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Air NZ on a high wire

By Graeme Kennedy

Friday 23rd May 2003

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Air New Zealand is faced with a balancing act in preparing an upgrade and possible expansion of its long-haul operations ­ a move many in the industry say is long overdue.

While many other international carriers offer enhancements such as flat-bed accommodation in first-class cabins, superior business-class seating and individual video screens throughout the aircraft, Air New Zealand maintains a product perceived as dated.

There are few complaints about long-haul service ­ the carrier regularly wins "best airline" accolades ­ and its Boeing 747-400 fleet with an average age of 11 years is one of the industry's youngest.

Air New Zealand has specialist teams working on upgrade options but they do not come cheaply and would cost the company many millions of dollars while, although operating profitably, it is still recovering from the disastrous losses after the Ansett Australia collapse.

The airline's problem is where to find the money for the upgrade and how to apply it. Enhancements are usually given to the premium cabins but Air New Zealand's major revenue source is from leisure travellers ­ those who buy on price and fly economy class to boost the country's booming tourism industry.

The extent of the upgrade will depend on where the costs can be extracted ­ and that's where the balancing act comes in.

Chief operating officer Andrew Miller points out that 75% of the carrier's long-haul income is generated offshore, with most coming from the leisure sector ­ and as a relatively small airline by world standards Air New Zealand is a price-taker rather than maker in most markets.

"In New Zealand we have a very high proportion of premium passengers but we have to reflect the type of travellers we carry here," Mr Miller said.

"An upgrade is extremely costly and we can't be all things to all people."

He said many long-haul routes were unprofitable, a situation that was part of Air New Zealand's case to the regulatory authorities for approval of the proposed Qantas alliance. The two carriers working together in key leisure markets would cut costs, generate more traffic and increase tourist flows to both countries.

He said the best airlines focused on their particular market and invested heavily in that sector ­ in Air New Zealand's long-haul operation the focus is overwhelmingly leisure.

Mr Miller said the premium market was also the most vulnerable to events such as September 11, the Iraq war and Sars as first-class and business-class passengers stayed home due to personal safety fears.

Air New Zealand was also constantly reviewing its route network and identifying opportunities from developments in aviation technology giving aircraft greater range and access to new markets. "The Boeing 777-200LR, for instance, could do Auckland-Chicago easily and other growth markets would come within range with a one-stop service."

Air New Zealand teams were constantly watching new technological developments, he said, while aircraft builders Boeing and Airbus regularly visited Auckland to brief the company on their latest plans ­ Boeing was here recently to discuss its new 7E7 mid-range jet.

"Fleet replacement is a big investment so you can't make mistakes," Mr Miller said. "Technology is changing all the time and having smaller, more flexible building blocks is better than having bigger units with less frequency."

Unlike Qantas, Air New Zealand sees no role for the 550-seat Airbus A380, which Mr Miller said was a good tool for carriers operating out of capacity-constrained airports but far too big for his airline.

"With our critical mass and size Auckland-Los Angeles is the only route that would support it and we would rather have a double-daily 747 service, which better connects with domestic flights and provides more flexibility," he said.

"Airlines have got to understand that, whether it's Sars, Iraq or September 11, there will always be something that will hit the industry and they must develop more flexible and robust models to cope with them.

"We are strong and profitable domestically and we must take that strength to other elements of our business."

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