Air NZ doomed in fight with Qantas says Palmer

By BRIAN FALLOW

The New Zealand market is too small for two full-service airlines, and if Air NZ and Qantas had to fight it out Air NZ would be the likely casualty, its chairman, John Palmer, told the Commerce Commission yesterday.

Summing up the airlines' case at the end of a six-day hearing, Palmer said Qantas' core advantages of scale and connectivity in what was now a single Australasian market would prevail if the airlines were left to compete.

Forcing them to fight it out would waste resources.

"And if the structural changes force Air NZ into an ever-more-marginal role, or worse still lead to its collapse, the opportunities both parties have today to secure a future in global markets is likely to have been forgone, to the serious detriment of New Zealand.

"There is not likely to be a second chance."

The disadvantages arising from the alliance, on the other hand, were likely to be slight because the merged airline would be constrained by Virgin Blue, and on long-haul routes by other carriers, Palmer said.

Air NZ was only two years on from the brink of bankruptcy. While it had made an excellent recovery, it had not yet addressed its core operational weaknesses: its small and remote home market and the inevitable advent of a low-cost carrier.

In addition, Palmer said, the September 11 terrorist attacks in the United States and the Sars epidemic were chilling demonstrations of how exposed the airline industry was to severe one-off events.

"You need a business structure and a balance sheet strong enough to cope with those events. Air NZ currently has neither. The alliance would give us the prospect ofboth."

Earlier, Gerard Murphy, owner of Auckland travel agency Bon Voyage Cruises and Travel, questioned the weight being put on the prospects of Virgin Blue's entry.

Even if Virgin allocated all six of the new Boeing 737s it had ordered to New Zealand, that would not be enough to provide credible competition to the alliance on the transtasman route, he said, particularly if Virgin was expected to run up and down the main trunk domestic market with the same fleet.

Murphy said too little attention had been given to the fact that the alliance would monopolise routes from North America, which accounted for 12 per cent of tourist arrivals, not counting those who came from Europe via North America.

" Air NZ and Qantas will have virtual control over more than 35 per cent of our inbound tourist arrivals - on top of the huge influence they will exert over the tourist market from Australia, which alone accounts for nearly 50 per cent of tourist arrivals."

And the alliance would make it highly likely Air NZ would leave the Star Alliance, Murphy said, which would seriously compromise access to New Zealand for millions of potential tourists on round-the-world type tickets.

What happens next

The Commerce Commission will issue a final decision on the application by the end of next month.

Its Australian equivalent, the the Australian Competition and Consumer Commission, is expected to make its decision soon after.

Legal action - in the High Court in New Zealand and the Competition Tribunal in Australia - is expected: from the airlines if their alliance is rejected, and from alliance opponents if it is accepted.