In response to Jetstar's $5 promotional fare offer to celebrate its entry into the Dunedin market, Air New Zealand countered with hundreds of $1 fares to Christchurch, Wellington and Auckland.
Both airlines also offered $49 Auckland-Dunedin fares.
Jetstar Australia and New Zealand chief executive David Hall said the airline aimed to stimulate and grow the Dunedin market, with "thousands" of discounted tickets sold by yesterday afternoon.
Asked to comment on Air New Zealand dropping its prices, Mr Hall said: "It is a win-win for the community, and a win-win for the traveller".
Air New Zealand shorthaul group general manager Bruce Parton said the airline offered 600 $1 fares, plus $49 fares to Auckland, to prove "we are always competitive".
He questioned Jetstar's commitment after it pulled capacity out of Christchurch to enter the Dunedin market.
Mr Hall rejected those claims, saying the airline would grow the Dunedin market and remained committed to Christchurch.
A daily A320 jet service between Dunedin and Auckland was scheduled to start on July 14.
Dunedin was now the 57th Jetstar destination and the fifth in New Zealand, joining Auckland, Wellington, Christchurch and Queenstown.
"Dunedin, I think, is going to be a phenomenally large market for us, and it is market that we have always looked at, but we just needed to get the economics right."
Dunedin was a strong leisure market and growing tourism destination, and there was potential to capitalise on the business sector and growing tourism interest from Asia.
The opening of the Forsyth Barr Stadium and the Rugby World Cup was a great opportunity for the city, with extra capacity possible during the tournament.
It is understood the airline is investigating extra frequency between Auckland and Dunedin, including a Dunedin/Wellington/Auckland jet service, as well as transtasman opportunities.
Otago Chamber of Commerce chief executive John Christie said consumers "always benefit from price wars". However, it was frustrating Air New Zealand acted only when competition was introduced.
Tourism Dunedin chief executive Hamish Saxton said Jetstar's arrival was likely to result in further investment in the city, and "travellers taking advantage of these competitive fares".
