Regional Rivalry

Seismic shifts in NZ regional aviation as Jetstar takes to the field

Massive change is underway for regional aviation in New Zealand. Domestic incumbent Air New Zealand faces competition, often for the first time, on two fronts: firstly from Jetstar New Zealand, which starts Bombardier Dash 8 Q300 turboprop flights this December, and secondly from smaller regional NZ carriers like Sounds Air, Air Chathams and Kiwi Regional Airlines.

This will change the conversation and we’re very keen to compete.

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Aviation is a key contributor to – or detractor from – NZ regional economies

The lion’s share of the market is held by Air New Zealand and its three subsidiary regional airlines: ATR 72 operator Mount Cook Airline, Q300 operator Air Nelson, and Beechcraft 1900D operator Eagle Airways.

With the November 2014 decision to wind up Eagle Airways, just the two airlines and aircraft types will be left.

“We had a review of our regional flying business, and that was ATR 72s, Beechcraft 1900Ds, and Bombardier Dash 8 Q300s,” Air New Zealand chief sales & commercial officer Cam Wallace tells Australian Aviation.

“We looked at some of the markets we were participating in, and we were looking at the cost per seat of the individual aircraft. And that’s when we made a decision that in the future our aircraft types for regional New Zealand would be a combination of ATRs and Q300s. We’ll have about 48 of those aircraft when they all come in. At the same time, we made a difficult decision to retire the Beech 1900 fleet. The reason we made those tough calls and put such an investment into the new aircraft is because it gives us lower unit costs and the ability to price more aggressively. ” Part of the issue with retiring the Beechcraft 1900D fleet is that somesmall markets cannot support a Q300 service. Westport on the west coast of the South Island, Whakatane in the Bay of Plenty and Kaitaia in the far north of the North Island will lose Air New Zealand service.

“The characteristics of the New Zealand geography is that there are many, many airports, and many of the airports were within an hour or an hour and a half of the nearest airport, so obviously as we swapped out the Beech aircraft to a much larger aircraft we put more capacity in those markets,” Wallace says.

“There have been numerous small regional niche players that have started up in New Zealand as well, so there has been something of an explosion of small niche players in the New Zealand market. So a combination of us upgauging some similar sized markets close to these airports coupled with new entrants means that we think New Zealand is really well served for regional services. ” Indeed, Air Chathams began serving Auckland-Whakatane in April of this year, with Sounds Air taking over Wellington-Westport in the same month. Kiwi Regional Airlines, too, is a recent Dunedin-based startup with services set to commence on October 27.

Looking from Air New Zealand’s operational perspective, the airline’s domestic Boeing 737-300 fleet was retired over roughly the same timescale as the Beechcraft 1900D fleet, enabling the airline to operate two fewer types of aircraft. The successor Q300s, however, are not exactly young in the tooth. Air Nelson’s 23-strong Q300 fleet were delivered over four years from 2005 to 2009, replacing older Saab 340 props. Indeed, the very last Q300 to roll off the floor in Montréal was delivered to Air Nelson before Bombardier moved to Q400-only production. (Air New Zealand also took the final Boeing 737-300 off the line – see October 2015 Australian Aviation – a trend, perhaps, for the Kiwi carrier?) “We think the Q300s and the ATRs will be the core components of the regional fleet for the medium to long term. Our focus on new aircraft is the ATR 72‑600, so generally speaking those are the new aircraft we are investing in. Between the ATR and the Q300, we think the ATR has better operating economics,” Wallace says.

Australian Aviation put it to Wallace that the ten year old Q300 aircraft are out of production, and thus have a limited lifespan.

“Certainly we see them continuing in the medium term, so it’s not a two-five year proposition, it’s longer than that. ” But in time with the ageing Q300 fleet, it will be telling to see whether Air New Zealand’s next fleet decision for its regional flying moves to an all-ATR fleet, either by the removal of 50-seater aircraft or by the purchase of 42-50 seat ATR 42 turboprops to match its larger ATR 72s.

Air New Zealand’s fight, not flight, response to Jetstar regional

At the end of August, Qantas-owned Jetstar announced its first five routes over four regional centres using Dash 8 Q300s. Flights on the Auckland-Nelson and Auckland-Napier routes will begin this December, while Auckland-New Plymouth, Auckland-Palmerston North and Wellington-Nelson flights will start from February 2016. The LCC already has approximately 20 per cent of the New Zealand domestic market share from its Airbus A320 trunk route operations.

“We believe there is room for two airlines in regional New Zealand,” Jetstar’s impressively titled Head of New Zealand Grant Kerr tells Australian Aviation. “Part of the criteria for us when we were picking the destinations was whether therewas potential for growth in those regions, and the second part of the criteria was whether there was the ability to create partnership in that region as well. ” Overall, Kerr notes, “The criteria were: is there potential for growth? How quickly can that growth come? Will there be support through a partnership? How can we leverage the wider infrastructure they have and we have to start working together?” Air New Zealand’s Cam Wallace is bullish about the prospect of a new entrant. “We’re quite excited and energised by the opportunity to compete in the regions. We think it’s going to be good for customers, good for tourism, and actually really good for Air New Zealand as well. We want to win each individual customer through better product, better services and competitive prices. There has been some noise in the markets about how reasonable our fares have been, so we think this will change the conversation and we’re very keen to compete. We willbe extremely competitive, and we’re energised by the opportunity to compete. We’re saying bring it on – it’s going to be an interesting battle and we’re well prepared for it. ” Wallace continues, “The changes that we made to our regional flying network over the last year have positioned us in a really cost-effective way to compete aggressively, and it’s now even more important that we made those changes so we have the right cost base. Some people are surprised by our attitude to Qantas, an airline four times our size, but we’re very excited by the opportunity. ” So, with the addition of Jetstar, has the mix of aircraft from the strategic regional review changed for Air New Zealand? “No, they’ll still be a combination of Q300s and ATRs. Our schedule on those city pairs hasn’t changed,” Wallace says. “Obviously the market capacity is going to go up significantly, clearly, because a new competitor is coming in and every seat that they put on is going to be incremental capacity. We haven’t changed our product or our fleet of aircraft on those routes, we’ve kept them consistent. ”

Passenger experience will be more about ground efficiency than inflight

“At the end of the day,” Air New Zealand’s Wallace says, “whilst the flying is a very important component of the total journey, we’ll be looking to compete right across the customer journey – from the online or offline booking process, the lounges, the loyalty, the different corporate and regional facilities we have, the valet parking. So we look at the competitive challenge and the opportunity that presents itself in terms of the total journey. Certainly if you look at some of the city pairs – Wellington-Nelson is a good example – because you might only be in the air for 20 minutes we’re looking at every component of the customer interaction and journey rather than a one-inch pitch differential. ”“We have lounges in all the ports which they’ll be participating in,” Wallace notes. “As you know, we’re going through the most significant lounge upgrade process we’ve been through. We’ve completed Sydney and Auckland, and we’ve now got the Auckland regional lounge. Nearly all their regional flights will go from Auckland, and we now have an Auckland regional lounge as well as an Auckland main trunk lounge. At the regional centres, we will progressively be upgrading those lounges. That’s a really important part of our value proposition for our high value customers. What they can do is drive their car to valet, drop their car off, walk literally 10 yards, check in using the app and go straight to the regional lounge, and then walk another 20 metres to the gate. It’s a very smooth experience. ” Jetstar’s Grant Kerr is clear that his airline offers a different proposition to potential customers.

“Because we operate low-cost, point to point, we give our customers the opportunity not to be at theairport early. We’re not offering any lounges because they put a value on their time. They’re not paying for a Koru lounge like Air New Zealand has that they don’t need and they don’t access. They love the fact that also, when they arrive at their destination in the regions, all these airports don’t have carousels: the luggage comes straight off the trolley, customers walk to the trolley and they’re gone within five minutes maximum. They love that quickness,” Kerr says. “It’s straight to gate, straight to the aircraft. In the regions, airports are very small, and the airport parking maximum walking distance would be 50 metres, so the need for valet parking isn’t there. ” Kerr might be underestimating a little on the parking distance, but his point about some passengers valuing efficiency rather than perks is valid.

Although Jetstar will be using similar aircraft to Air New Zealand, Grant Kerr says that the LCC has cost advantages. “The Q300 is quite an efficient aircraft, and the sector length that we’re flying is about an hour. The maximum length is an hour twenty, which is Auckland-Nelson. That suits the Q300 really well. Also, we have only one cabin crew on board, keeping the costs low. Generally we try to target 80 per cent or even higher load factor – we have a different model altogether from a full fare airline. We’re confident we’ll get support from the regions as well. We’re already showing very strong support, and that’s continuing to grow as well. ” Interestingly, the Jetstar Q300s, to be operated in New Zealand – as there were in Australia, by QantasLink operator Eastern Australia Airlines – are older than Air NZ’s models. “There’s going to be a mix of the earlier ones. So we’ve got five coming into the country. They’ve been refurbished and have a Jetstar brand on the outside, full releathered internally, all the checks have been done in Australia. The aircraft will be virtually brand new when they enter into New Zealand,” Kerr insists.

“We’ll be offering similar to what we have: the opportunity to purchase on board. There’s tea, coffee, water, etc. . We won’t be going the full catering like we have on the A320s given the short sector lengths. There will be a beverage service and opportunity to purchase muffins and other small stuff. ” Notably, however, launch route Auckland-Nelson is longer in duration than existing Jetstar A320 routes like Wellington-Auckland and Wellington-Christchurch.

Only Jetstar can approach Air New Zealand’s network operations

“New Zealand as a country is driven by exports, and there is a lot of regional activity in the business, commercial, government and tourist sectors,” Air New Zealand’s Cam Wallace notes.

“It’s very important to have Kiwis connected as comprehensively aswe can possibly deliver. We serve the regions through a tremendous amount of inbound (visitors). Tourism in New Zealand is going through a real boom, so there is a tremendous amount of incremental traffic coming in, not only from China, but from the United States as well. The challenge for New Zealand and its infrastructure – and the challenge for us – is to disperse those customers from the hub of Auckland through the regions and show the tourists an experience more than Auckland-Christchurch-Queenstown-Wellington. That’s a big focus for us. Both from a cargo perspective and a passenger perspective it’s making sure we’ve got the frequency, capacity and a network. We think we’ve got that really comprehensively covered. ” In terms of international connections, there is a large opportunity, Wallace suggests. “There’s a whole bunch of customers, certainly from China,who book domestically in New Zealand, through inbound operators. The amount of trans-Tasman connection on regional service is material, but it’s not in the high percentages. If you look at Queenstown, Dunedin, Christchurch, we serve the trans-Tasman from a lot of ports within New Zealand, so logically the connecting traffic is a smaller percentage. Even the international connecting traffic, some of it’s bought locally from inbound operators. It’s a significant part of our business, but we don’t have percentages on exactly how much it is. ” Jetstar agrees. “What we’ve tried to do with our schedule is to make as much connectivity as possible,” Jetstar’s Kerr says, “whether that be with the codeshares, whether that be from regional onto Jetstar trans-Tasman, Qantas trans-Tasman, Emirates trans-Tasman – whatever connectivity we can achieve is how we’ve arrived at the schedule. With the announcement of Jetstar flying Auckland to Rarotonga, all the regions connect to that flight. We’re trying to make it seamless. ” For Air New Zealand, meanwhile, “the schedule is designed primarily around point to point, and there’s a combination of business, corporate, government and leisure traffic,” Cam Wallace says. “But because we’ve got such significant frequency, even on markets like Wellington-Nelson, there’s a lot of flights on that sector, which is probably about 21-22 minutes of stage length in the air, it allows us enough connectivity be it Wellington-Sydney, Wellington-Melbourne or Wellington-Auckland to connect to an international long-haul flight. That’s one of the great strengths that our network has, that tremendous amount of flexibility but also capacity and frequency. We’re covered very well from a frequency perspective in the regions. ” Australian Aviation asked Wallace whether the airline was intending to focus some regional flights on non-Auckland

Any market that Jetstar has entered, we see airfares dropping by up to 40 per cent.

connections in order to offer a better connection experience. Auckland’s domestic and international terminals are a 15 minute walk or bus journey away from each other, so connecting in single-terminal Christchurch and Wellington is significantly better from a passenger experience perspective. For regional centres such as Nelson, with its 20-minute flights to Wellington (compared with over an hour to Auckland plus a terminal change there), will Air New Zealand be making the most of its broader network and funnelling passengers via Wellington? “We don’t look at that, because there’s a combination of traffic,” Wallace says. “You’ve got the sitting periods when the house is sitting, but the more material part of the government business sector for us is actually the government departments and the employees who work for ministries who are travelling throughout the year, not just when the house is sitting. ” Air New Zealand is “totally agnostic” on preferred hubs, Wallace elaborates. “There’s individual dynamics: Auckland is our coreinternational hub where the majority of our international long-haul flights come into, so obviously that plays a big part in connecting passengers regionally and on the trunk. Wellington’s an important market because it’s a hub of the government, and there’s an awful lot of government traffic originating from Wellington or travelling to Wellington from the regions, and that’s quite a big part of what we do, and then Christchurch has a whole tourist infrastructure around it. So quite distinctly different, but all important for different reasons. ”

Air New Zealand’s pricing continues to spur criticism

Jetstar’s Grant Kerr is quick to highlight pricing as a big draw for potential passengers. “Before we even announced the four destinations, we’ve seen our competitor respond, dropping their prices across destinations. Typically, any market that Jetstar has entered, we see airfares dropping by up to 40 per cent. So it’s a considerable drop in airfares once there is competition and people have the choice. ” One of the key factors to a rise in low-cost carriers in any monopoly market is the perception that the incumbent legacy carrier is taking advantage of its dominant position on a pure pricing and fare opacity basis. The combination of a well publicised insurance issue, frequent press coverage of high regional fares and the very existence of a monopoly is a problem for Air New Zealand.

As a wider point of principle, if legacy airlines behave in a way that leads passengers to think that all airlines are a bunch of opportunistic price-gougers charging fees at every opportunity, the passenger experience and service argument for flying them compared with low-cost carriers is lost. Passengers from other markets know that they have to look for Ryanair, Southwest, AirAsia – or indeed Jetstar – for cheap fares. In the age of web purchasing, Jetstar is just a ten second search away even for a passenger who has never heard of the airline before.

The difference between Jetstar and Air New Zealand in terms of pricing is significant, but in terms of passenger experience it has previously been the difference between a 30in pitch Airbus A320 seat on Air New Zealand or a 29in Airbus A320 seat on Jetstar. When trunk routes like Auckland-Wellington or Wellington-Christchurch take under an hour to fly, is it really worth $250 to fly Air NZ compared with $80 on Jetstar? How does that change when passengers are comparing a Jetstar A320 with an Air New Zealand ATR 72 turboprop? Or even between practically identical Q300s on both airlines? Those perspectives are not always the only considerations, of course. Jetstar passengers to and from Queenstown, with its frequent weather issues, have often considered themselves poorly served in terms of communication, care and options when the airline cancels flights, leading some passengers to swear off the airline entirely.

“It’ll be interesting to see as we grow and people become accustomed to the low fares we have,” Kerr says. “I believe there’s a lot of people in all the regional cities, not just the four we’re flying to, who haven’t flown before, because it hasn’t been affordable. ” As Jetstar’s routes launch and bed in over the next few months, and more regional upstart airlines start to operate, it will be fascinating to see exactly how big the latent market for regional flying is – and how that market changes the dynamics of regional aviation in New Zealand.