, Air New Zealand has focused on the quality of its service – something that travellers have been willing to pay a premium for.

But by slashing prices, Air New Zealand in some ways sends a message that paying that premium might not be worth it. If 750,000 flights can go for under $50 a seat, then why should we ever have to pay more?

In an article written for the Harvard Business Review, consultant Rafi Mohammed uses the example of the Domino's pizza chain to explain the impact of deep discounts on consumer behaviour.

In late 2009, Domino's had been charging $9 for a medium size two-topping pizza, but made a decision during the recession to cut the price to $5.99.

This was the first shot in what Mohammed calls the 'Great Pizza War' – and one which was followed by similar moves from its competitors.

It didn't take long for the $5 pizza to become the standard charged by all the commodity takeaway players in the market. Domino's had effectively defined a new low-price standard - where it now remains stuck.

Drive past either a Domino's or a Pizza Hut in New Zealand today and you'll know that the $5 price tag has become the franchisee's burden to carry.

As Mohammed explains: "Deep discounts devalue a product or service, limiting companies' ability to raise prices as the economy improves. If people get used to paying $10 for a large pizza with lots of toppings, it's hard to restore a price of, say, $16.99 when demand picks back up."

Air New Zealand's reasons for its massive price shake-up are understandable, rational even. The airline is trying to stimulate local tourism at a time when its revenue outlook isn't looking as stellar as it once was.

The thing with tourism is that it ebbs and flows. So what happens down the line when tourism demand returns? Will Air New Zealand be able to push up prices at that stage - or will it be trapped alongside Domino's in selling a devalued commodity product indistinguishable from that offered by competitors?

This is part of the reason why many international airlines launch budget subsidiaries that allow them to compete on price, without damaging their primary brands.

Take for instance Lufthansa, which is able to charge a premium, while simultaneously competing on a cost level via its Eurowings brand. That way it gets the best of both sides, without engaging in a race to the bottom with its flagship brand.

You also see this approach playing out in consumer goods space, as seen in the example of US beer company Anheuser-Busch which introduced its budget Natural Pilsner brand during the 1990s recession. In doing so, the company was able to maintain the pricing power of Budweiser at a time when demand was dropping.

This is not to say that Air New Zealand should launch a budget airline to compete with Jetstar at price level, but it will be interesting to keep an eye on the long-term impact of these slashed prices.

Consumers certainly will. And if those prices do start to climb again, you can rest assured that Air New Zealand's brand will be in for a turbulent ride.