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Air New Zealand And Qantas Apply To Co-operate

Media Release 12 April 2006

Air New Zealand And Qantas Apply To Co-operate On The Tasman

Air New Zealand and Qantas today announced they have signed a codeshare agreement for their Tasman routes. The airlines will shortly file applications seeking authorisation from the New Zealand Minister of Transport and the Australian Competition and Consumer Commission.

The agreement, which is subject to an independent audit review, will be specifically limited to the Tasman only.

Benefits to the consumer would include better loyalty programme advantages, a better spread of schedules, better connections to onward flights and the retention of low fares.

Air New Zealand customers currently have the choice of 134 Tasman departures per week. Under the proposed codeshare with Qantas this would increase by 63% to 218 departures.

The codeshare will also have significant benefits for the environment. Air New Zealand currently uses 1.78 million barrels of fuel a year on the Tasman. This will be reduced by around 100,000 barrels annually under the proposed codeshare.

"The Tasman is a fiercely contested market," said Rob Fyfe, Chief Executive Officer of Air New Zealand. "The number of seats on sale is greater than the number of passengers carried; in fact the equivalent of 11 empty A320 aircraft make two return trips per day. To continue such over capacity in the present environment of high fuel prices would not only be uneconomic, it would be financially and environmentally irresponsible."

A codeshare agreement will allow the airlines to reduce cost by removing some surplus capacity and utilising aircraft more efficiently, while increasing the number of flights available to each airline's customers.

Mr Fyfe said that while the proposed codeshare arrangements with Qantas and recent initiatives designed to remove costs from Tasman operations would be positive for Air New Zealand, the company would still be well short of achieving adequate returns on its substantial fleet investment. Air New Zealand currently has almost a billion dollars invested in aircraft on the Tasman.

"Once the proposed codeshare arrangements with Qantas become effective, the market will continue to be highly competitive," said Mr Fyfe.

"The reality is that both Air New Zealand and Qantas continue to compete against a significant number of other airlines on the Tasman. Both airlines would also remain vigorous competitors in marketing and distribution."

The proposed codeshare will be supported by revenue, pricing and scheduling arrangements. Once it becomes effective, all revenue earned by Air New Zealand and Qantas on Tasman routes will be allocated on an agreed basis. Each carrier will benefit from its own cost reduction programmes and continue to maintain independent and competitive relationships with travel agents.

Mr Fyfe said it was expected that the applications could take around six months to be assessed by regulators on both sides of the Tasman. The value of the benefit of the codeshare cannot be released for commercial reasons. ENDS. Issued by Air New Zealand Public Affairs Ph: 09 336 2671

Codeshare Benefits

* Air New Zealand customers currently have the choice of 134 Tasman departures per week. Under the proposed codeshare with Qantas this would increase by 63% to 218 departures.

* Better loyalty programme advantages (can earn and redeem points on 63% more flights across the Tasman).

* Better schedule spread (access to 63 % more flights a week across the Tasman).

* Greater range of connecting options and enhanced seamlessness of service.

* Potential for new destinations and improved frequencies.

* Cost savings from extraction of capacity (removal of two aircraft from the Air New Zealand fleet and one from Qantas) will allow sustainability of low fares.

* Air New Zealand currently uses 1.78 million barrels of fuel a year on the Tasman. This will be reduced by around 100,000 barrels annually under the proposed codeshare. * Enhances Air New Zealand's financial position, and provides it with a sustainable base from which to continue to grow and develop its wider network. A strong and secure Air New Zealand is vital to promoting New Zealand as a tourist destination offshore and taking our nation's goods to the world.

The Tasman Market

* The current market conditions on the Tasman are not sustainable:

* 8 carriers in operation for 5.4m passengers one-way flying across the Tasman

1 Market load factor declined from 75% to 70% between 2003 and 2005

2 The equivalent of 11 empty A320 aircraft make two return trips per day

3 Between 2003 and 2005 capacity growth of 39%, passenger growth of only 31%

* Air New Zealand and Qantas have tried strategies independently to address the current performance gap:

* Air New Zealand has utilised low cost based airline Freedom Air, introduced Tasman Express and implemented a strategy to reduce operating costs.

1 Qantas has launched Jetstar and a cost reduction programme.

2 Neither Air New Zealand nor Qantas are meeting their target return on capital.

3 Neither airline can viably extract capacity alone as it provides the opportunity for the other to expand and gain a broader network advantage.

* The Tasman is a critical market for Air New Zealand as it represents 20% of all revenue by the Air New Zealand group.

* The current overcapacity of around 6300 empty seats a day will get worse when competitors start flying the 500 plus seat A380 across the Tasman.

* To unilaterally decrease the number of flights, in an attempt to improve profitability, would provide other carriers with an opportunity to expand and gain a broader network advantage.

* The need to reduce costs to compete more effectively in markets burdened with overcapacity is a worldwide phenomenon, which has led airlines to seek efficiencies through mergers and code sharing.

Codeshare Overview

* Governance * The operating carrier will manage the flight (revenue management and on the day operations) 1 Joint Working Group and Committee to oversee the combined operation

* Alliances * Air New Zealand to remain in Star Alliance 1 Qantas to remain in One World Alliance

* Network: * Relates to Tasman Flying only - no implications for the New Zealand domestic or any other geographic market 1 The carriers will continue to actively compete on domestic New Zealand and non Tasman international sectors. 2 Customers booking on line or via a travel agent will see who the operating carrier of their flight will be before they pay for their fare

* Codeshare * A codeshare will be established:

* Required for Air New Zealand/Qantas 161 Permitted with agreement for Freedom and Jetstar

* Financial structure

* Based on an allocation of net revenue only. Each carrier's revenue will be determined by a combination of the capacity flown by that carrier and historical yield.

1 Costs are not included in the model (each carrier benefits from its own cost reduction programmes)

2 No Equity investment. Qantas' redeemable convertible notes will be unwound and $98 million repaid over four years.


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