Tasman bloodbath?

The S. 30s struggled along at 160mph (257km/hr) at an altitude of 5000ft and bad weather often forcing the aircraft down to just 1000ft.

While the S. 30s could fly higher the heating system did not work above 5000ft.

When poor weather forced the aircraft to higher altitudes, out came a liberal supply of blankets.

Now some executives may be reaching for a comfort blanket as airlines look to increase capacity and frequency on trans Tasman routes.

“Bloodbath” has been the recent headline, but trans Tasman routes have always bordered on marginal at best for over 20 years.

But this time it may be a deeper shade of red.

The inefficiencies of the routes are incredible. For example, six airlines fly between Sydney and Auckland operating 86 flights a week using a mixed bag of aircraft from 150-seat 737s to 360-seat 777-300ERs, while four airlines operate 42 weekly flights from Melbourne-Auckland using mainly 737s and A320s.

In February, Emirates will replace a 777-300ER with a 490-seat A380 on Sydney to Auckland just to add some spice.

In all, seven airlines operate 330 flights a week between various cities in Australia and New Zealand, and there is significant duplication.

With the various changes in the next eight months, capacity on the key routes will increase by between eight and 14 per cent.

Problem is, says Air New Zealand’s CEO Rob Fyfe, that demand “is probably growing at maybe between two and four per cent per annum. ” “So that means the only option is for the existing operators to materially reduce prices to try to fill up their aircraft and, of course, that’s going to see everyone’s profitability go south. ” And there is no doubt Fyfe is right. Tasman routes have been marginal for years, but at the same time appealing for airlines because of the typically shorter ranges.

For Air New Zealand there is also the double whammy of Virgin Blue operating in its domestic market. In a strange twist there are two full service airlines and one discount airline operating in a domestic market one quarter the size of Australia, whereas in Australia there is one full service and three discount carriers.

Fyfe says “that it’s hard to see that a market this size, which is a quarter to a fifth the size of Australia, can really sustain three domestic competitors of any scale. ” He is of course absolutely right, with a US study from the 1980s stating that in an ideal world an airline needs a population size of 40 million to operate effectively.

The airline industry however is the antithesis of an ideal business world, with competition regulators focused on as many airlines as possible in a given market with religious zeal.

Air New Zealand’s shorthaul manager, Bruce Parton, warns that the airline is not seeing any significant growth on Tasman routes.

“Profitability on the Tasman deteriorates rapidly when the rate of capacity growth in the market exceeds the rate of passenger growth.

With passenger numbers flattening out, any significant increase in the level of market capacity will cause a decline in the profit of all airlines on the route,” he told the Business Herald recently.

With the New Zealand economy officially sliding into recession and the Australian economy on the East Coast slowing significantly, pricing pressure will be intense.

Last year Air New Zealand trimmed capacity by 11 per cent and in the first six months of this year increased fares several times in response to the massive fuel hikes. However, in August the airline moved to protect its market share and cut lead in fares on some routes by as much as 30 per cent. Qantas was yet to respond at press time.

Air New Zealand also rolled out in September the first of its revamped 767-300s and A320s with increased leg room for premium economy passengers plus IFE for all.

While a bloodbath seems inevitable, Parton does not think it will be a repeat of the 2003-05 carnage when capacity increased 17 per cent and yields fell by about 20 per cent.

All the players will be hoping that Parton is right, and it is also to be hoped that competition regulators that thwarted Qantas’s and Air New Zealand’s bid to bring economy of scale and rationalisation – that would have led to genuine and sustainable fare reductions – to the Tasman in 2002/3 will also see how wrong they were.