By David Knibb in Auckland

Alliance plans with Qantas may have stalled, but Ralph Norris is not letting that distract him from forging ahead with new initiatives and a new vision for Air New Zealand

"We haven't shelved anything," insists Ralph Norris, Air New Zealand's (ANZ) managing director and chief executive, talking about the creation of a major Australasian airline force from the proposed tie-up between ANZ and Qantas Airways. Appeals are pending to reverse the decision by competition regulators to reject the alliance, but Norris is not waiting for the results. He hesitates to call it "Plan B", but nevertheless is proceeding with a restructuring programme for ANZ that he feels it needs, regardless of what happens with Qantas.

Designing an airline around different scenarios may seem tricky, but Norris sees ANZ's revamp as essential in any event. An alliance with Qantas, in his view, would only make it better.

The need for change was obvious when Norris took control at ANZ in February 2002. The airline had come close to collapse, triggered by what Norris calls its "Australian adventure", when the group took control of Ansett Australia. Only months earlier, after the failure of Ansett, the New Zealand government had rescued ANZ with a NZ$885 million ($585 million) bailout that effectively re-nationalised the flag carrier. Ansett's fall wiped out ANZ's presence within Australia, erased the Singapore Airlines stake, and left a crippled ANZ vulnerable to its much stronger rival and neighbour, Qantas, which had a network that already overlapped most of its own.

Thanks to a highly liberal aviation regime between New Zealand and Australia, Qantas and ANZ both held unlimited route rights across the Tasman Sea between their two nations, as well as liberal fifth freedoms beyond each country and unrestricted cabotage within each market. Each airline had exploited these rights until Ansett's collapse. After that, the game belonged exclusively to Qantas.

Two years ago Norris was still settling in when Qantas made some inopportune remarks about "crushing" ANZ, and he felt the need to ask his lawyers to investigate whether Qantas was engaged in predatory pricing. Whatever hopes Qantas may have held about ANZ running scared were quickly dashed. Three months into this stand-off, Qantas broached the idea of buying a minority stake in ANZ. By November 2002 the chiefs of the two airlines were announcing plans for a strategic equity alliance.

That Norris negotiated this deal from a weak position is undisputed, but he would also argue that this does not affect the benefits that it would bring. He does not go as far as his chairman, John Palmer, who contends that the Qantas alliance is "the only realistic way for ANZ to provide for a sustainable independent future". Instead, while extolling the benefits of an alliance, Norris seems intent on providing ANZ's future in the best way he can - with or without Qantas.á

Dramatic turnaround
ANZ has already made a substantial turnaround. Prior to Ansett's collapse and its own near-collapse, the carrier lost NZ$1.42 billion for the financial year to June. That still holds corporate New Zealand's record for a loss. A year later, with Norris at the controls for the last quarter, the airline's loss was down to NZ$320 million. By June 2003, ANZ had turned this into a net profit of NZ$166 million - its first in four years. For the current year, Norris predicts a NZ$220 million profit on NZ$3.3 billion revenue, and analysts believe this is a conservative estimate.

Part of this recovery is due to one-off events - writing off Ansett's collapse quickly - and to better travel conditions. There has been pent-up demand following the terrorist attacks, Middle East conflict and SARS outbreak. New Zealand has also benefited from its perception as a safe destination, and the publicity surrounding the Lord of the Rings trilogy, which was filmed there. But these alone do not explain ANZ's recovery or why Norris predicts that in five years the airline will be as strong or stronger.

Due to New Zealand's geography - close to Australia and far from everything else - the airline serves four distinct markets, each with its own dynamics that in turn demands its own strategy. These are: domestic New Zealand, the Tasman between New Zealand and Australia, the South Pacific islands, which have ethnic ties with New Zealand's large Polynesian population, and the long-haul routes to Asia, North America, and Europe. ANZ is restructuring separately in each of these markets in recognition of the differences between them.

Discount conversion
The first and most dramatic change has come in the domestic market, where ANZ has converted itself from a full service into a discount carrier. "The launch of Express Class on our domestic network - lowering fares and simplifying the product offering ahead of the competition is not the usual behaviour of an incumbent market leader," Norris admits.

"What we have done has been about a rigorous restructuring of our core business rather than trying to add something to the edge of it. If you're going to compete against new carriers, you've got to grasp the nettle," he adds.

Express Class converted ANZ's Boeing 737-300 domestic fleet into a single class with 12% more seats, higher utilisation, more internet bookings (up from 3% to 45% in two years), no more hot meals or free drinks, and no more travel agent commissions. "We changed every aspect of the business," Norris explains, "from customer contact at the airport to experience on the aircraft, and in an integrated fashion."

The result has been a 35-40% cost reduction, 20-50% lower fares, leading to a 40% leap in traffic. Express Class has boosted ANZ's domestic market share from 70% to 77%, while flying more passengers on better margins. ANZ now earns 23% of all flight revenue from its domestic routes.

Express Class, according to Norris, has also had a pre-emptive effect. It has cooled the ardour of its rivals for New Zealand domestic routes. "It's well known that Qantas operations in New Zealand are losing money," Norris says. "Obviously it is the network value that keeps them here, but at a cost." Norris believes Express Class has also discouraged Australia's discount carrier, Virgin Blue, from encroaching on the New Zealand domestic market with its Pacific Blue brand.

"New Zealand only has seven or eight airports that are 737-capable. Contrast that with Australia, which has at least 40. Once you get past Auckland, Wellington, and Christchurch, the routes also become thin, and even on these three a significant amount of traffic is business-related, where ANZ has a strong following," says Norris.

"Given what we've done with Express, by adopting a low-cost model and doing away with all the handcuffs (such as Saturday night stays) we've eliminated the risks that most network carriers have."

Pacific Blue still talks of launching domestic flights, but a number of industry observers agree with Norris that Express Class has largely headed it off.

ANZ's attempt to extend its Express Class success to the Tasman underscores that what works in one market may not work in another. When ANZ launched Tasman Class with fare reductions and service cutbacks based on the Express Class model, business travellers protested. ANZ had kept a scaled-down business class on the Tasman, but passengers soon made it clear that what they would accept on one-hour domestic sectors they were not prepared to endure on three-hour Tasman flights. Quickly, the hot meals, china and free drinks came back.

The dynamics of the Tasman are also forcing ANZ to change its strategy. It competes head to head with Qantas; their capacity and market shares oscillate around 35% each. But both face an unusual array of airlines foreign to both countries.

More than a dozen carriers from Europe, Asia, and the Middle East arrive each morning in Sydney, Melbourne, and Brisbane. Their return flights leave Australia that evening. Rather than sit idly all day, these carriers exercise fifth freedoms and fly services to and from New Zealand. Over-and-back trans-Tasman flights fit neatly into their schedules. The result is that a dozen such carriers operate daily trans-Tasman flights, usually to and from Auckland. Most operate widebodies.

Tasman challenge
"All of them effectively provide a long-haul service on a short-haul route," Norris complains. "As a low-cost carrier we are competing at the same price point with a full-service offering that is marginally priced. The Tasman is an area of real challenge for us."

His solution is to quit trying to compete with these carriers for leisure traffic and to focus instead on what they cannot offer - frequency. From July, ANZ is increasing its Tasman flights from 116 to 125 a week, adding 100,000 seats a year.

"The Tasman leisure market is being oversupplied," Norris explains. "But the fifth freedom carriers are only flying one flight a day [usually leaving New Zealand mid-afternoon]. That doesn't meet the needs of the business market. We're down-gauging our aircraft from Boeing 767s to Airbus A320s and taking a frequency approach versus a widebody approach. We're targeting the business market with additional capacity in the Auckland, Wellington, and Christchurch markets to Sydney and Melbourne because we believe there's a good market potential for us."

In contrast to the Tasman, in the Pacific islands ANZ has long enjoyed an 80% market share against such small players as Polynesian, Royal Tongan, and Air Pacific. This is not a business market; demand is price-sensitive. So the response has been quite favourable to ANZ's new cost- and fare-cutting initiative called Pacific Class. With stage lengths comparable to the Tasman, applying this was a straightforward exercise. But the impact of the Pacific Class initiative seems to be more market diversion than stimulation.

"We've noticed a softening in our domestic bookings that coincides with these new fares," Norris says. People are heading for the islands rather than other parts of New Zealand. "It's not quite a zero sum game," he complains, "but it's not far off it." He hopes this is a temporary phenomenon and that Pacific Class provides permanent stimulation in Samoa, Tonga, and Fiji.

The long-haul markets that tie remote New Zealand to the rest of the world are the last for Norris to address. This network shrank when ANZ stopped flying beyond Australia after Ansett's collapse, and temporarily shrank again with SARS, but it still includes key cities in Asia, California and beyond to London.

Restructuring these markets entails product upgrades and some new routes. ANZ has committed to refurbish its eight Boeing 747-400s at a cost of NZ$20 million each. Norris concedes: "Our long-haul product was starting to look tired."

Besides extending the life of its 747s, ANZ also plans to replace some of its 12 767s as leases expire. It issued a request for proposals last December to Boeing and Airbus. "Because of size and range restrictions, the 767s we fly on some routes to Asia are no longer competitive," Norris says. Shanghai is one route ANZ would like to add if it had the right aircraft.

Norris says ANZ "is not far away" from picking a 767 replacement, which he says will be leased rather than purchased, thus keeping down capital requirements. "Our long-haul plan is to move into another family of aircraft over 10 years."

In June ANZ will launch services to San Francisco - its first new long-haul route in eight years. Besides Shanghai, the only other prospect Norris is willing to discuss is London Heathrow via Asia. With daily service already to Heathrow via Los Angeles, a route over Asia would make ANZ a globe-circling carrier. With London equidistant from New Zealand in either direction, that might boost ANZ's share of the New Zealand-UK market, which stands now at a modest 34%.

Limited frequencies
The obstacle is the UK-New Zealand bilateral, which limits ANZ to seven weekly frequencies. Norris is reluctant to move any aircraft off the US route to launch flights over Asia. "Daily is the most economical frequency," he says. "Diminishing Los Angeles-London would make that route uneconomic." Talks are under way between UK and New Zealand aviation officials.

The theme that resonates through discussion of any issue is that Norris is unafraid of change, but is also cautious. And at the centre of all the discussions is a firm vision for the future of ANZ, which governs what the group will and will not do. The carrier will not, for example, use its Australian cabotage rights. "We have other options for expansion that make more sense than moving into Australia," he says. Neither does he see much sense in making use of fifth freedoms beyond Australia: "Our analysis is there's not a buck in it to make sense." ANZ under Norris is also unlikely to add new Australia gateways. "For them to be economically viable you need to have both airlines working together or one sits back and allows the other to fly," he adds.

ANZ will also remain cautious about new long-haul opportunities, analysing each carefully. "This company in the past had a habit of launching off into new routes and then finding that it had to retreat," he says. But neither will ANZ seek to roll back the liberal regime that gives Qantas and Pacific Blue unlimited Tasman rights and cabotage within New Zealand, even if, in return, ANZ effectively gains nothing. "The single aviation market is here, and I don't think it's going to go away."

And, most significantly, Norris will press ahead with appeals in hopes of gaining ultimate approval for an ANZ alliance with its biggest rival. "Five years from now," he predicts, "ANZ won't be too dissimilar from what it is today." Given the chaos he faced on arrival, that seems a reasonable enough goal. And he is doing what he can to reach it by placing his bets both ways.

Change manager
Ralph Norris's background is not in aviation but in managing change within the banking and finance industry.

Two years out of Auckland's Lynfield College he joined Auckland Savings Bank in 1969 as a computer specialist.

His innovations led to a series of promotions, mostly on the technology side. By 1991 he became managing director of ASB Bank Limited, a post he held for nine years.

Norris played a leading role in the nationwide expansion of ASB Bank and its introduction of interactive telephone banking, internet banking, and a virtual bank product called BankDirect.

During his tenure, ASB Bank won the New Zealand marketing award for the service industry three times. Norris was judged New Zealand Executive of the Year in 1997. The Common-wealth Bank of Australia appointed him to head its international financial services division in 2000. He retired from banking a year later.

Norris is a former chairman of the New Zealand Bankers Association. He was on the Prime Minister's Enterprise Council and Y2K Task Force and he belongs to the New Zealand Computer Society and Institute of Management.

Norris, 54, became an independent Air New Zealand director in 1999. He was appointed managing director and chief executive in February 2002. He says banking and aviation share common traits - both are network, global, mass-customer businesses with a high reliance on information technology.

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