Battlelines drawn in air seats war

BY ROELAND VAN DEN BERGH

Pacific Blue's demise in the domestic airline market clears the way for a battle royal between Air New Zealand and Jetstar.

The Australian budget airline announced this week that it would withdraw on October 18, having lost "tens of millions of dollars" during its three-year foray, with no prospect of making a profit.

Pacific Blue flies two Boeing 737-800s between the main centres as well as Queenstown and Dunedin.

The decision is part of a network-wide restructuring ordered by parent Virgin Blue to cull loss-making routes and refocus Pacific Blue on the Tasman, Asia and the Pacific Islands.

Some of the freed-up domestic capacity will be redeployed on the Christchurch to Melbourne services, which will become daily, and a fourth weekly service from Dunedin to Brisbane.

Jetstar has wasted no time in immediately bringing forward expansion plans, saying it will add a fourth Airbus A320 to its domestic fleet as soon as early next year, taking its trans-Tasman fleet to eight.

The Qantas low-cost offshoot has made no secret of its aspirations since taking over Qantas' domestic services last year.

However, travellers are concerned that Pacific Blue's departure will lead to higher fares and fewer services.

Pacific Blue had an immediate impact on the cost of domestic travel by cutting the cheapest standard fares by 30 per cent between Auckland, Wellington and Christchurch, forcing Air NZ to match it.

In addition, travellers have benefited from a ready supply of super special fares as low as $1 as airlines looked to fill planes.

House of Travel retail director Brent Thomas says low fares and specials will still be available, but there will be fewer of them.

Centre for Asia Pacific Aviation executive chairman Peter Harbison says a market with three carriers will benefit from "a lot more irrational pricing".

But competition between Air NZ and Jetstar will not be the stable duopoly that existed before Pacific Blue.

In light of the planned trans-Tasman alliance between Air NZ and Pacific Blue's Australian owner Virgin Blue, Qantas will use Jetstar to take the fight to the national carrier.

"You have got a new entrant carrier which is powerfully backed, which wants to grab market share, and which wants to hurt the incumbent. "You are not going to see low prices go out the window at all."

The alliance, if approved by regulators, will change the market dynamic by creating a sizeable competitor to the Qantas/Jetstar juggernaut, Mr Harbison says. It will give Air NZ direct access to Australian domestic passengers for the first time since its doomed purchase of Ansett Australia nearly 10 years ago.

Air NZ could use that access to the Virgin Blue network to threaten Qantas' 90 per cent domination of the lucrative Australian corporate market.

Qantas held back from attacking Air NZ while there was the slightest chance that the two could be buddies, Mr Harbison says.

Attempts at similar arrangements between Air NZ and Qantas have previously been rejected.

"But now that all bets are off, I suspect the thinking might be, if we really want to make Jetstar work we've just got to make Air New Zealand hurt."

Mr Harbison also expects Qantas will at some point attack Air NZ's monopoly on the regional network using turboprop aircraft.

Air NZ has had the regions to itself since Origin Pacific went broke in 2006.

The airline has launched a range of initiatives to keep regional customers loyal, including a new discount loyalty card for frequent fliers.

Dunedin is perhaps hardest hit by Pacific Blue's departure, as it leaves the city without a competitor to Air NZ.

Jetstar spokesman Simon Westaway says the airline "is running a ruler over Dunedin" to see if it is a viable route, and how it might fit into the network. But the immediate focus is on expanding services from the three main centres.

Forsyth Barr aviation analyst Rob Mercer says the decision to pull Pacific Blue out was driven by cash-strapped Virgin Blue Group moving into a loss in the second half of the financial year to June.

It was always a tall order for Pacific Blue to survive long term as the third airline in a small market.

Pacific Blue lacked the market share in Australia to feed enough passengers through to its New Zealand operation, Mr Mercer says. "It's hard to expect New Zealand is ever going to be profitable for three airlines."

Air NZ's profits on the main trunk routes should improve without Pacific Blue as a competitor, allowing for a slight increase in average loads and reducing the need to sell as many discounted seats, Mr Mercer says.

Yields are recovering after being pulled back by competition and the economic downturn last year.

Mr Mercer is forecasting about a 5 per cent improvement over the next year.

But the replacement of the Boeing 737-300 domestic fleet with bigger A320s next year, along with Jetstar's growth plans will put a brake on substantial fare increases, he says.

Pacific Blue entered the domestic market in late 2007 to attack Air New Zealand's soft domestic underbelly and seize the advantage of being the first budget airline to mix it with the Air NZ-Qantas duopoly.

The airline had been flying on the Tasman for three years.

Mr Harbison says that at the time Virgin Blue had spare planes that it did not want to use in Australia and muddy the waters on profitable routes it operated as duopolies with Qantas.

So it moved them to New Zealand to create an Australasian network in favour of starting an "ultra-low-cost" brand to battle with newcomer Tiger Airways on its home turf.

THE high returns being made by Air NZ on its jet routes could not be ignored any longer, Virgin Blue's then boss Brett Godfrey said.

Mr Harbison says a low-cost carrier will often do things on the back of an envelope. It will try a route, but get out quickly if it doesn't work.

In the end the domestic planes could be better used elsewhere rather than losing money on a network that it can look to Air New Zealand to provide in the future.

"Had it not been for the prospect of a relationship with Air NZ, the decision to pull out would have been a lot harder," Mr Harbison says.

It will make it a lot easier to develop the alliance if they are not competing head to head.

Mr Harbison believes it will be only a matter of a few years before another third competitor tries its luck in New Zealand, with Australia's newest domestic budget carrier, Tiger Airways, high on the list of contenders.

Australia and New Zealand are increasingly becoming a single market.

"It is shorter to fly between Sydney and Auckland than it is between Sydney and Perth."

If Tiger Airways can find a cost edge and use New Zealand to complement its Australian operation, the opportunity will be taken, Mr Harbison says.

However, Tiger does not automatically qualify to fly on the Tasman under the open skies agreement because of its foreign ownership (backed by Singapore Airlines) and its lack of flights originating from outside New Zealand or Australia.

It wants the rules changed to cover airlines that have their principal place of business in either country regardless of ownership.

- © Fairfax NZ News