Tuesday, January 26, 2010

Air New Zealand focuses on the premium

It is rare that a New Zealand company captures the global attention of the industry it is in, particularly one primarily state owned. Given that Air New Zealand retains minority private ownership, as is publicly listed, that has ensured that political pressure on how the airline runs its business has been very limited. However, it has also meant it has lacked capital to expand, so has focused on its core business.

The new long haul products announced today are reviewed on my airline service blog here. For economy class it is quite revolutionary for those taking the Skycouch, but is no overall advance for others in economy. in premium economy it becomes best of its class with maybe only one rival (although the legroom has been cut), whereas business premier is more of a tweak rather than a serious change.

From a business perspective what is particularly interesting is how dominant the premium cabins are becoming for the airline.

At present services from Auckland to London via LA, and some other services to Vancouver, San Francisco and LA are operated by Boeing 747s with the following configuration:
46 Business Premier
39 Premium Economy
294 Economy
= 379 passengers.

These are to be replaced with Boeing 777-300ERs, which are smaller than 747s but larger than the current fleet of Boeing 777-200ERs. However, look at the seat configuration:
44 Business Premier
50 Premium Economy
246 Economy (including 66 that will convert into couches for 44)
= 340 passengers

In essence, Air NZ is giving up mass market cheap economy class for targeting more discerning tourists, while focusing more on upmarket tourism and business travellers. Bear in mind that few know one of Air NZ’s most profitable routes is LA to London, because the fares that can be charged on that route are almost as high as Auckland to London – although it is a fraction of the cost to service. However, tourism from the UK to NZ has dropped dramatically due to the recession.

It is betting that given its cost structure is mid range among its competitors (Qantas is higher, Emirates and Malaysian are lower), it needs to pitch itself with something to attract discerning travellers. Not the bargain basement lot who are price focused and who really don’t care about legroom or food.

Still it faces a struggle for growth, given that it is undercapitalised and has missed out on realistic opportunities to plunder the Australian market (but that’s another story of corporate blunders combined with government interference).

Now is not the time to sell, but as the majority shareholder, it would be wise to consider at least some sell down of the airline ownership to get some new capital. Ultimately it will need a strategic shareholding by another carrier to have any serious hope of expansion, which means the word that too many in New Zealand politics are far too scared of – privatisation.

I've reviewed all of the product enhancements on my airline service blog:

The business case
Economy Class
Premium Economy
Business Premier
Catering and entertainment
How competitive is it?
Images of the new products

However if you want my quick summary of it all:

Economy - Skycouches are great for couples, but everyone else loses a little width and legroom. Most economy passengers are slightly worse off.

Premium Economy - A significant improvement with far more width, space and better seats, but the same recline. This isn't as good as business class used to be in terms of recline, and at 36" seat pitch it is frankly the worst for legroom in its class.

Business Premier - Business as usual, little change here, except the catering will leap ahead with freshly cooked food, not reheated.

It will first be seen on the new Boeing 777-300ER, the longer larger version of the current 777-200ER. The 777-300ER (dubbed 77W in the industry) will replace 747s for Air NZ, which means sadly losing the upper deck and nose cabins, both far more exclusive than main decks (with only one seat either side in Business Premier).

The first routes will be Auckland-LA and Auckland-LA-London. The existing 777 fleet will also be progressively retrofitted.

Some industry media coverage:
Business traveller
Flightglobal
Wall Street Journal

NZ Herald has great images of the economy seats
NBR has different coverage
Air NZ website has three press releases and a new website to reveal more in a week.

UPDATE:

Apparently Air NZ got a design company to profile passenger types - and they match Simpsons characters. I'm not thrilled to be a blend between Lisa Simpson and Mr Burns.

Full set of photos on flickr here.

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