• Grant Bradley
Unpacking the baggage of Aussie exit and how Air NZ may benefit from the withdrawal
Jetstar’s failure
This country is dotted with airlines that have given it a go and failed, and routes that just don’t pay. Notably, Air New Zealand has seen off Ansett’s domestic operations, Pacific Blue and in a parting gift to the Kiwi carrier’s former chief executive Christopher Luxon, Jetstar’s regional operation.
In 2015 Air NZ revealed it was losing $1 million a month on routes it then axed. And this is an airline with about 80 per cent of the domestic market, a solid loyalty base, large fleet and substantial infrastructure.
On some routes it was competing against cars; otherwise, the 19-seater aircraft it was operating to some places weren’t economic and needed replacing.
A Ministry of Transport commissioned study published in 2016 found that aircraft with fewer than 10 seats cost $134 an hour to operate, 10-20 seats $121 an hour and those with more than 20 seats, $95 an hour.
Luxon said at this week’s annual shareholders’ meeting that on lossmaking routes, each fare was costing his airline $52.
Airlines are increasingly “rational” (ie cut-throat), Air NZ particularly so. That didn’t produce a good outcome for Kaitaia, Whakatane and Westport back then and Kapiti since. This was never going to work.
So the Qantas Group’s decision to deploy five Bombardier Q300 planes to four regional cities from Auckland and Wellington was a bold punt.
The aircraft belonging to Eastern Australian Airlines were sitting in the Outback waiting for work and the decision to fly here came when Qantas was locked in a battle with Air NZ over the Kiwi carrier’s support for Virgin Australia in the Aussie airline’s home patch.
Regional push
In mid-2015 and with some fanfare, Qantas boss Alan Joyce and thenhead of Jetstar Jayne Hrdlicka launched the regional push at a briefing that got the seal of approval from the Prime Minister of the day Sir John Key (who was also Tourism Minister) and he welcomed the Aussies’ influence on opening up the country and bringing down fares.
The four centres were seen as just the start, but Air NZ was not about to roll over and let a big competitor expand under its nose.
Using price levers, it made sure that didn’t happen and four years later Jetstar has finally thrown in the towel.
Qantas is four times bigger than Air NZ, and also an extremely rational airline, and the fact that it hung in there for so long is testimony to how hard it tried to make it work. But losses since launch (including $20 million last year) finally told.
New Jetstar boss Gareth Evans said the airline had given it a ”redhot go”. The regional airline started with just five planes — a tenth the size of Air NZ on the regions — and this effectively fell to three as schedules were cut.
Air NZ’s domestic operation also has a massive advantage. At its core is a business and government travel market which it fiercely guards and is responsible for around half of its revenue.
That’s something that Jetstar, in spite of getting rights to fly public servants, struggles to crack.
For Jetstar, its regional operation made up less than 20 per cent of its footprint in this country — the bulk of revenue comes from jet services, which will continue. Asked whether it was spread too thin, Evans said: ”We always knew this was going to be a challenge.” There’s one big message here — to start flying the regions, you need very deep pockets and patience.
Home ground advantage always helps but that’s not necessarily going to help local third tier players.
Carriers such as Air Chathams and Sounds Air have grown their network as Air NZ has pulled back from some areas but they won’t be leaping into the routes that Jetstar has exited. Third tier airlines try to avoid competing directly with routes operated by Air NZ — they don’t have the scale or frequency to effectively compete.
Jobs on the line
About 70 staff now face an uncertain future. They are being consulted about their roles and Jetstar says there are about 50 jobs they could fill for the rest of its operation here.
The E tu¯ union says it has about 20 members among the crew and the announcement out of the blue was disappointing and there are likely to be job losses. Pilots say it is unsettling.
Following the announcement, some staff were unable to work as they absorbed the news and couldn’t fly, meaning there were cancellations.
About 20,000 passengers have bookings beyond December 1 and Jetstar has offered full refunds, waived fees to change the date of travel, while Air NZ has stepped in with $50 fares on the affected routes. But there is angst among those whose travel plans have been thrown in the air.
Airlines — or in this case an operation of one — fail with alarming frequency, but not so often in this part of the world.
The fine print on tickets covers this but that’s cold comfort. Already, customers have complained that the alternatives don’t cut it.
Jetstar’s reputation will take a hit. ”We’re not cutting and running,” says Evans. “I hope consumers will see it for what it [was] — a genuine attempt to bring competition to these markets.
“I think people will understand you can’t continue to run losses forever.”
Qantas has been frustrated by the New Zealand public attitude. Travellers say they love the presence of Jetstar but didn’t fly with it to the regions enough.
Joyce said last year that the “best way of ensuring viability is for all the communities to get behind and support them”. Not enough did. Airports will be hit too.
In the regions they have been investing heavily in infrastructure.
One Jetstar destination, Hawke’s Bay, is nearing the end of a $20.2 million expansion while Nelson has just opened a $30m terminal. This sort of investment was not pegged to a few Jetstar flights a day, but the presence of the airline was a vote of confidence in regional flying.
There’s only one winner here: Air New Zealand. It has pledged to hold lead-in fares at current levels for 12 months, but has said nothing about other fare types. Regional routes produce about 40 per cent of Air NZ’s domestic revenue.
The Auckland-to-Napier, Nelson, New Plymouth and Palmerston North, and the Wellington-Nelson services that Jetstar flies make up about 5-6 per cent of Air NZ’s regional business. While that’s not big, yields on these routes are set to improve.
The news of Jetstar’s withdrawal had an immediate impact on Air NZ’s share price and it has continued to climb, closing up 11c in two days to $2.775 on what they were trading at before the announcement.
‘Frenemies’ deal
Last June the two airlines surprised the airline sector with a “frenemies” deal that had been negotiated in what was described as record time after Air NZ announced a break-up with Virgin Australia.
The agreement allowed Qantas and Air NZ to codeshare on each other’s domestic routes, some lounge reciprocity and co-operation in other technical areas. The deal didn’t need regulatory scrutiny and there was some nervousness that this could reduce competition — as has just happened.
But it wasn’t the frenemies deal that led to this, says Jetstar. The economics had been poor for years.
The deal mainly benefits New Zealanders flying into Australia and then flying domestically — they are channelled to use Qantas flights instead of Virgin Australia services.
The airlines vowed to compete as usual on international routes and there are signs that more is looming. Qantas and joint venture partner American Airlines had their deal renewed in July and this has given the US carrier scope to increase flying from New Zealand.
There is market chatter that American could resume year-round flying between Auckland and Los Angeles and/or start Auckland-Dallas services. Flights to the US from Christchurch are also a possibility. Air NZ never welcomes non-stop flying across the Pacific by competitors.
Politics are changing
Air NZ is always a convenient political target. Key (who now is on the airline’s board) subtly dug at the airline over regional pricing for political effect when he welcomed Jetstar’s announcement in 2015.
Since then, self-proclaimed champion of the regions Shane Jones has been laying on the criticism with a bulldozer. Luxon became a target for the cuts to some services and an even bigger one with his possible foray into politics for the National Party.
In light of the Jetstar exit, he was able to tell shareholders at Air NZ’s meeting on Wednesday that running a regional operation is complicated, and made the point that regional flying had grown at three times the rate of GDP growth over the last five years.
The towns and cities that still have services have more of them.
Dame Therese Walsh took over from Tony Carter (who last year also had a sharp verbal spat with Jones) as chair of the airline yesterday and she said a search for Luxon’s successor is “progressing well” and an announcement would be made within the next month.
The departure of Jetstar from the regions gives Air NZ plenty of scope to ramp up prices, something Jones and Finance Minister Grant Robertson have warned against.
A new chair and a new chief executive gives the airline the chance for a reset with this Government.