New Zealand travellers are being promised a price war as Australian budget carrier Virgin Blue prepares a long-awaited assault on the domestic air market, promising to bring 'affordable fares' and 'competition' to the New Zealand market.

The Australian airline co-founded by British tycoon Sir Richard Branson is launching in true Branson style, with a big publicity splash.

A newspaper advertising campaign started by its subsidiary, the trans-Tasman Pacific Blue, promises the chance "to be a jetsetter on a backpacker's budget". The development has drawn a swift reaction from Air New Zealand, which has vowed to match Virgin Blue's fares.

However, Air NZ will not say whether it will follow the Qantas example by setting up a low-cost subsidiary to take on Virgin Blue.

Australian aviation analysts say Virgin Blue's entry into the Australian market and the setting up of Qantas low-cost subsidiary Jetstar had led to a 20 per cent reduction in domestic airfares between 2002 and 2004. Air NZ has already dropped domestic fares by up to 26 per cent in January, and has been matched on the limited domestic routes Quantas operates in New Zealand.

But expectedly, travel agents are delighted by Virgin Blue's proposed entry to the market. They feel it will be a terrific boost for New Zealand travellers and tourism, increasing competition and creating more flight availability. Virgin's Australian and Pacific routes will also become more accessible to New Zealanders.

Virgin revolutionised Australia's domestic and international air transport networks with its highly competitive, 'no frills' but fun service. It is now Australia's second-largest airline, after Qantas, with about 30 per cent of the domestic market.

Virgin has reported a near-doubling in annual profits to $174 million for 2006-07. But it acknowledges that higher costs may offset any revenue growth it sees this year, as it has set up new services in the US and New Zealand.

Some experts expect Virgin Blue will concentrate on leisure travellers in New Zealand, but others think business customers will value the airline's high standard of on-time performance. The timing of the announcement has taken some observers by surprise. Virgin Blue is busy in Australia preparing to meet fresh domestic competition from the Singapore-based Tiger Airlines. It also intends starting long-haul operations to the United States soon.

Virgin Blue had ordered a fleet of new 100-seater Embraer jets to expand its Australian operation. This aircraft could also be used for a wide range of operations in New Zealand, including flights to the tourist centres of Queenstown and Rotorua as well as on the main trunk routes between Auckland, Wellington and Christchurch.

Virgin Blue needs to make enough aircraft available to compete with Air NZ on the frequency of flights as well as fares. Qantas has too few aircraft in New Zealand's domestic market to do that.