“Air NZ shares down10% on rival’s bombshell” screamed the NBR headline this afternoon after Jetstar announced plans to deploy Q300 turboprop aircraft on regional routes in New Zealand. Up until now Jetstar has only focussed on main trunk routes using Airbus A320 jets.
If there was a word I would use to describe Jetstar’s announcement it’s not bombshell. It’s more like predictable. Any share market analyst or shareholder surprised by today’s announcement should really be looking seriously at their analysis and/or where they seek advice from.
In 2013 Jetstar poached former Air Nelson General Manager Grant Kerr to head up Jetstar operations in New Zealand. Despite the court ruling against Air New Zealand in a restraint of trade restriction in Kerr’s employment contract, the reasons for employing him were very clear – his intricate inside knowledge of Air New Zealand’s regional operations were just what Jetstar needed if they were going to successfully launch an offering.
Fast forward to 2014 and lots of rumours of Jetstar bring Q300 or Q400 aircraft across the Tasman to launch operations in New Zealand started. Rumours at the time where that that Jetstar were having a lot of trouble building a profitable business case for this, and at a time when parent Qantas was bleeding massive amount of money, it seems the project was put on hold because they weren’t willing to invest in something that wasn’t necessarily going to be profitable. If true, delaying the launch may ultimately turn into a bad thing for Jetstar.
Many people out there think Air New Zealand are a cash cow. Right now they are – but that’s not to say every aspect of the airline is. Under the current CEO Christopher Luxon and the current executive team the focus has been on cost cutting, with absolutely no part of the supply chain being immune from a goal to ensure the airline is as lean as it can be. Many (including myself as a high value customer) believe that this profit at all costs mentality has been taken too far, and that some aspects of the airline operations are now far too heavily focussed on profitability rather than customer satisfaction. Whatever you view, it’s safe to say that right now Air New Zealand are in a better position than ever to fend off competitors.
The rumoured delay has given Air New Zealand time to completely restructure it’s regional operations, which according to CEO Luxon saw many smaller regional destinations losing millions of dollars. In recent months we’ve seen the scaling back of the extremely inefficient and costly Eagle Air B1900 fleet before these aircraft are ultimately withdrawn, upsizing from B1900 to Q300 aircraft on some sectors (per ASK on a Q300 is significantly better than a B1900) which has seen pricing fall to fill seats, and the withdrawal of services from some regional routes where bigger aircraft such as the Q300 would have been unsustainable.
The delay has given Air New Zealand time to completely refocus and restructure, something that’s very bad for a competitor trying to launch services on routes. As many regional routes are marginal due to due to the much higher cost of flying passengers on a smaller plane versus a jet, it’ll be very interesting to see how Jetstar price their seats and to see the response from Air New Zealand.
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Comment by mattwnz, on 20-Jun-2015 00:43
They will possibly be cherry picking the most profitable routes. Also heard that they maybe going to local councils for grants for setting up. But this creates competition for Air NZ which ratepayers part own. What other owners of a company would help pay for a competitor to setup in their backyard. I think there are profitable routes, and they have the might of they powerful Australian owner behind them.
Comment by lNomNoml, on 27-Jul-2015 14:42
Long story short, Air NZ has been milking it too much as usual and they have had enough of it.