Fares to fall as transtasman rivalry increases for Air NZ

Air New Zealand faces increased competition on hotly contested transtasman routes as cheap fuel costs encourage airlines to add capacity and new routes, and dust off older, less efficient planes, helping to drive down fares.

AirAsia X is to start flying from Auckland to Kuala Lumpur via Australia's Gold Coast from March 22. Its introductory $99 fare between Auckland and the Gold Coast has sold out for March 22 and is selling fast on other days they're available, the AirAsia website shows.

The cheapest Air New Zealand flight on that route for March 22 is $242, according to the Webjet website.

The transtasman market is the most competitive for Air New Zealand, and rivalry is increasing, with reports its Star Alliance partner Singapore Airlines is to begin direct flights between Canberra and Wellington and indications it is unlikely to code-share with the national carrier on that leg.

Air New Zealand lost market share on transtasman routes in the June 2015 year, according to a First NZ Capital report. The market grew 6.9% in the 12 months to June, more than three times Air New Zealand's passenger number growth, trimming the airline's share by 1.7 percentage points to 35.7%.

That trend shows in the 2015 accounts for Qantas Airways' Jetconnect unit, which operates the Australian carrier's transtasman routes. The division's revenue climbed 21% to $91 million in the year ended June 30, 2015.

"This isn't going to be a game-changer for Air New Zealand – this type of competition is ongoing," says Rob Mercer, head of private wealth research at Forsyth Barr. "We are going to see airfares come down over the next 12 months and we are going to see airlines look to put into service a fleet which can now be competitive on long-haul routes."

International travel costs drop
Government data shows international air travel prices fell 4.2% in the year ended June 30, 2015, and are 21% lower than their peak in the fourth quarter of 2008.

The ever-decreasing price of oil – which this week fell below US$30 a barrel for the first time in 12 years – is positive for Air New Zealand. Jet fuel represents around 25% of the airline's pretax cost base, according to Forsyth Barr.

Cheap fuel gives greater capacity for extra flights, with airlines more likely to fly across the Tasman if the alternative is leaving the plane on the ground, Mr Mercer says.

The Wellington-Canberra flight, which would be the first between the two countries' capital cities, would be an add-on to a Singapore-Canberra direct connection, the first time the Australian capital city would have been serviced by a direct long-haul international service. An official announcement is expected next week.

"The cost of fuel is a lot cheaper, so you can just put capacity between New Zealand and Australia, even though it's not a service which is necessarily profitable," says Mr Mercer, with cheaper fuel also making older aircraft more competitive.

"All new aircraft are based on being 25% more fuel efficient," he says. At $US100 a barrel, "25% is $25 – at $30, 25% is only $7.50. The long-haul routes have potential capacity competition coming on, as airlines will look to put into service the 747s again, which were becoming less competitive on the leg between Asia, New Zealand and the US."

However, Mr Mercer says Air New Zealand's alliances with Cathay Pacific, United Airlines and Singapore Airlines on long-haul routes means the airline is in good shape to work with key carriers and manage the pressure that might eventuate as a result of low fuel prices.

Air New Zealand's shares climbed 20% in 2015, a year when an oversupply of oil pushed global fuel prices lower. The stock has gained about 2% this year, while declining 0.5% to $3 today.

The shares are rated an average "hold" based on six analyst recommendations compiled by Reuters, with a median target price of $3.13.

(BusinessDesk)