The two services a week will be suspended until October 24 and Brisbane-Dunedin reduced to one service a week in May and June, returning to two flights a week in July.
Air NZ general manager Tasman Pacific Airline Glen Sowry said the Dunedin-Sydney route was not viable during the winter months because of soft customer demand and an oversupply of transtasman capacity.
During the past nine months, loads on the Dunedin-Sydney service had averaged 55.4%.
"We cannot afford to continue operating half-empty aircraft across the Tasman."
The yield on the service was also poor, with sale and Smart Saver fares making up 94% of fares and the percentage of business travel lower than on comparable routes, he said.
"We have worked hard to stimulate the market in Dunedin, with some extremely competitive pricing resulting in average fares out of Dunedin being lower than other main ports."
Mr Walls said the development news would have a "quite severe impact" on the company, although by how much had not yet been calculated.
"It'll certainly put us under a bit of pressure and impact on those who work at the airport for Air New Zealand and the retail shops."
While the airport company understood the challenges faced by Air NZ in such a cut-throat market, thousands of people had taken transtasman flights out of Dunedin in the past decade.
"You have to ask what happened to that market. It has not changed."
What had changed was the end of flights by Freedom Air and a perception developing that Air New Zealand was uncompetitive, he said.
"I'm disappointed we're going to be penalised by a massive marketing failure by Air New Zealand to build on what Freedom put in place."
The airport company would now be doing what it could to help bring back year-long services to Dunedin as well as talking to any other company interested in flying transtasman flights out of the city.
Tourism Dunedin chief executive Hamish Saxton said the Australian market was vital to Dunedin and the province, and the news was disappointing.
While he was confident the airline would continue flights, Tourism Dunedin would still be talking with other airlines about flying transtasman routes.
Air New Zealand announced last Friday the suspension of its transtasman services from Hamilton.
