Air NZ oils regulators' palms with new Tasman Express

By Graeme Kennedy

Friday 15th August 2003

Air New Zealand's slim chance of gaining regulatory approval for the proposed Qantas alliance has been strengthened by the launch of its low-cost Tasman Express product this week.

And with capacity estimated to increase by up to 40% on Tasman routes by the end of this year, the Commerce Commission is expected to factor the increased competition into its decision-making.

But more important to convince the commission that the deal will not be anti-competitive will be Qantas' reaction to the Air New Zealand initiative, which is expected as early as today, to reinforce positive aspects of the move before the authority begins hearing final arguments on Monday.

Industry sources say the Australian carrier could match the Air New Zealand range of lower fares but maintain full service as it did after Air New Zealand introduced its domestic Express Class product late last year to demonstrate that competition would continue if Qantas' proposed 22.5% holding was approved.

Air New Zealand would manage the two airlines' Tasman operations including fares and schedules under an approved alliance but sceptics doubt an enhanced Qantas product would remain in the market for long.

Air New Zealand says it already faces strong competition on the Tasman with 10 competitors including carriers such as Emirates, LAN Chile, Malaysia, Aerolineas Argentinas, Thai, Polynesian and its own Freedom with Korea's Asiana and Royal Brunei scheduled to start services later this year.

But Sir Richard Branson's Virgin Blue, which has rights to enter the crowded market, points out that these operations do not represent true Tasman competition as they ignore New Zealand's other international gateways at Wellington and Christchurch.

The New Zealand carrier's expansion of its low-fare model is no surprise the company announced earlier this year it planned to extend its fewer-frills domestic product on to the Tasman and has indicated it might be taken further to include regional Pacific destinations.

The initiative must gain points with the Commerce Commission, which will give its final decision on the alliance proposal late next month. The planned partnership has, however, been widely rejected by consumers and the travel industry as being anti-competitive.

With Tasman Express launched just days before the last-ditch Commerce Commission hearings, Air New Zealand will emphasise that competition is alive and well and that consumers, rather than fearing higher fares, will be getting a great deal.

Air New Zealand introduced Tasman Express to lift traffic by cutting costs with its more efficient A320s and fewer-frills service in a market which employs an estimated 20% of its total capacity in available-seat kilometres.

The carrier, with traffic boosted by the success of its domestic Express Class product, is doing well and is expected to announce a full-year net profit of more than $210 million on August 28.

Qantas will next Thursday report its annual results which analysts are forecasting to be close to $A450 million.

Meanwhile, Business Travel International chief executive David Allen said Tasman Express would drive corporate clients to seek other options among the increasing number of carriers on the route.

Mr Allen said the Air New Zealand business class product offered lower service levels such as shorter seat pitch, plastic cutlery and simpler meals with the new fares and less price-sensitive corporate travellers would make choices to fly from the range of competing airlines sometimes at lower to get the comfort and service they wanted.

And unlike leisure travellers who could book months before departure and have a better chance of securing the cheapest seats, businesspeople often had to go at short notice when only the top rates were available.

"Air New Zealand is saying they have made across-the-board reductions of around 20% but we are consistently getting saving of 40% for corporate clients by juggling the types of travel and mixing carriers," Mr Allen said.

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