Low fares only part of Virgin Blue approach

A report in the NZ Herald by David Stone an independent aviation commentator and consultant, says that a major factor in the timing of Pacific Blue’s entry into the New Zealand domestic market has been to get ahead of Qantas’ low-cost subsidiary, Jetstar, whose transtasman services are also based in Christchurch.

Given the apparent inevitability of a low-cost challenge to Air New Zealand, Brett Godfrey, CEO of Virgin Blue, Pacific Blue’s parent, says “Why come in second?” and while low fares drew most attention following the Pacific Blue announcement last week that it would enter the domestic market, Godfrey pointed to a number of other benefits for New Zealand travellers.

Both sides of the Tasman would be treated as a single market so that, with mutual code-sharing, Pacific Blue flights would connect with those flown by Virgin Blue throughout Australia. Godfrey said this would be reflected in cheaper end-to-end fares and he expected up to a 15 per cent increase in passengers as a result.

Godfrey emphasised the technological advancement of the Virgin and Pacific Blue B737-800 aircraft – the youngest fleet in the region, with their consequent reliability having enabled Virgin Blue and Pacific Blue to achieve “fantastic on-time performance”, which would appeal especially to business travellers. He wants on-time performance data to be publicly disclosed here as it is in Australia.

Although Pacific Blue will remain a no-frills airline, it will nevertheless enable passengers to join “Velocity”, Virgin Blue’s frequent flyer programme.

However, except for Pacific Blue’s “launch” fare of $39, Air NZ has not only matched the newcomer’s lead-in fares as Godfrey predicted, but its other, more flexible fares are set at lower levels than those announced by Pacific Blue.

But the difficulty in interpreting fare data is that airlines do not reveal how many fares are to be sold at a particular level, the reason being that under sophisticated yield management regimes, the numbers will vary flight by flight according to demand.

Although Pacific Blue’s planes will carry more passengers, as they have 44 more seats than Air NZ’s older aircraft, they will operate a total of only 10 flights a day on the main trunk routes Auckland-Wellington-Christchurch compared with Air New Zealand’ s current total of 56.

Consequently, Godfrey sees Pacific Blue establishing a niche market in New Zealand, as initially Virgin Blue did in Australia, resulting in an increase in numbers travelling by air.

Air NZ is determined not to lose business to the newcomer. It has been expecting a low-cost carrier challenge for some time and, following a lengthy review, will be announcing its own changes to the “domestic experience” tomorrow, when the airline is to release its annual results.

Air NZ is no novice in the low-cost carrier business, with its subsidiary, Freedom Air, one of the first to be established in 1996, when it saw Kiwi International off the Tasman.  But for Australia reneging in 1994 on its formal agreement with New Zealand, Freedom may well have entered the Australian domestic market in the following year, five years ahead of Virgin Blue.

In an earlier interview, Air NZ CEO, Rob Fyfe, said that a major decision to be made was whether to maintain two airlines, given that the differences between them had diminished with both Freedom and Air NZ domestic now using the same fleet and Air NZ’s move to lower fares. The answer may be part of the decision announced tomorrow.

Report by The Mole