Buoyant Kiwis enjoy high yields, but can it last?

Don’t look now, but Air New Zealand (ANZ) is in expansion mode. In early March, the airline announced the resumption of flights to Osaka this coming November, ending a three-year hiatus that began when its Japan flights were consolidated in Tokyo during a weak market.

The announcement came not long after the launch of new routes to the Americas. In December the carrier started flights to Houston and to Buenos Aires, following the arrival of three 787-9s that were delivered last year. Management has also announced plans to mount service in June to Ho Chi Minh City, which will be operated on a seasonal basis, flying three times a week with 767-300 aircraft – the same type used on the Osaka route.

So what’s gotten into the suddenly active ANZ? For the first half of fiscal year 2016, it reported a net profit of US$225 million, up 154 percent from the same period a year earlier. Lower fuel prices and a weaker currency accounted for a chunk of those gains, but they were mostly driven by a strong rise in operating revenue, according to the airline. Cargo revenue was US$126 million, an increase of 21 percent on the prior period. Excluding the impact of foreign exchange, cargo revenue increased 11 percent, driven by a 9 percent increase in volume and 1.6 percent increase in yield.

At a time when yields are falling nearly everywhere, international routes to and from New Zealand have been exceptionally buoyant in terms of yield. For Hawaiian Airlines, for example, the strongest international sector in cargo last year was the route to Auckland. “It’s been a dynamite market for us,” said Tim Strauss, Hawaiian’s vice president of cargo. The carrier targets traffic to and from the U.S. West Coast and Boston (with a truck link to JFK airport in New York). Hawaiian, however, eschews mail on the sector. “We get better per-unit yield at the container level,” Strauss added.

The main reason is that New Zealand has been a fairly balanced market, with a mix of hard goods and perishables going south and perishables dominating northbound loads. A tight supply of U.S. beef has ensured a steady flow of beef being flown in from the South Pacific, Strauss noted.

Peter Lamy, president of Los Angeles-based American Worldwide Agencies, notes that a lot of meat, especially lamb, is carried from New Zealand via the United States to Europe, chiefly the U.K. The routing reflects a key characteristic of New Zealand’s cargo market: The lack of lift, which – combined with the long-stage sectors involved – makes for lengthy and sometimes complex routes, such as moving via Asian points like Tokyo or Singapore. From the U.S. West Coast, the closest alternatives to ANZ’s direct Auckland service, in terms of transit times, are courtesy of Hawaiian Airlines and Air Tahiti Nui. “Going via Honolulu is a three-to-four-day service, Air Tahiti Nui is an extra 12 hours, and they only have a couple of flights a week,” Lamy said.

Being the only show in town with a direct route, ANZ has had no need to negotiate cargo rates for the past 10 years, according to Lamy. Since the airline stopped flying freighters between the U.S. and its home market, yields have held up well, notes Peter Burn, Air New Zealand’s former head of cargo for the Americas and Europe.

But this happy state of affairs is about to end, most observers believe. In June, American Airlines is going to launch daily service between Los Angeles and Auckland, using 787 aircraft. The following month will see the start of flights by United Airlines, linking San Francisco with New Zealand’s business hub, also with 787 equipment. Initially the service will operate three times a week, but this will be stepped up to daily frequency in October, according to a spokesman for United Cargo. “We do have significant hopes for cargo on this route, though we’re not targeting any specific segments yet,” he said. “We expect machinery and electrical equipment to be notable commodities southbound and food products to be among the substantial product groups northbound.”

The entry of United and American will mark a sea change in the trade lane, Lamy predicted, pointing to the U.S. carriers’ size, customer base and historically aggressive pricing tactics. While lift in this market is relatively tight at this stage, it will not take much to tip the balance into overcapacity, he added.

For shippers looking for lower prices, things could get even better, if an unconfirmed rumor of plans at Qantas to mount freighter flights to Auckland were to become reality. “This surprises me,” said ANZ’s Burn, “but the low fuel prices would help.”

In any case, another niche that has so far offered higher yields is about to get hit with a serious infusion of capacity, notwithstanding the toll that the long stage sector takes on the possible payload on the new flights.