Budget Airline Fails in New Zealand

If the latest information on Jetstar NZ is true, full service carriers might start sending teams from all over the world to study and if possible replicate the benefits that the Qantas budget subsidiary is unintentionally delivering for Air New Zealand.

Consider the fundamentals behind this story:

Jetstar NZ can’t give its seats away at around $NZ 100 for a short one way flight, leaving Air NZ to charge up to $340 for the same trip.
Yet on the face of it, New Zealand, comprising two islands, and one mobile and prosperous society, could not have been better set up to suit the advent of high frequency short distance low cost flying.

It is the last place on earth that a full service carrier could successfully compete with a low fare carrier, especially where some fares may be three times as high on the former as on the latter.

It is the last place where a low cost carrier could fail. But while we can’t measure the monetary extent to which Jetstar NZ is a failure, its Head of New Zealand, Grant Kerr, says in the interview that at best on some major routes he has only 24 per cent of the market.

What this means is that Jetstar NZ has mopped up the lowest paying quarter of the passenger uplift on those routes, thus lifting the average fare being collected by Air NZ for the other three quarters of sector in terms of head count.

Air NZ has every reason to be grateful to Qantas for the manner in which it is conducting its business in New Zealand, a golden windfall which it must wish will continue indefinitely.

The article suggests that unpunctuality is the major reason business travelers avoid the huge savings to be made flying Jetstar NZ. The incident in which a check in clerk jumped the counter to punch out a passenger, a radio station shock jock, in 2010 seems to have faded with time.

However the real lesson from Jetstar NZ’s admitted lack of traction with higher yielding passengers may be that the unintended value of low cost competitors is to lift average yields for those carriers that have developed a strong brand following among customers who will not shift their support just because of price.

If this lesson is applicable in Australia it means that over time Qantas and Virgin Australia would be better off letting someone else compete in the low fare domestic market rather than their self owned or controlled budget brands of Jetstar and Tigerair respectively, and deal with that external competition from the position of strength that comes from keeping the higher paying customers for themselves.

At the moment in NZ, everything Jetstar does can be seen as directly benefiting Air New Zealand.