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Today Ralph Norris, Managing Director & CEO, Air New Zealand
made a speech to the Inbound Tour Operators Council at Spencer
on Byron Hotel, Takapuna. The Conference theme, “The Future Challenge – Thinking Outside The Square”
and the theme of the full and unedited speech given is “The Future Challenge – Thinking Outside The Square”.
SPEECH
Thanks for the welcome. It’s great to meet as partners in one of the world’s biggest, fastest growing and most volatile businesses.
I’m optimistic about our future. My optimism is based on a firm belief that we have the talent and capacity for change to overcome the challenges that will confront us.
My optimism has been well-tested in recent times.
Last year was never going to be a good year. Exchange rates for the US dollar were pumping up our costs. Fuel prices were at a 10 year high. Competition was worse than cut-throat.
The signs of recession were on the wall for the world airline industry well before last September.
But September turned into the month from hell for Air New Zealand.
It was the month when time ran out on our effort to find the capital to cure the ills of Ansett. Our biggest investment turned into our biggest liability. Ansett threatened to suck our whole business down – and it nearly did so.
At almost exactly the same time, Osama Bin Laden’s terrorists launched their savage hijack attack on New York – and the world travel and tourism industry went into a tail-spin.
It’s hard to imagine how things could have been worse.
On the Board at Air New Zealand we were staring down the barrel – from the wrong end.
We had days – rather than weeks, or months – to develop a survival strategy.
Writing off our Ansett investment breached our loan covenants with our banks.
We had to give them confidence we could survive.
The New Zealand Government recognised the strategic importance of Air New Zealand – particularly to the vital inbound tourism sector of our economy.
But the Government also needed to see we had a viable survival strategy before it would commit capital to save the business.
Very tough decisions were taken. We had to cut Air New Zealand free from Ansett. We had to do so on the basis that would gain us a clear break from further liability.
We achieved that through an agreement with the Administrators who’d taken over
Ansett.
Next, we had to restructure the business on a “home alone” basis. We weren’t an Australasian airline group any more.
We had to scale back our management and our staff to suit the needs of an Air New Zealand without Ansett and an international market where demand had suddenly nose-dived.
By last Christmas, we’d produced a 5 year business plan to demonstrate that we could regain commercial viability. On that basis, we won our survival capital from the Government.
We halved the size of our Board. We halved Director’s fees. Executives took salary cuts of up to 15%. More than 250 managers left the business, reducing our management payroll by 30%. We have been seeking – and gaining - commitments from our various employee groups to a 12 month wage pause.
We have applied stringent spending, purchasing and hiring disciplines. We cut back flying on loss-making routes in our network.
We’ve used a lot of the new capital to pay down unsecured debt ($600 million to be precise).
And we negotiated new lines of credit.
We raised cash by selling non-airline assets – like our profitable South Island ski-fields and our Jetset travel businesses in Australia.
Through the Jetset sale, we capped losses and helped the new owners consolidate it into what is now the largest agency network in Australian –
Travelworld.
Air New Zealand is Travelworld’s preferred airline supplier on the routes we fly.
We re-established our own, independent sales and distribution network in Australia.
Since Christmas, inbound market demand has recovered – particularly from Japan and Asia.
In fact, New Zealand is one of the few countries in the world that has seen visitor arrivals from Japan grow pretty well consistently month on month this year, compared to the same period last year.
I think that’s due in large part to the major initiatives jointly taken by Air New Zealand, Tourism New Zealand, the New Zealand Government and our Japanese travel industry partners to revive interest in our destination post-September 11.
We’ve also seen the kiwi dollar strengthening against the greenback – the currency in which we finance aircraft acquisition and fuel purchases.
Currently, we are running ahead of the targets in our 5 year recovery plan – but we’re not out of the woods.
We had standing commitments to acquire new aircraft.
We continued to take delivery of new Beech 1900 turboprops to replace the Metroliners and Bandareintes on provincial routes. We acquired a 9th new ATR for Mount Cook, and another 737-300 for our domestic jet fleet.
We had another major commitment : to replace the Boeing 767-200 aircraft in our fleet.
Obviously, there’d be significant economies of scale if we could couple our replacement order with the acquisition of additional aircraft to provide prudently for our short-haul jet needs five years into the future.
After careful analysis, we committed to a major order of 15 Airbus A320 jets. They will replace the 767-200s and older 737s that we’ll be retiring from our fleet between now and the last quarter of 2004.
At the same time, we negotiated purchase rights to take a further 20 A320 family aircraft within 10 years. Those purchase rights set a price formula negotiated in what is currently a buyer’s market. In other words, it’s
favourable.
The A320s will start entering our fleet at the end of the third quarter next year. They will be the vehicle we use on the Tasman and short-haul Pacific Island services.
We regard this commitment as a very significant demonstration of confidence in our 5 year recovery strategy.
A “core-out” strengthening of Air New Zealand is now under way.
It starts with our domestic services this year, moving on to our short-haul Tasman and Pacific Island routes next year, and finally to a major re-work of our long-haul international services going into
2004.
We set this order of priority for a very simple reason. The areas of our business where we are currently strongest are also the areas that are most attractive to our competitors. We’re strengthening the base camp before we go for the summit.
Let me assure you – we are not ignoring our long-haul opportunities while we gear up for increased competition.
In our next schedules, connections to the USA will be boosted by stepping up
· To double-daily services between Auckland and Los Angeles.
· From three to five services a week between Sydney and Los Angeles
· From two to three services a week between Auckland-Nadi-& Los Angeles
· And to a three flight a week service - Auckland-Rarotonga-Papeete-Los Angeles - from January.
Connections with Japan will be increased...
· We’ll go daily between Auckland and Narita and Kansai
· Up-gauge the 4 services a week between Auckland & Nagoya from 767s to 747s
· And re-introduce charter operations between Japan and New Zealand.
In terms of connections with Hong Kong...
We’ll lift service frequency between Auckland and Hong Kong from 5 a week to daily - on a year round basis.
· Looking further out, we’re negotiating to try and get 5th freedom rights that would enable us to operate services from New Zealand to the UK via Hong Kong – as well as via Los Angeles
That’s the international long-haul picture for the next year.
Next – the Tasman…
In October:
· We’re introducing Freedom Air services between Brisbane and Auckland, Wellington, and Christchurch – a 23% boost in number of seats we fly between Queensland and New Zealand, a 64% increase in capacity between Brisbane and Christchurch.
· The Air NZ Christchurch-Sydney double daily service will have one of the services up-gauged from 737s to 767 aircraft – providing an extra 86 seats a day.
· Air NZ Auckland-Sydney services will be stepped up from 20 to 28 a week
So, there’ll be new opportunities to develop dual destination itineraries covering Australian and New Zealand destinations – in particularly South Island New Zealand.
The biggest change at Air New Zealand next year will be in our domestic services.
At the end of October, we introduce the new Air NZ Express service on the main trunk between Auckland, Wellington, and Christchurch.
This is the real start of the “core-out” reconstruction of Air New Zealand for the next decade.
It began with a rigorous piece of self-analysis.
We looked hard at what we’d been promising our customers over the last decade.
At various times, we’ve presented ourselves as
· The Pride of the Pacific – seeking outside approval...
· The Airline of the World’s Greatest Travellers – showcasing the world to New Zealanders.
· Then we had “The World’s Warmest Welcome” – showcasing New Zealand to the world.
· Finally, we were the “Absolutely” Australasian airline – marrying Ansett and Air NZ to create a new, world-beating combination.
And it didn’t work.
All the notions of Pride, Quality, and Relevance that we wanted to project to potential customers simply weren’t being matched by the Air New Zealand experience in 2001.
Our domestic customers saw us as “arrogant”, low on effort, low on ease, low on personal choice, and inconsistent in our service standards – Great in the air on International, pretty diabolical domestically, and on the ground.
Our international customers gave our crew service, food and wines high-ratings – but thought our “hard” product (seats and in-flight entertainment systems) was dated.
The overall message was clear – Air New Zealand was not delivering what today’s air travel customers want.
When it comes to what they want from us by way of short-haul airline services - they told us loud and clear.
· Lower fares
· Better schedules – more personal choice and control
· Simpler transactions
· Better Loyalty Rewards.
They also told us what would they trade down to get what they wanted from a new Air New Zealand short-haul jet service.
Without revealing too many confidences, it was things like
· Business class on our domestic jet services
· In flight meals and alcohol service
· Complex special deals.
Was there any significant difference between the wants of business travellers and leisure travellers ? The answer is no.
The customers’ voice is the driving force behind the design of the new Air New Zealand Express service.
It will also drive the development of the short-haul and long-haul international strategies we’ll be implementing over the next 2 years.
Unfortunately, I can’t give you the new Express fare structure today. It’ll be announced round the end of this month – for travel from the end of October.
I can tell you that the typical new Express and Link service fare will be down significantly on current levels.
We believe our new Express fares will be very competitive against any other budget carrier that wants to enter the New Zealand market.
That’s why we’re withdrawing our own VBA carrier Freedom Air from domestic operations.
The launch of the Express service at the end of October will bring other customer-driven changes.
Our domestic short-haul customers tell us they don’t really need a domestic business class. Very few of them buy a ticket to get there.
So the Air New Zealand Boeing 737-300 jet fleet operating domestic services will be reconfigured to a one-class cabin.
Our domestic 737-300 seating capacity will be increased from 122 seats to 136. That gives us more than 11% more capacity on the main trunk.
Seat pitches will be set at 30 and 31 inches – and new, ergonomically-designed seats will be installed midway through next year to create extra knee-space.
The upside : your chances of getting a seat on a prime-time domestic flight, or redeeming Air Points on an off-peak flight will go up by more than 11%.
Next, the customers tell us that in-flight meals and alcohol on domestic flights aren’t highly valued.
In-flight meals and alcohol service on domestic flights will be replaced by a new in-flight snack-packs, tea, coffee, and water.
But we’re also exploring new ground catering arrangements to provide customers with an opportunity to purchase a more substantial food and beverage option for consumption in-flight.
We are taking other steps to make the Air New Zealand Express journey more customer-friendly from start to finish.
This month, we switch on a new Internet system – that’ll make it much easier for customers to identify their domestic travel options, carry out a booking and purchase transaction, redeem Air Points (if they have them) and get on-line, real-time information about the operating status of their flights on the day of travel.
By October, we will have lifted our IT-based customer service systems to another new level to simplify and streamline the domestic travel experience with Air New Zealand.
You might be saying : how does all this help me as an inbound tour operator?
World-wide our new, customer-friendly web-site will make it easy for your customers to “check us out”. I believe it will give them more confidence to make the commitment to a New Zealand tour.
Second, our additional jet capacity will make their movement around New
Zealand easier.
Third, as part of our new domestic strategy, we’re also stepping up our Link airlines turbo-prop connections through the important tourist centres like Rotorua, Christchurch, Queenstown, Dunedin, and Invercargill.
Finally, connectivity between our International and Domestic services will also be improved.
We’re looking forward to helping you identify the new value that can be extracted for your customers from the changes we’re making.
Back to the list of service enhancements on the agenda for this year.
Lounge facilities :
Under our current year development plan :
· The domestic Koru club lounge in Auckland will be expanded and refitted to Wellington-plus standard.
· We’ve also budgeted a refit at Christchurch this year.
· Melbourne and Los Angeles lounge developments are also in the works.
The improvements to our Air Points loyalty reward scheme are probably less important – but may be significant to Australian inbound business.
· Benefits for our high-yielding frequent flyers will be improved.
· And, for the first time, there’ll be an opportunity to redeem Air Points on Freedom services to New Zealand from Brisbane.
In terms of other changes under way, I have to mention the matter of travel
agents’ base commissions.
You know there’s been a world-wide wave of change on commissions and agents’ remuneration that’s barely touched Australia and New Zealand - so far.
But if our airline and New Zealand’s travel and tourism business are to remain internationally competitive and viable, we can’t ignore the rest of the world.
International travel consumers are better informed and better equipped to shop around the world than ever before.
They want value for their money – and they want to exercise as much control as possible over how they spend it. They don’t like hidden or buried costs.
Clearly, international leisure travellers value New Zealand’s attractions – a safe, visitor-friendly country offering one of the world’s richest diets of natural, cultural, action and relaxation attractions and experiences.
But we are also one of the most remote destinations on earth. The cost of getting here is a major factor in the potential consumer’s calculations.
Over recent years, air travel distribution costs have been generally trending down – but not here.
If we stand still while the carriers of other nations lower their costs and their fares, we run the risk of pricing ourselves out of the market.
We can avoid that fate by honestly facing up to the task of delivering what our customers really value – at prices they consider fair.
The best test of that is to send the bill to the consumer rather than the supplier of the service.
The transactions then becomes a far more honest, transparent, and controllable process from the customer’s perspective – and no-one should fear the outcome.
Anyone who is in the business of delivering fair value for service can expect a fair return.
So, we’ve given notice that we intend to eliminate the base commission payments we make to travel agents for Air New Zealand domestic services, sold in New Zealand for use after the end of October.
That’s a modest change compared to the approach being taken by major carriers elsewhere in the world.
The Air New Zealand Travel Centre and Call Centres will sell domestic travel in New Zealand on exactly the same basis as the independent agencies.
They won’t get any concessions from us on the domestic fares they can offer – and they’ll be expected to generate their margins by mark-ups or customer services fees.
This way, customers can decide if the agencies are adding value to the transaction. If they don’t think so, they can turn to a “no fee”, direct transaction with us on the Internet.
The Air New Zealand website will be where our very lowest domestic fares will be available.
When we served notice of the end of base commission payments on domestic fares sold in New Zealand, we also opened negotiations with travel agents on new remuneration arrangements.
The new arrangements are designed to reward travel agents for generating significant increases in the volume and value of business for our airlines, instead of individual fare transactions.
Now that kind of activity adds value to our business – and we’re prepared to pay incentives to make that kind of gain.
None of these remuneration changes under negotiation affect our commitment to marketing air travel to and within New Zealand.
There’s been some nonsense talked about how Air New Zealand expects people to market its services for nothing.
We don’t expect people to sell our products without assistance or return.
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