About 1000 Flight Attendants and Related Services Association members walked off the job in two 48-hour strikes last week. A third and final strike – planned for yesterday and today – was called off after a breakthrough in negotiations late on Friday. However, it was too late to reinstate flights.

The massive logistics of flying planes around the world meant that Air New Zealand’s contingency plan covering the entire strike period was irreversible once it was implemented at 5 pm on July 13. About 15,000 passengers had their travel arrangements disrupted, mainly to Asian destinations.

Details of Friday’s agreement were secret till staff vote on it from today.

Air New Zealand Crews had demanded a pay increase of 3.8 percent for each of the next three years. Air NZ offered 3.3 percent in the first year, followed by 3.4 percent and 3.3 percent. Increased allowances and more annual leave were also sought.

But the real sticking point seemed to be over crew numbers for the new Boeing 777 fleet. Air NZ wants to have 10 cabin crew to look after 313 passengers on the 777, a ratio of one crew member to 31 passengers.

This compares with a 1:30 ratio on the 767 and 1:28 for the 747. The union wants 11 crew members on the 777, but Boeing recommends 10 and Air NZ’s rivals also use only 10. AdvertisementAdvertisementAir New Zealand said the union claims would cost $14.2 million over three years and it could afford only half that amount. The strike has cost $2 million.

Air New Zealand has already settled at 3.3 percent with its other unions, including a smaller, rival cabin crew union.

But as costly and damaging as the strike is to its reputation, especially in fickle Asian markets, Air NZ was adamant it could not allow its wage bill to blow out beyond that of its competitors.

Labor costs accounted for 23 per cent of the airline’s costs, compared with 20 per cent for most of its competitors, Air NZ group general manager Rob Fyfe said.

While airlines generally pay the same for fuel and maintenance costs, Asian carriers have a much cheaper labour force and more favorable labor laws.

“It is rare that you will find a flight attendant on a Singapore or Thai aircraft who is over 30 years of age. They are all on fixed-term contracts of three to five years,” Mr. Fyfe said.

That left labor as the point of difference. “If we allow our wage bill to drift up then we have got to find compensating savings somewhere else.”

Air NZ has already reinvented itself with the introduction of the Express-class model on domestic routes in 2002, which removed many of the frills and was introduced on short-haul international services in 2003.

It is also about halfway through a four-year programme to reduce annual costs by $245 million.

Even those savings would merely allow the airline to stand still, Mr. Fyfe said. “In the last 18 months we have improved our cost base to the tune of $70 or $80 million, but effectively all of that has been consumed by less revenue due to the surplus capacity and increased competition.”

At stake is the long-term competitiveness of the airline at a time when Asian carriers are rapidly adding capacity throughout the region, fuel costs are rising and airfares are falling.

Orders to plane-makers are at record highs, with Asian carriers accounting for 45 per cent of placements for Boeing jets alone as they put more planes in the air to cater for a rapidly growing tourism market out of China and India.

Air NZ itself expects to add 6 per cent capacity this year, reaching more than 10 per cent in 2007, similar to that of its competitors.

Airlines are also scrambling to match each other’s in-flight services with expensive new technologies in seat design, entertainment and communications equipment critical to retaining customers, who are increasingly sensitive to getting the most for their travel dollar.

Air New Zealand will spend about $2 billion replacing or upgrading its international fleet in a bid to catch up with competitors and stem the flow of passengers going elsewhere.

The eight Boeing 747s are being refitted and will have three cabin classes: fully reclining business-class seats, super-economy and seat-back entertainment in the economy. The same cabins will be fitted in the new fleet of eight 777-200ERs, which will replace smaller and less efficient 767s.

Express class reduced domestic fares by an average of 20 per cent, but that has resulted in a 40 per cent increase in passengers over two years.

Half of those passengers now book their travel on the Internet, cutting out travel agents, who have had their commissions slashed.

Forsyth Barr head of research Rob Mercer said: “(Air NZ) just can’t afford to be complacent about costs at the moment, otherwise all the benefits of the fleet upgrades and the strategy upgrades will not be delivered.”

Air NZ’s forecast profit of $220 million before tax in the year to June – after a $20 million downgrade last month because of record fuel prices – is still a long way short of providing an acceptable return on capital.

“The airline’s profitability is under intense pressure at the moment and if you look out two years, airfares will continue to have downward pressure on them and therefore airlines have to look at ways they can deliver lower operating costs,” Mr. Mercer said.

That is reflected in the share price which has slid from about $1.80 in September to $1.26 last week.

Mr. Mercer said the share price was an accurate reflection of the risks Air NZ faced. “I don’t see a key turning point till we can be sure where fuel prices are going to settle. . . and also what the ramifications will be on our market with the increase in capacity that is going on stream in the Asia-Pacific region.”

Vital to Air NZ’s long-term viability will be its ability to expand its international network and take advantage of the Asian tourism boom which is enjoying the impressive underlying growth of slightly less than 10 per cent across the region.

“Of course they can compete, but can they grow their business? If you want to stand still in the market we are heading into, then that is a dangerous strategy,” Mr. Mercer said.

But Peter Harbison, managing director of the Centre for Asia Pacific Aviation, warned that a small carrier such as Air NZ had little margin for error when it flew too far from home because this reduced its ability to exploit any lower cost base advantage.

“It will increasingly look to partnerships to reduce its risk exposure on long-haul routes.”

The introduction of new planes often resulted in jockeying between flight staff taking the opportunity to push for better conditions, and management looking to tighten work practices.

Mr. Mercer urged crews to take a longer-term view. “The staff should embrace the fantastic changes that are occurring and see it through, because there should be greater benefits from being a successful, growing airline, than one that is struggling.”

How much does it cost to cancel a flight with Air New Zealand?

If the flight is cancelled before departure, the cancellation fee costs USD $300 per adult and child. After the flight sets about, the fare is non-refundable. For no-shows the tickets cannot be rebooked or used any further. The ticket is refundable if it gets cancelled within 24 hours of reservation.