Upfront

If the Government is still counting on healthy capital gain from its duress-driven investment in Air New Zealand it should read recent survey on ‘Rethinking the aviation industry’, compiled by US consultants McKinsey and Co.
The sobering report warns that airlines face problematic future. “Traditional [airline] carriers that do not significantly overhaul their service models and cost structures risk eventual failure, and government efforts to support them will only prolong the difficulties of the industry.” Oh dear.
Recovery for airlines is linked, at least in part, to improved passenger yield – the price paid for each passenger-kilometre flown. According to McKinsey, business travel has been the primary source for high-yield passengers and now business travellers are changing their ways and their priorities might not fit well with new business models being considered by airlines like ours.
In recent years business travel has accounted for an ever-smaller share of airline revenues and, September 11 notwithstanding, “factors indicate that the decline may be longer term”. The inconveniences caused by time-consuming new security measures have made business travel even less attractive, and the likelihood is that these inconveniences will continue for some time yet.
Companies are making fundamental changes to reduce their travel costs and these are likely to have long-lasting effects on travel revenues, says McKinsey. Large corporations, including those with branch operations in this country, are using their purchasing power to negotiate volume discounts, sometimes as high as 20 to 30 percent. And some corporations are enforcing travel restrictions tied to these volume agreements – that could cut an airline like Air New Zealand out of the loop.
The report also points out that alternatives to business travel may now finally take hold. “Companies are turning increasingly to travel substitutes such as videoconferencing and have been experimenting with shared corporate jets as replacement for first-class travel for their top executives.” The latter is less likely to take-off here.
But again, according to McKinsey, new advances such as web conferencing have boosted demand for videoconferencing services, with 30 percent year-over-year increase prior to September 11. Since then the growth rate has increased to 40 percent.
Air New Zealand will have trouble developing model that copes with the competing priorities of business and leisure travellers. Leisure travellers seek the lowest prices and are less concerned with service, flight frequency or broad slate of destinations. Business travellers on the other hand demand frequent flights to wider range of destinations, seek quality service and are willing to pay reasonable premium for these benefits. New Zealand business travellers might need to lower their sights, or chose another airline. That could be even more problematic.