Actually I think they're being a lot smarter than that... there is definately a market for business class on the trans-tasman and pacific routes, and what they're doing is cutting costs in other areas - sales, back office and operating costs, which are much harder to get under control than just cutting inflight service, as the US carriers are finding out. I think biz is here to stay on the pacific routes, along with the current food and drink offering in Y, because AirNZ have managed to get themselves into a position where they can offer these low fares in a sustainable manner (and well done to them!).
I've had a quick look at the fares on the AirNZ pacific site and I think they look great, biz class NAN-AKL is now F$666 one way, with smart savers at F$259 which is amazing (only about F$70 more than a o/w 1hr inter-island flight on Air Fiji or Sun Air). I think Virgin Blue are going to find it much harder to crack into the market with these kind of fares than say easyJet or Ryanair had it here in Europe.
Cheers, Zac