Air NZ's pre-emptive cut to regional domestic fares points to full-on battle - travel agents

Air NZ answers competitive threat from Jetstar.

See also: Air NZ 'marches to its own beat' - CEO

Air New Zealand's [NZX: AIR] move to offer up to two million domestic fares under $100 and boost domestic capacity 8% this year as it answers a competitive threat from Jetstar will grow the overall number of people travelling and provide a regional economic boom, travel agents say.

The Auckland-based airline made a pre-emptive strike against rival Jetstar today with the announcement of the cheaper air fares on domestic routes, while announcing a record earnings result.

It had earlier started cutting lead-in fares by 11-to-40 % on a number of routes ahead of Jetstar's announcement next month of which five regional destinations it will fly to from December. Palmerston North and New Plymouth are hot picks.

Air New Zealand says it won't be undercut in its home market and chief executive Christopher Luxon says it was confident it could continue to sell the extra capacity profitably.

"We are confident of our ability to stimulate the economy to fill those seats. We don't lose to Australians at home," he says.

Flight Centre general manager corporate Simon McKerney says consumers can expect a full-on battle to emerge which will be positive for them because until now Air New Zealand has been able to make a lot of money from its near monopoly in the regions.

"They are protecting their patch," Mr McKerney says. "They're reacting to the competition and front-footing it to get the loyalty of customers with cheaper pricing. They're not just resting on their laurels and know they have to, and are, doing more," he says.

House of Travel commercial director Brent Thomas says the increased competition will grow the overall number of people travelling, including tourists brought in by Jetstar parent Qantas Airways and others.

"It's not just domestic flights. Air New Zealand has had $99 one-way flights and lower to Australia, so from the international point of view those numbers will also grow. It will benefit those customers planning to travel and increases those travelling."

Mr Thomas says there was double digit growth on the main trunk routes when Jetstar first came into the New Zealand market and he's expecting a similar increase on the regional routes.

Jetstar is starting with four turboprop planes and will offer Qantas frequent flyer points on its domestic NZ network for the first time to help drive loyalty. Thomas said Jetstar is likely to add capacity over time as it builds demand, which is what is has done on the main trunk routes.

While fares will drop and are already doing so, they will need to remain at levels that allow both airlines to retain profitability, he said.

"We don't want to see a straight-out price war because that won't be sustainable for either airline. We want to get to the level where everyone still makes a profit but we're giving consumers more choice and great pricing," Mr Thomas says.

Flight Centre's Mr McKerney says he expects a regional boom in the destinations Jetstar chooses to fly to.

"If you're a corporate with a sales team flying into somewhere like Palmerston North and you can get two people there for the price of one, then you're going to increase their travel more frequently and that's going to have a commercial spin-off for companies in those regions."

The national carrier today reported a record full-year result underpinned by strong demand, cost efficiencies, and cheaper fuel. Net profit rose 24% to $327 million for the year ended June 30 and pretax normalised earnings climbed 49% on the previous year to $496 million. That was in line with expectation once the $29 million loss from the airline's 26% stake in Virgin Australia is taken into account.

Mr McKerney says Air New Zealand's record result is a testament that the company's strategy of focusing on the Pacific Rim with great code shares and alliances is paying off.

Air New Zealand also plans to push harder into the Australian market outside of Sydney by positioning Auckland as a gateway to North and South America, It had a 20% increase in Australian members of its frequent flyer Airpoints programme in the past year.

It's also facing a potential threat to its lucrative monopoly on flights between New Zealand and North America next year, with Qantas partner American Airlines considering launching flights from Auckland to Los Angeles. Air New Zealand currently attracts Australian passengers onto its trans-Pacific flights via a stop in Auckland.

The shares fell 2.8% to $2.575, and have gained 7.3% this year.