Cost-cutting gets the nod

By Graeme Kennedy

Friday 29th November 2002

Air New Zealand is encouraged by the first month's performance of its new Express Class and optimistic about the future of the low-cost no-frills domestic product.

However, its success measured in actual revenues, yields and profits will not be known until about February after an initial three months of operations.

The carrier cut Available Seat Kilometre (ASK) costs by 25% by ending meal service and business class and imposing charges on some previously free services and increased capacity 11% with the introduction of all-economy class seating.

The radical change from a full-service to a fewer-frills airline with a lower cost base enabled Air New Zealand to cut fares and stimulate passenger traffic emulating the wildly successful discount carriers such as easyJet and Ryanair which are ordering new aircraft in their hundreds and posting record profits while traditional airlines continue to struggle in the post-September 11 and global economic slump.

The increased traffic is also boosting business for travel agents, most of whom are charging service fees since Air New Zealand cut commissions as part of its cost-reductions.

Chief operating officer and deputy chief executive Andrew Miller said passenger numbers were up 28% this month against forecasts of a 20% lift. Bookings for December were up 20%, January 20% and February 35% compared with the same months this year.

Mr Miller said travellers were booking further ahead, particularly for cheaper leisure fares which accounted for 20% to 25% of aircraft seats twice the capacity allotted to the cheapest fares before the new pricing was introduced in late October.

He said the biggest fare cut was 60% on Auckland-Queenstown while the trunk routes varied between 10% and 60% for an average of around 28%. Non-trunk fares were now between 10% and 20% lower.

Booking online was the cheapest option and website usage had soared from just 4% a year ago to 30% this month as business slumped through Air New Zealand call and travelcentres which charge $10 a sector.

"And a lot of people still want to use travel agents and pay a fee for making reservations," Mr Miller said. "Travel agents play the same role as before and with the average fare coming down and the market increasing by more than 20% their business is also up.

"Travel agents are going into the website to book online for their customers and are charging them and that's fine by us.

"Companies are staying with the corporate travel management firms to get travel and entertainment reporting if they spend $2-3 million on travel and another $1 million on entertainment they need reporting and are willing to pay for it.

"We surveyed New Zealand's top-500 companies and found that under our new fares they will pay around $40 million less with us but we expect them to use that saving to travel more."

Mr Miller said 98% of corporate clients were happy with the changes, with only a few concerned they were not being rewarded with more discounts for high volumes of travel although the whole fare structure was now lower.

He said weekday use of the airline's new no-baggage self check-in kiosks was highest at Wellington at 20%, followed by Christchurch with 17% and Auckland which has a high leisure travel component at 15%.

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