Winning With a Bad Hand: Air New Zealand is an unlikely superstar. But Qantas and its allies are a growing menace

Its hub geography is terrible. It has limited scale. It has a small home economy with relatively high labor costs.

Yet Air New Zealand continues to win with a bad hand. In calendar year 2015, despite all its inherent challenges, the airline from Auckland once again
prevailed against conventional wisdom. It earned a 13% operating margin, ranking it among the top 10 intercontinental carriers worldwide. This followed two consecutive years of solid 8% margins after starting the decade with three consecutive years in the low single digits. Air New Zealand is an airline, in other words, that’s quietly and counterintuitively climbing into the ranks of elite profit producers. But can the trajectory remain so positive?

First, an explanation of how it steamed its way to the top: For that, look no further than the airline’s own management, which detailed the climb in a presentation to investors last week. For starters, the company set upon a general strategy of growing new revenue streams, competing in the right markets, working with the right partners, selling through the right channels and driving cost and complexity out of the business.

One of the most visible aspects of Air New Zealand’s business plan is its fleet plan. It replaced B747-4s with B777-300ERs, one of the most efficient and profitable widebody machines in the sky. The B747s are now all gone. Gone too, eventually, will be ANZ’s B767-300ERs. They’re being replaced by another aircraft much loved by network planners: the state-of-theart B787-9. ANZ was the first airline to fly the -9 version of the Dreamliner. In doing so, it gained 31% more seats than the B767s with a variable operating cost of carrying those seats 20% lower than before. The B787-9 feels like it was tailor-made for the remote New Zealand market, which needs efficient, mid-sized, ultra-long-range planes to reach many distant overseas locales but without an excessive number of seats. On the narrowbody front, ANZ again made all the right moves, retiring all of its B737 Classics in favor of an allA320 fleet, with the superefficient A321-NEOs next in line to arrive. The A320s helped not just at home but in the hypercompetitive trans-Tasman market to Australia. Even the regional fleet is getting a refresh, with ATR 72-600s, again the aircraft of choice for many regional airline…

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