Air New Zealand is about to be squeezed in the domestic market from both sides by Australian rivals. In October Qantas said it would export its business traveller-focused City Service operation from Australia to New Zealand. This follows Virgin Blue's decision in August to launch low-cost domestic flights in New Zealand through its subsidiary Pacific Blue.

Over the next several months Qantas will add frequencies within New Zealand, restart the Wellington-Christchurch route that it dropped in March, and introduce its City Service brand of service in the Auckland-Wellington-Christchurch triangle. City Service is popular with business travellers on Australian trunk routes because of its frequency, fast check-in and enhanced in-flight service.

Extending this to New Zealand represents the first step Qantas has taken in years to upgrade local operations. Until now Qantas has been content to run a limited, low-yield service in New Zealand with the objective of feeding its overseas flights. By targeting the high end of New Zealand's domestic market, this move runs counter to reports that Qantas would delegate its New Zealand operations to low-cost Jetstar.