Ditched

Why the divorce? According to Air NZ Chief Revenue Officer Cam Wallace, the market dynamics on flights between the two countries have changed and the time is right for each airline to focus on its own objectives.

Previously regarded as a vital buffer against the rival pairing of Qantas and Emirates Airline who also code-shared across “The Ditch”, the Auckland-based flag carrier now clearly believes that when it comes to Australia it can stand on its own two feet.

“This move will enable us to deliver a more consistent customer experience by using our own fleet and delivering an improved schedule, which we’ll provide more details about shortly,” said Wallace.

Virgin appears nonplused by the development, with chief executive John Borghetti declaring it will now look to compete vigorously and that it “provides opportunities for the Virgin Australia Group on the Tasman, including operating both the Virgin Australia and Tigerair Australia brands in the market.”

He said Virgin has had a strong presence in the market since 2004 and we will continue to enhance its offering to suit both the business and leisure markets.

“Virgin Australia will continue its strong focus on providing competition and outstanding service on the Tasman, which remains an important part of our network and strategy as an airline group.”

It’s a clear signal that trans-Tasman flyers can look forward to happy days when it comes to ticket prices.

So, what has changed?

Trans-Tasman flying has traditionally been a volatile business with profitability often scarce through various waves of over-capacity and fierce competition. Air New Zealand hasn’t only had to face a head-on battle with rival Qantas but compete with fifth-freedom flights operated by an array of international airlines operating services into New Zealand via Australia. They include Emirates (its JV with Qantas got a five-year extension in March), Singapore Airlines, Taiwan’s China Airlines, Philippines Airlines, South America’s LATAM Airlines and Malaysia’s AirAsia X.

The strategic alliance with Virgin, forged at the end of 2010 – it included code-sharing, feeding passengers on to each other’s domestic networks, sharing lounges and ground facilities as well as frequent flyer benefits – was seen as a key plank in combatting this threat.

In more recent times, however, the pressure has eased. Four of the 10 international operators reduced capacity last year. These were Emirates (by 4.4%), Jetstar (by 10.2%), China Airlines (by 21.6%) and Philippine Airlines (by 10.8%). Philippine Airlines withdrew from the trans-Tasman market altogether at the end of 2017, replacing its Manila to Auckland via Cairns service with direct flights between Manila and Auckland.

Most significant, however, has been an adjustment in the way the Qantas/Emirates duo are tackling the market. Until last year it was common to see three giant Emirates Airbus A380s parked at Auckland Airport, a sight that appeared to many observers to be a bit of over-kill. The Dubai carrier operated separate flights to Auckland through Brisbane, Melbourne and Sydney, as well as another service to Christchurch through Sydney. From March this year it ditched Melbourne, Brisbane and Sydney to Auckland, retaining only its Sydney to Christchurch A380 service.

Emirates President Tim Clark said demand on its Australia-Auckland flights had been hit after the launch its non-stop flight between Dubai and Auckland last year and due to competition from new entrants. The Dubai carrier is evaluating the possibility of adding another non-stop Dubai-Auckland flight or a new non-stop Dubai-Christchurch flight in the future, Clark said.

At the same time, as part of its renegotiated agreement with Emirates, Qantas increased the frequency of its services between the two countries, adding seven new return flights per week between Melbourne and Auckland and an extra two return services per week between Brisbane and Auckland, with some up-gauged from a B737 to a wide-body A330.

Nevertheless, according to Qantas, the total number of seats between Australia and New Zealand on all airlines will still fall by 3.7 per cent after the changes. On the one hand, that is likely to benefit Air NZ with capacity cuts potentially leading to a boost in airfares. That will depend on what Virgin decides to do and to what measure it throws budget Tiger into the fray. Overall, however, Luxon says there is now “much more rational behavior on the Tasman which is really fantastic because there was over-capacity sitting there”.

It is a market that has seen continual growth since 2008. The number of seats available between Australia and New Zealand grew from 7.55 million to 10.25 million from 2008 to 2017, representing a 36% increase in capacity over the past 10 years. During the same period, the average capacity on departing flights between Australia and New Zealand increased from 196 to 217 seats, indicating the use of larger aircraft.

OAG schedules show that the percentage of trans-Tasman flights operated by narrow-body types has actually increased, from about two-thirds in 2008 to 75% of all services in 2017, but that there has been an increase in the frequencies operated by larger narrow-body aircraft. The B737-800 and A320 were the main single-aisle aircraft used between Australia and New Zealand in 2017, while smaller types including the B737-300 and B737-400 have been phased-out since 2008.

Passenger statistics from the Australian Government’s Department of Infrastructure, Regional Development and Cities, up to and including October 2017, show that Auckland was the second largest international destination from Australia last year.

Another reason why Air NZ has opted to go it alone on the Tasman is that it has never been in a stronger position, both financially and in terms of its confidence as a stable operator able to compete head-to-head with the best. In August it reported a A$358.6 million after tax profit for the year ended June 30, 2017, down 17% on a year earlier but still the second biggest profit in its history. This despite a year in which it faced several major issues, including a burst pipeline Auckland Airport.

While Luxon concedes the past 24 months have been “quite a challenge” he says the business has been highly resilient and highly competitive. With many carriers around the world complaining they are carrying more passengers for less money with yields down, he says its a different story at Air NZ.

Luxon says the business has been highly resilient and highly competitive.

“If you look at our monthly statistics, we’ve had an improving RASK (Revenue per Available Seat-Kilometer) situation for the last year. That’s been a very big focus for us, to get the revenue mix right and to make sure that where possible when we have got rising cost around fuel that we are trying to recover that through revenue. If you look at our RASK and yield, they have been moving in a very positive direction.”

While trans-Tasman is important, he is also set on establishing Air NZ as the major player in transporting people from Asia, including China, through New Zealand to North and South America. It’s another reason why it feels Virgin is no longer a must have in its plans and the central players, strangely enough, have been a goose and a kiwi bird. Unlikely as that may seem, a unique advertising campaign featuring Dave the Goose and, more recently. Pete the Kiwi (the New Zealand bird who wants to see the world but is hampered by his inability to fly), flying to North and South America from Australia via Auckland aboard Air NZ has been a huge success.

Luxon says it has been going “superbly well” and points out over the last three years Air NZ has really built a much stronger presence in Australia.

“We’re the number one corporate reputation companyhttps://mail.google.com/mail/u/0/#inbox in Australia, which is unusual for a foreign company to have that title. We have obviously expanded our sales presence across all the States and we have then been able to have a compelling story to say if you are sitting in Adelaide why not jump on a Dreamliner, come through Auckland… and then transition out to Buenos Aires, to Houston, to Los Angeles. To give you a feel for it we probably have 40 per cent of our traffic to Argentina are Australians. 25 per cent of our traffic to Houston would be Australians. It’s been a great source of extra volume when you come from a country of five million people to be able to tap into a much larger market.”

‘We’re the number one corporate reputation company in Australia.’ Christopher Luxon

Air NZ’s network is now 30 per cent bigger than it was five years ago.

“So that is affording us some opportunities and connectivities that haven’t happened before. For us, to go from Australia through New Zealand out to the east coast of North and South America is really very interesting. To be able to connect China and Southeast Asia through Auckland to South America is also very interesting. Being three hours closer to the Americas than the eastern seaboard of Australia means that yes, we think there’s a huge opportunity for us to do launching into the east coast of North and also South America.”

In the midst of this Air NZ has been facing a wave of new competition from fast-growing Chinese airlines. As well as Air China, China Southern and China Eastern, the likes of Sichuan Airlines, Tianjin Airlines and Hainan Airlines are also flying in. But Luxon has taken an innovative approach to nullify their impact.

“Yes, the Chinese have come in but a lot of that is from secondary and tertiary cities which impacts us less. We have also built a pretty good business model for China which is that we have gone after much wealthier upper middle-class travelers. What we are interested in is the free and independent traveler, not the group traveler. You can fill the planes up with different customers but if you don’t have the right margin structure and economics it’s a real problem. Your planes are full but you are losing money flying to China.”

In fact, over the past four or five years, Air NZ has changed all the wholesalers and retailers it deals with in China.

“We go after wealthy 30-year-old couples, wealthy middle-class families and 80% of the people now coming on our flights are spending eight days or more in the country, almost as much as a U.S. tourist in terms of their daily spend. That’s a much better mix for us. They are also customers who only have limited annual holidays, two weeks a year and they want to start their holiday on an Air New Zealand flight interacting with Kiwis, so they have consciously chosen Air New Zealand over the Chinese mainline carriers. That’s how we have margined our business up and how we’ve got the economic model of that right.”

In the light of all of this nobody should be surprised the Air NZ-Virgin marriage is coming to an end. The relationship hasn’t always been made in heaven. Air NZ sold its 26 per cent stake in Virgin to Chinese interests in 2016, unhappy with the lack of returns it was getting on the investment as Virgin continued to struggle to make profits.

It has actually been winding back many features of the alliance with the Australian carrier ever since. From November last year Virgin’s Velocity Frequent Flyer members were no longer able to earn or redeem points on Air New Zealand’s longer international flights, such as from Auckland to Los Angeles or Houston, nor could status credits be earned or lounge access enjoyed prior to those flights.

A year earlier, Virgin passengers were also turfed out of Air NZ’s Australian lounges except when actually travelling to New Zealand. It does, however, appear Auckland doesn’t want to cut all ties to Virgin and will seek to arrange to continue some kind of code-sharing arrangement on Virgin domestic flights in Australia. Negotiations are ongoing.

Air NZ and its subsidiaries now operate a fleet of 106 aircraft with 56 of those in the mainline operation: 30 Airbus A320 for domestic and short-haul international flights, with eight Boeing B777-200ER, seven B777-300ER and the eleven Dreamliner operating long-haul international.

Subsidiary Mount Cook Airline operates 27 ATR 72 turboprops and Air Nelson 23 Bombardier Q300s to towns throughout New Zealand. Two more B787 will arrive this year as well as four A321/320 neo. Also due to arrive are four more ATR. The airline is currently going through an RFI (request for information) and RFP (request for proposal) process with Boeing and Airbus in terms of a replacement for the B777-200 fleet. Under consideration are Boeing’s B787-10 and B777X as well as the Airbus A350.