Air New Zealand’s Rob Fyfe completes restructuring and plots expansion

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Rob Fyfe is ready to move Air New Zealand (ANZ) back into expansion mode, after several years of stagnate growth.

The ANZ chief executive says the restructuring which he has led over the past year is nearly complete and the result is a stronger carrier that is in a position where it can again expand.

ANZ had been growing capacity at an annual clip of only 1% until this year. Fyfe says capacity, as measured by available seat kilometres (ASKs), will be up 6% in 2006 and ANZ plans to maintain annual capacity growth of about 5% over the next several years.

Auckland-Shanghai and Hong Kong-London are the first set of new routes to be added during this period of expansion. Fyfe says ANZ plans to add one more international destination per year and is now trying to figure out what route will be launched next October.

“A lot of work is now being done to see what new destination will be added, tentatively in 12 months' time,” he says.

One new route under consideration is a beyond service from Shanghai to London or a city in continental Europe. ANZ has not served continental Europe since it dropped its Frankfurt service in 2001. But traffic from Europe to New Zealand is increasing and new traffic rights to Europe via Shanghai provide potentially lucrative opportunities.

Fyfe says ANZ secured rights to operate from Shanghai to one European destination of its choice when it negotiated with Chinese authorities for its new Auckland-Shanghai service, to be launched on 6 November. ANZ will initially only serve Shanghai three times per week but Fyfe believes the demand will quickly be sufficient to upgrade it to daily, which will give it the frequency required for a beyond service. Fyfe says ANZ is now talking to new Star members Air China and Shanghai Airlines about codesharing opportunities and potentially supporting the new Shanghai-Europe service.

Securing beyond rights from China for passenger services is extremely difficult but Fyfe says New Zealand’s relationship with China on free trade “helped a lot”. He says Chinese authorities are also “open to extending” the bilateral to allow ANZ to serve another Chinese city when it is ready. China is the fastest growing source of tourists for New Zealand, with arrivals up 300% year over year.

A third service to London is one possibility for Shanghai. ANZ only added its second London service on 29 October but Fyfe says there has been demand for more flights to London for a long time and its inability to add another flight has allowed other carriers such as Emirates and Singapore Airlines (SIA) to gain market share.

“Over the years we’ve seen our market share dwindle because we weren’t able to offer more than a daily service,” he says. ANZ believes the new service will let it fly at least 38% of UK residents travelling to New Zealand, compared with 33% currently and just 29% last year.

Hong Kong was selected as the stopover for the second London service (Los Angeles is the stopover for the existing service) because no Star carrier was serving Hong Kong-London. Fyfe says there is also good opportunity in Hong Kong for cargo and connecting passenger traffic. Flying via Singapore was not attractive because it would “mirror” what other Star carriers already operate, Fyfe says.

Cutting losses
ANZ has terminated its Singapore service altogether because Fyfe says it was not profitable without any onward connections. ANZ codeshares with SIA but Fyfe says “Singapore is quite independent-minded” and “secures its traffic as a priority”. SIA is now the second largest carrier in the UK-New Zealand market after ANZ, in part because it is the only carrier offering a one-stop service from London to Christchurch, a popular tourist destination on New Zealand’s south island.

ANZ over the past two years experimented with direct services from Christchurch to Los Angeles but Fyfe says it cannot operate these types of services profitably.  “Direct services to Christchurch essentially cannibalises Auckland traffic,” says ANZ group general manager for international, Ed Sims.

As part of its new growth plan, ANZ is also eyeing new services to Beijing, Buenos Aires, Chicago and Mumbai. But Fyfe says these destinations cannot be launched until the carrier takes delivery of eight new Boeing 787-9s from 2010. Its new fleet of 777-200ERs do not have the range to reach these destinations with a full payload and Fyfe says ANZ is not interested in the 777-200LR because the markets do not have high enough yields to support an ultra-long range aircraft.

“The economics [of the 787] look more compelling than going to the 777-200LR,” Fyfe says. “[The 787] is the logical aircraft for us for developing markets.”

The renewal of ANZ’s fleet is an important component of Fyfe’s restructuring plan as it will reduce fuel costs per ASK by 10% to 15%. Fyfe says it plans to further reduce fuel costs by 3.5% annually through several initiatives including single-engine taxiing.

The new 777-200s are replacing 767s and 747-400s while new Airbus A320s are replacing older-model 737s. Fyfe says the 787s will mainly be used as growth aircraft. He adds ANZ also plans to exercise purchase rights for 777-300ERs to replace its remaining 747-400s in 2012-2013.

“Unless you’re absolutely confident you can get a passenger in every one of your seats, there’s an incentive to right-size your fleet,” he says, adding that switching from the 747 to 777 on the Auckland-Los Angeles-London route will save ANZ NZ$62 million ($41 million) per year in lower fuel bills.

The restructuring also is reducing ANZ’s workforce from about 11,000 to 10,000. First class has been removed from the entire long-haul fleet in favour of an improved business class and new premium economy product. Besides Auckland-Singapore and Christchurch-Los Angeles, several unprofitable routes have been axed including Auckland-Taipei, Auckland-Nagoya and Los Angeles-Papeete.
“We’ve had a major refocus of our network. Airlines are very good at starting new routes, not exiting routes that aren’t performing well,” Fyfe says.

The restructuring has allowed ANZ to drop fares by 3%, which in turn is stimulating traffic. While ANZ is still implementing the staff cuts, Fyfe says the restructuring is almost complete. “By mid next year we hope to be through the most difficult phase and be able to focus on growing the business,” he says.

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