Air New Zealand looks at bulk discounts

Back in January I drafted* a lengthy post on what Air New Zealand could do better, and part of that was on regional airfares. I sampled five regional, seven domestic, two trans-Tasman and two international fares for travel in a month’s time. The results were startling, though not surprising:

It’s twice the cost per kilometre to fly on a regional turbojet than it is on a normal domestic jet, while international travel is a bit of a bargain really. There are reasons for this, as the longer routes can amortize costs over more passengers, but the impact remains. That difference between the regional and domestic market is concerning if you live in a small town a long way from the bigger cities.

I sampled used the flexi fares available for 18 February, looking at them on Sunday 16 Jan. Full table under the fold. This was a few months ago, and I’m sure things have changed a bit in the meantime, but the main lesson remains – regional fares are a lot more expensive per kilometre than international ones.

The regional pricing problem is a big one for Air New Zealand. They are often the monopoly provider on these smaller routes, and the next best alternative can also be high cost. Flying from Wellington to Nelson is expensive, but taking a ferry and driving is also expensive, and also takes a lot of time.

In that unpublished post I proposed some answers:

1. Price against buses, trains and cars – and advertise against them as well. Southwest Airlines are famous for this – they offer a cheaper alternative to alternative modes of travel. That does not help Nelson so much with the ferry crossing (probably why the fare is so high now), but why not start comparing prices for families? Indeed – why not offer a family ticket – certain flights only?
2. Sell ten-trip tickets for the same route, so that individuals can start treating the plane like a bus and commute from and to the provinces. You could also offer “book the next 5 weeks” of this flight (at the same time) to receive a lower price category.
3. Give guaranteed a maximum price guarantee for higher status flyers – so that people that travel a lot can get access to cheaper fares (e.g. the cheapest flexi fare) even after they have been sold out to regular folk. Make this apply to all flights, not just regionals and you’d make this Gold Elite flyer very happy.

A guaranteed rate (options 2 and 3) would be good for flyers and for Air New Zealand. Flyers would have certainty around their travel costs, and be able to book closer to the travel time.

Air New Zealand would lock in capacity sales and prices, rather than see travellers buy a combination cheap and expensive fares, and choose not to fly when fares are high. They would receive a nice up-front payment for those 10-trip tickets, and see increased travel from frequent flyers in #3 as they seek to get their money’s worth. There will be a few bonuses as some flyers don’t meet their expected 10-trip flight numbers in time.

So it was with considerable interest that I read Roeland Van Den Bergh’s article in the Dom Post today about plans for a new Air New Zealand product:

• A card costing $1000-1500) that gives discounts of between 20 per cent and 35 per cent on any regional fare.
• Card includes  Koru lounge membership
• Fares earn airpoints

A lot of these flyers will automatically have Koru membership due to the amount that they fly – so I’m not going to put much value on that.
If we say that the average discount is only 20%, and the card is $1500, then flyers would need to spend $7500 each year to make money (discounting the time value). That’s 22 return flights each year between Napier and Wellington at the full flexi-fare rate ($171). If the card cost is $1000 and the average discount were to be 35% then flyers would need to spend only $2857 each year to make money, which is just 8.4 return flights between Napier and Wellington.

So it’s too soon to tell, but there is potential here for Air New Zealand to deliver a very interesting product. I would imagine a 2-tier approach could work well – with higher discounts available for those that spend more up front and fly more.

Other good news is that those Koru memberships may be worth something, as Air New Zealand apparently plans to upgrade some Koru lounges and add more to the regional airports. That’s good news, as the lounges I’ve been to in the regional airports (most recently Napier and Palmerston North) are tiny, essentially un-staffed, and can be more crowded than the airport itself.

At the lower end of the market Air New Zealand will aparently double the number of grab-a-seat deals to regional airports – which will keep the aircraft load factor nice and high.

So it remains to be seen exactly what this product will look like. But it’s a move in the right direction.

Full price comparison table

*The post got a bit unwieldy and I got a bit conflicted.