Air New Zealand Air Points - Will AirNZ go no-frills / low-frills on short-haul routes - and is this a good idea?

Along with the good news about AirNZ's improved share price and profit outlook, there is a lot of speculation around at the moment regarding AirNZ adopting a more no-frills approach on all domestic routes and the more leisure-oriented short-haul international routes. See for example this story (http://www.nzherald.co.nz/business/businessstorydisplay.cfm?storyID=1843451&thesection=business&thesubsection=transport&thesecondsubsection=aviation&thetickercode=AIR) from the NZ Herald, which claims that this recommendation has been presented to the board by management, and this report (http://www.nzherald.co.nz/business/businessstorydisplay.cfm?storyID=1842696&thesection=business&thesubsection=transport&thesecondsubsection=aviation&thetickercode=AIR) which quotes UBS Warburg's estimate that moving no a 'low-frills' approach would improve AirNZ's bottom line to the tune of NZ$65m per year.

I'm curious to know people's opinions on this. While I understand that low-cost airlines are flourishing around the world, a large part of AirNZ's core business is long-haul flights, and it has built up an excellent reputation as a comfortable long-haul carrier. My concern would be how you would manage to go 'low frills' for short-haul without damaging the brand's credential as a full-service carrier on long-haul / business oriented routes. All the successful low cost carriers have very clear identities - you know that on Southwest or Easyjet or Virgin Blue that you will get a no frills service. In contrast, most of the low-cost 'airline within an airline' attempts seem to have failed - e.g. Shuttle by United, and Delta and US Airways no-frills arms - albeit in quite a different market. Air Canada seem to be trying to launch two different low cost carriers within its own brand - but that is an airline with a domestic monopoly, rather than one which is threatened by a much stronger, larger rival.

I'm a very loyal NZ flyer, and a big part of that loyalty is because even in economy on short flights you get decent seats/legroom, excellent food/wine and civilised service, plus frequent flyer miles of course. To my thinking, that is a core part of AirNZ's brand - they are renowned for their excellent catering and greater than average seat pitch. With a move to 'low frills', which would presumably mean no catering and considerably tighter seat pitch, my decisions would become purely based on price rather than any brand loyalty. Isn't that a waste of a valuable brand? What about the corporate market? Would this affect their relationship with other *A airlines?

Opinions please, people!

Does not Air NZ own Freedom Air which is no frills on some domestic routes and to selected Oz destinations ??

Expect more "no frills" on short haul routes (less than 4 hours). Price counts 1st, 2nd & 3rd to many people on these routes. Virgin Blue (Aust) could decimate the Auckland - Queensland route given half a chance

I suspect politics rather than economics will be the greatest influence in the decision (the government has to accomplish something from its investment in AirNZ). I doubt that low-cost carriers such as Ryanair (or even Virgin) are eyeing the large and lucrative NZ market as their best opportunity world-wide. That said, I would favour Air NZ changing flights under 2 hours duration and maybe offering charter-class holiday destinations. However, the cost savings on meals and one flight attendant are not what make the no-frills carriers successful! Hopefully AirNZ management realizes that and is doing a full analysis.

Why did Shuttle by United fail while Southwest and RyanAir thrive? And United was helped by having the world's largest market, dominant hubs, loyal customers thanks to a FF plan -- yet it still lost money! I'm not sure of the full answer, but a part of it is plane turnaround time and utilization. Another part is fleet standardization. And in the case of Southwest, flexible staffing (many different jobs are performed by the same person, at different times of the day, allowing fewer staff to do the same work). My point is that the airline procedures have to be constructed from scratch for a no-frills airline to work. The attempts to run no-frills operations inside a regular airline have all failed ... even those that would seem to have several advantages.

Another complication is cargo. Most no-frills airlines carry little or no cargo (they barely carry baggage!). I would imagine that AirNZ has a substantial amount of domestic cargo and this would be disruptive of the flight frequencies and turnaround times needed for no-frills ops.

The final problem is hub feed. Some of the domestic service is feeding international flights -- thus there is little flexibility in flight time. Southwest thrives because it does point-to-point flights with no feed, and in fact the Southwest hubs do not work well (my opinion). This would limit the gain on higher plane utilization for AirNZ. Remember than 5% is probably the difference between a thriving airline and one that is out of business in most markets.

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by number_6:
The final problem is hub feed. [...] </font>

Hub feed? Good grief!

Last I checked Air New Zealand domestic National (not Link) aircraft served a whopping 5 cities in the entire country. Losing business class seating on the 737s running between those cities hardly seems the end of the world seeing as most of those routes are under 90 minutes long.

While I travel to and from NZ in first or business class, I never book NZ domestic travel in business -- what's the point on such short flights?

New Zealand has a very small domestic market population wise, a fairly small domestic market geography wise with short air routes, a hurting currency, and a fairly price sensitive domestic customer base. And Air NZ is facing increasing competition on some of its national/mainline routes from a low fare/frills competitor. How much are the government and taxpayers of New Zealand willing to spend on "frills" if they don't make for a competitive and profitable airline?


[This message has been edited by Quokka (edited 05-06-2002).]

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by Quokka:
Hub feed? Good grief!

Last I checked Air New Zealand domestic National (not Link) aircraft served a whopping 5 cities in the entire country. Losing business class seating on the 737s running between those cities hardly seems the end of the world seeing as most of those routes are under 90 minutes long.</font>
By hub feed I meant co-ordination with international flights. My point is that replacing 8 business seats with 12 Y seats and eliminating a flight attendant and meal service does not lead to much cost saving for the airline. The significant economies that no-frill airlines enjoy are from other factors. Would AirNZ benefit from dropping the customer-perceived service level to the no-frill point, while keeping its costs higher? What else must change before the cost basis is competitive? Or is a more creative solution called for, such as getting more USD denominated revenue?

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by number_6:
The significant economies that no-frill airlines enjoy are from other factors. Would AirNZ benefit from dropping the customer-perceived service level to the no-frill point, while keeping its costs higher? What else must change before the cost basis is competitive?[/B]</font>

Good point - and good question. It's worth remembering that cutting business class is not the same as becoming 'no frills'. In the UK, for example, where flights are similarly short, BA has no domestic business class but does offer meals, bar service and lounges. Business class is far from essential on short flights - provided there are lounges, convenient schedules, and the economy service is decent, that probably would not really affect the corporate market, while probably saving a significant amount. Going truly 'no frills' certainly would, however.