Air New Zealand - Strategic Analysis and Recommendations

Since the appointment of RALPH NORRIS as Managing Director and CEO of Air

NZ in February 2002 Air NZ has been working on its new strategic direction.

Structural changes in the ma rketplace made a new direction indispensable and Air

NZ is now turning away from inflexible service offerings to align its route and

service standards to customer needs.

In fact, Air NZ is developing from a full service airline into the direction of a “value-based-plus” airline (Airline to put profit on menu, 2002) which involves lower fares and more customers. Reduced revenues (per customer) should be off- set by lower operating costs mainly achieved by simplification of product bundles and services. (UBS Warburg Conference, 2003, p.11 ; Airline to put profit on menu, 2002) The following subchapters give an overview of the key aspects of Air NZ strategic direction.

1.1 Mission and goals

The company’s mission, although not explicitly stated as such, is to “position it- self as a long-term sustainable business providing value to its customers, employ- ees and shareholders”. (Annual Report 2002, p. 13) At the UBS Warburg Transport and Leisure Conference in Sydney on April 9 2003, RALPH NORRIS gave a strategic update in which he presented Air NZ’s stra- tegic key goals:

1. Maximise the overall Group return on capital employed

2. Bring diversity and balance to the Group’s earning streams

3. Take full advantage of the Group’s competencies in markets where we have in-

fluence

(UBS Warburg Conference, 2003, p.23)

Concrete objectives concerning the goals have not been publicised. Apart from the first goal, goal no. two and three are very broad and give room for different inter- pretations.

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1.2 New Philosophy

“It is no longer sufficient to be good at flying planes. The Air New Zealand of the future will excel at flying people.” said Ralph Norris and concludes: “From an air- line perspective, the core of this turn-around is a new and fundamentally different philosophy.” (UBS Warburg Conference, 2003, p.8)

In this new way of thinking customers become the centre of attention. Their needs are what counts. But Air NZ wouldn’t offer anything that is possible rather than what is justifiable from a bus iness point of view. Those service components which don’t bring added value compared to their costs externally (for the customers) and internally (Air NZ) will be dismissed. (Annual Report 2002, p.5)

1.3 Cost reduction

The ‘new philosophy’ is strongly linked to cost reduction, which is one of today’s Air NZ main issues. Its strategic goal “Maximise the overall Group return on capi- tal employed” implies cost reduction and becoming a “long-term sustainable bus i- ness providing value to its customers, employees and shareholders” must entail constant work on cost reduction measures.

But cost reduction by all means is not always clever and sometimes also not pos- sible. According to SIOBHAN VINISH (Director of public relations and communica- tions, WestJet Airlines, Canada) conventional full service airlines like Air Canada have difficulties to go into the low-cost market. Main reason is that a low cost strategy needs commitment from all employees in form of a lending-a-hand- attitude. (Mark & Crossan, 2002)

It is questionable if Air NZ’s employees are willing to make such a contribution. In any case, the executives and managers of Air NZ should be a living example.

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1.4 Portfolio of businesses and airlines

Air NZ businesses are inter-related with the airlines as its centre. According to

RALPH NORRIS Air NZ is currently facing a “strategic dilemma” which lies in the

inseparability of the profitable businesses (Express Class, Engineering, freedom air) from the rather loss- making ones (Air New Zealand International, Tasman) because the loss- making ones enable the success of the profitable bus inesses to a large part. (UBS Warburg Conference, 2003, p.5)

1.4.1 Engineering and Cargo

ANZES, Air NZ 2500 people strong engineering business is highly profitable (EBIT $47m). But still over a half of ANZES revenues come from the internal customer Air NZ itself and not from the outside market. (UBS Warburg Confe r- ence, 2003a, p.17; Annual Report 2002, p.12)

In the future, ANZES will follow a different growth strategy compared to the int e- grated airline but both will still complement each other. (UBS Warburg Confe r- ence, 2003, p.21)

Cargo as well as Ground handling are both profitable, too, and its revenue comes not only from Air New Zealand but also from external clients. (UBS Warburg Conference, 2003, p.22)

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1.4.2 Airlines

“All [three airlines] are integral to our future success, and removal of any of the mix will have serious strategic and commercial implications for Air New Zealand” states RALPH NORRIS (UBS Warburg Conference, 2003, p.10).

Air NZ is offering full- service on the long-haul international routes. Although currently in the red, Air NZ International still tries to widen is presence because it is strongly linked with Air NZ long-term future. Sydney and Hong Kong flights were increased as well as new code-sharing agreements with Singapore Interna- tional Airlines (SIA) on direct Christchurch-Singapore flights arranged. For short- haul international flights Air NZ will apply the new Express model, too. (Thomas, 2003)

The restructuring and re-branding of Air NZ’s domestic trunk route business as Air New Zealand Express in November 2002 proved to be a success. Here Air

NZ could apply the value-added plus strategy (no more hot food and alcohol, no

business class) and the market accepted it with increasing passenger numbers. Fares were cut by up to 28% and Air NZ was able to undersell its competitor Quantas in New Zealand domestically (Thomas, 2003). Passenger numbers rose by over 30% and internet bookings went up to 35% (UBS Warburg Confe rence, 2003, p.13).

Freedom air, the third in the row, is positioned as a no-frills airline even below the Express product for the pure leisure routes. Its trans-Tasman services have been expanded and the airline yields a high profit (Interim Report 2003, CEO's re- view). Freedom air even more than Air NZ Express is Air NZ’s weapon agains t potential no- frills newcomers such as Virgin Blue and Jump because the market entry barriers for this niche are now increased fundamentally.

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1.5 Strategic Alliance with Quantas

Part of Air NZ’s current strategy is to find a strong partner. Quantas is the favour- ite candidate and an alliance with them would present one of the fundamental pil- lars of Air NZ’ future. RALPH NORRIS sees Quantas and Air NZ as “logical part- ners” and he judges an alliance “as a solution to our [Air NZ] long-term strategic dilemma” (UBS Warburg Conference, 2003, p.16), which has been described above. However, he did not make clear in which way an alliance with Quantas is meant to solve its strategic dilemma.

A going- it-alone-strategy would result in a withdrawal from international routes

and Air NZ would have to face a war of attrition with Quantas – and won’t be the winner at the end (Tho mas, 2003). These are strong words, and one should not ne- glect that Ralph Norris tries to make the alliance look like a last resort for New Zealand’s national carrier in order to get the deal approved by the authorities.

A final decision about the alliance is due not before the end of September 2003

(Australian go vernment pushes, 2003).

Interim sum up

Although the last paragraphs might give a different impression one can sum up that Air NZ is in the process of shifting from a struggling reactor and defender to the more active position of an analyser. Air NZ balances its core activities with prospective new activities such as freedom air, new express class, etc. (Hunger & Wheelen, 2001, p.45)

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