Air NZ pulls up after inside-out overhaul

[Wirraway]

Fri "The Australian"

Air NZ pulls up after inside-out overhaul
After red ink, it's blue skies for the carrier, says Geoffrey Thomas
October 01, 2004

AS turnaround stories go, Air New Zealand's is about as good as it gets. In just over 2 1/2 years, under chief executive Ralph Norris, the company has come from the nightmare of writing off $NZ1.45billion ($1.35 billion) to posting combined annual profits of $NZ331million over the past two financial years.

It is an outcome few would have predicted following the downfall of Ansett in September 2001, when AirNZ itself teetered on the edge of collapse, as major shareholders Brierley International and Singapore Airlines baulked at recapitalising the carrier.

This prompted the New Zealand Government to step in with an $NZ885 million injection in October 2001, thereby acquiring a controlling 82 per cent stake.

At the end of November 2001, new board member John Palmer took over as chairman of the tottering concern. Norris, one of only two board members to survive the Ansett debacle, was appointed to his post in February 2002.

One of the first things on the agenda was a staff survey to gauge the airline's heartbeat. The results were disturbing, indicative of a desperate need for some "intensive care" to bring the airline back to life.

Only 29 per cent of staff bothered to respond, and of those, 90 per cent claimed that management was out of touch, possibly reflecting years of neglect under executives whose entire focus was shareholder return.

Norris's mantra is the opposite. "It is all about people," he insists. "The relationship between staff and customers is critical. If you get the staff relationship in good order, then you have a great opportunity to get superior satisfaction. If you get that, then you get superior shareholder returns."

But first he had to stop the flow of red ink, which had resulted in further losses of $NZ319 million in 2001-02. His measures were harsh but effective: a 30 per cent pay cut was imposed on management and all perks such as chauffeur-driven cars were dropped. Non-management staff were asked to take a pay pause. As most of the lay-offs came from management ranks, the staff began to take notice.

A key platform of his rebuilding strategy was to "ensure that people felt their input was valued", Norris says. Carefully thought-out input was required to rebuild a shattered airline. It was clear the staff was working with tired and outdated equipment and Norris, with a real passion for technology, was determined to give them the right tools.

The company's makeover comes under what is termed the Business Transformation Program, which incorporates more than 40 initiatives designed to deliver $NZ245 million in savings over three years.

By the end of 2003-04, the program had netted $NZ65 million in savings from such items as increased online bookings and self-check-ins at airports and efficiencies gleaned from newer aircraft, such as the A320 on trans-Tasman services.

The first priority was a radical restructuring of the domestic product to repel an impending assault by Virgin Blue.

It launched Express Class in November 2002, featuring single-class flights on which neither meals nor alcoholic beverages were provided. A simplified fare structure was put into place -- fares were 20 per cent lower on average, with some up to 50 per cent below those previously available.

With the elimination of first class, cabin seating was increased by 14 to 136 on 737-300s. Self-check-in airport kiosks were installed and within a short time more than 50 per cent of passengers were using this method -- the highest take-up rate in the world.

At the end of August, Air NZ revealed that overall domestic traffic had risen 40 per cent since the new service was launched.

Next on Norris's agenda was an overhaul of the airline's trans-Tasman services, which, with service to nearby Pacific islands, accounted for nearly 16.5 per cent of revenues last year.

The evaluation team ordered and optioned 35 A320s to replace 767s and 737s. The switch has resulted in operational savings of 15 per cent.

The new product was dubbed Tasman Express and was modelled on the lean domestic Express, with the addition of an eight-seat business class, overhead video screens for in-flight entertainment and in-seat power for business class passengers.

Tasman Express has been an outstanding success and Air NZ has been able to increase its passengers by 11 per cent despite a combined growth in capacity on Tasman routes of 30 per cent.

The final piece of the puzzle was the carrier's formerly neglected long-haul business. Air NZ's product was not competitive with those of its Pacific and Asian rivals and it had become abundantly clear that it was missing out on the cream of the premium-class business market.

Again, the airline took to the task with a clean sheet. A 30-strong planning team spent 18 months redefining what was needed to satisfy market needs and trends.

In June, Air NZ announced a comprehensive makeover of its long-haul product, with an order for eight 777-200ERs and two 7E7s worth $NZ1.35 billion to replace its 767s.

It also placed options on a further 42 aircraft.

The decision to buy 7E7s was no surprise to those who know Norris and his penchant for the latest technology.

"We expect to buy 777-300ERs and 777-200LRs to replace the 747-400s, and the 7E7s will operate such routes as Auckland-Mumbai," he says.

While Air NZ is yet to specify what model of the 7E7 it is buying, he says the aircraft will be in the fleet by 2010.

Norris says: "It is very likely that in the next decade, the 7E7 could be the biggest component of the fleet."

For its existing fleet, the airline committed to a $NZ160 million interior refit of its 747-400s, which includes a revamp of premium and economy products. The 747s receive the 777 interior, with new galleys and toilets and an upgrade.

Following a trend that has been under way for many years, first class is to be dumped and replaced with an upgraded business class product that will feature Virgin Atlantic's 79-inch lie-flat seat-beds.

Responding to demand for more comfort in economy, Air NZ is introducing a premium economy product that features wider seats from seating manufacturer Recaro, set at a 39/40-inch pitch.

This class will have a modest start with just 26 seats in the rear of the upper deck of the 747, and Norris agrees with the suggestion that it may not be long before the airline is converting a complete zone on the main deck to super economy.

It will be charging a 20 per cent premium over the standard economy fare for the product, which will feature in-seat power and full premium-class meal service. Regular economy passengers also get new seats and greater overhead bin space, with 777 sculpted interiors, and the carrier is retaining its industry-best 34-inch pitch.

The first refitted 747 will be rolled out of Air NZ's engineering base next May and subsequent aircraft will be completed at a rate of one a month.

Air NZ's make-over is a challenge to Qantas. Within 12 months, Air NZ, armed with Boeing 777s and restyled 747s, will be offering a product different to and competitive with Qantas offerings across the Pacific from most Australian capital cities.

After the announcement of the interior make-over, one Australian industry observer summed up the transformation of Air NZ thus: "Two years ago, Air NZ needed the equity alliance with Qantas to survive. Now Qantas needs the alliance to keep tabs on Air NZ's dramatic revival."

But that alliance is dead and there are not too many tears in Auckland.

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