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Airlines fly into headwinds on Tasman route

QANTAS and Air New Zealand are preparing for bloodshed on the highly competitive trans-Tasman route, as they face the triple whammy of a looming price war, other rivals increasing flights and an economy in recession.

In a risky move for the national carrier, Air NZ has slashed fares on its most crucial route, just over a month before Virgin Blue's subsidiary, Pacific Blue, begins nine flights a week between Sydney and Auckland. The new services will add about 300,000 seats a year to the route.

The Sydney-Auckland route is already hotly contested by Dubai's Emirates, Chile's LAN and Aerolineas Argentinas, as well as Qantas and Air NZ. Capacity could increase further once Emirates begins daily flights of its A380 super-jumbo in February.

But Etihad has doused speculation it is about to follow its main rival, Emirates, across the Tasman. "We have absolutely no plans to fly to Auckland," an Etihad spokesman said on Friday.

Industry insiders believe Air NZ's decision to reduce one-way fares for flights from Sydney to Auckland by about quarter is a risky move because of doubt about whether any increase in traffic will cover the cost of reducing prices, particularly in the leisure market.

The cut to fares is primarily to protect market share as Virgin Blue redeploys capacity from the Australian domestic market to the trans-Tasman via Pacific Blue.
Air NZ admitted that conditions in the Tasman market would become "increasingly challenging" due to the surge in capacity from rivals. The carrier will announce its full-year earnings in Auckland tomorrow.

Despite an overall increase in the number of seats filled last month, the carrier reported a slight dip in its load factor (a measure of seats occupied by paying passengers) to 76.9 per cent for the Tasman and Pacific routes last month.
The extent to which the fare cuts and increased capacity affect Air NZ's revenue will depend on Qantas's response to the lower fares. "Whether it is big or small will depend on how hard Qantas comes back to respond to Air NZ's pricing moves," an insider said.

Pressure on the route comes as the NZ economy is officially about to slide into recession, and growth in Australia slows.

Macquarie Equities estimates Virgin's decision to redeploy aircraft to the trans-Tasman market will increase capacity between Australia and NZ by about 7 per cent, after taking into account a small increase by Air NZ and by Emirates flying the A380.

"Virgin Blue's decision is likely to be seen as a better financial option than purely parking the planes, while the additional capacity on the Sydney-Auckland route will place downward pressure on yields for both Air NZ and Qantas," Macquarie said.

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Air New Zealand will still be here making a profit long after Ansett Blue has gone.

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