Existing Economy loads were around 90%, meaning that on average the airline only sold 140 of the 156 Economy seats (in addition to 5 of the 8 Business seats).
Suddenly the 8 Business seats were gone, but to raise the same revenue as when they existed the airline now needed to sell more Economy seats - when they already couldn’t sell the 156 they already had.
It’s like a sports team which can’t sell out its 20,000 seat stadium trying to fix the problem by increasing the stadium’s capacity to 35,000 seats.
A 90% average load factor doesn't mean every single flight goes out with empty Y seats. In fact it means the opposite, the majority of flights would be 100% full in Y with only a selection of off-peak flights at lower demand times at lower numbers. If Y is full on most flights then the revenue opportunity from adding more of them is considerable. Narrowbody J was filled with mostly Oz point of sale long haul travelers as you pointed out. As a rule, NZ point of sale (including business) don't fly J trans-Tasman, but in Y class are less price-sensitive because of loyalty and/or business accounts. The strategic decision is therefore much more finely balanced. How many of those Oz long haul travelers would accept an economy seat on the TT leg at a slightly cheaper fare, and how many would be lost to all-J competitors? Would the number lost be responsible for more or less revenue than that gained by new Y passengers, who are more likely to be NZ-origin with a greater propensity to pay a higher Y fare?
In this region not just Qantas but also Fiji Airways, Air Calin, Air Tahiti Nui, Air Niugini and even Air Vanuatu operate Business Class on every shorthaul flight. But apparently Air NZ serves a “more Jetstar” clientele.
NZ is higher margin than all of those airlines.
The shorthaul passenger just about everywhere is "Jetstar clientele". Flyers of all types would prefer to pay less and sit in economy on shorter flights. All-Y Southwest carries more domestic US business traffic than any other carrier. Easyjet is the top carrier out of London. No major European airline offers J seating on their narrowbodies.
Yet Air NZ management has had a free ride for over a decade for a monumentally stupid and self-defeating all-economy shorthaul international model which does not survive even the slightest scrutiny, is economically illiterate and wasn’t supported by the data or even most departments of the airline when it was implemented.
And, just as Loyalty and International warned, Air NZ ended up surrendering a significant part of its long haul market as a result, as well as the market share that it had in Australia, where it had more frequent flyer members than Virgin at the time it ripped out the Business cabin on the A320’s.
I know you're exaggerating for effect, but it would have been a close call revenue wise either way and not a "monumentally stupid" decision. NZ did fine forgoing whatever market share it lost from the decision, which despite what you assert I doubt amounted to a truly significant number of pax. The dominant J markets from Oz continue to enjoy a daily J offering connecting to the relevant long haul destinations. Even better in fact, a true long-haul product rather than a 20% bigger seat and 5 inches more legroom.
Ironically both Qantas and Virgin Australia now have as their CEO’s people who used to run LCCs. Yet neither of them are stupid enough to remove Business class from their 737 fleets.
Virgin probably should remove J. With current capacity shortfalls in Oz and a generally non-premium brand I reckon they could generate more revenue from increasing seat count in their planes. If their fleet didn't already have it do you think they'd be installing it post bankruptcy?