How An Airline Justifies Investing in Its Onboard Service (Since Most Don't)

(MoneyWatch)  We always hear airlines talking about how people choose their flights primarily on price and schedule, which makes it hard for them to justify spending to improve their onboard service. But Air New Zealand recently took delivery of its first airplane with a revamped cabin experience that cost millions of dollars to develop -- in addition to the hundreds of million dollars it will cost to outfit its entire fleet.

How can the airline justify that cost? I spoke with Air New Zealand's outgoing head of its long haul operation, Ed Sims, to better understand how the airline can justify such a large investment in something that most airlines wouldn't consider. His rationale helps create a justification that other airlines should consider in their quest to increase revenues.

I sat with Sims in the airline's new Premium Economy cabin to talk about why Air New Zealand had been able to make such a large investment that brings some previously premium-only amenities -- such as flat beds and premium meals -- into the coach cabin.

When Sims came into Air New Zealand, he wanted to accomplish three things.

1. Prove a long haul international airline could be profitable
2. Create a culture where everyone speaks the same language
3. Deliver the best airplane experience in the world

The first and the last have often been thought to be in conflict, especially in the U.S. industry. But sure enough, the first one has certainly been accomplished with Air New Zealand now regularly posting strong profits. In the last fiscal year, it made $58 million. The culture has also come a long way from when the airline nearly went under in 2001. And now, Ed has delivered one of the best airplane experiences around, at least in my opinion. How has this happened?

Making ultra-long haul flights nicer
First, Air New Zealand knows its place. To get just about anywhere from Auckland is an ordeal. The 12+ hour flight to LA is double the flight time from the East Coast of the U.S. to London. Air New Zealand operates in an environment where nearly everything is ultra-long haul flying, but it's not alone in that type of flying. Airlines like Qantas and South African face similar challenges on a broad scale. And nearly every airline has some segment of ultra long haul flying. It's those ultra long haul passengers that are willing to pay more.
Sims admitted as much when I asked if the airline would use the same strategy for its domestic flights and flights to Australia. That certainly isn't in the cards, because people don't care about product for the short flights, or at least they aren't willing to pay much for it. But for ultra long haul, it's completely different.

Air New Zealand thinks of itself as being the first impression of New Zealand for the tourist. As an extension of the New Zealand brand in that sense, it's important. In a previous conversation with Ed, he talked about how Air New Zealand faces a different kind of competition than most airlines. It's a competition for destination instead of just for airline.

Selling the destination
More and more airlines fly to New Zealand, but it's still a fairly small market. So when it comes time for a family to plan a vacation, Air New Zealand may not compete as much with other airlines for the business but will instead compete with other destinations. Someone might choose to go to Australia or Europe instead. So if Air New Zealand can help sway the decision, it does so. Many national flag carriers face similar situations, though that's not the case in the highly competitive U.S. industry.
Air New Zealand takes aim at families by offering premium amenities for kids. They get a snack box at their seat when they get onboard and a bag with toys and games. Air New Zealand will also have a story time for kids in the back galley, giving parents a bit of a rest. And the new, unique SkyCouch allows coach passengers to turn three seats into a full bed for the first time. That's great for keeping kids comfortable, and if kids are happy, so are parents. This is the kind of smooth travel experience that can help dictate where a family spends its time and money.
So Air New Zealand's bet is that this will bring more travelers to its airplanes and that it will help boost profits even further. Early signs are that families are responding and people are paying more for the more premium offerings onboard, including the SkyCouch.

But as in any good company, this is just the next step in the strategy. Though Sims is leaving, he says the airline is already working on what's next. The 787 will be delivered (eventually) and that will bring new opportunities.

Related:

• How Air New Zealand Started the Process of Creating a New Cabin Environment
• Air New Zealand's Secret Weapon: War Dances and Happy Customers
• Air New Zealand's Process for Narrowing 30 Concepts To the Final Two Seats

Photo via Brett Snyder