Air NZ 'must merge or fight losing war'

Air New Zealand must enter an alliance with Qantas or face a lengthy war of attrition at home and abroad, the airline has warned.

On an offensive to sell the deal with Qantas, Air New Zealand chairman John Palmer warned yesterday: "In the absence of an alliance, continuation of the war of attrition is unavoidable."

And Qantas was a "formidable competitor", he said.

"The strategic alliance with Qantas provides the only answer that can ensure Air New Zealand's survival as an independent, New Zealand owned and controlled, domestic and international airline."

The airline yesterday outlined the case it would put to the Commerce Commission for the Qantas buy-in.

It includes a report by Australian firm Network Economics Consulting Group, which said it was inevitable a discount carrier would enter the New Zealand market within three years, knocking either Qantas or Air New Zealand from the domestic market.

"Air New Zealand is not well placed to win that battle, nor does it have the financial resources to signal to Qantas that it can successfully engage in a long-term fight for market share."

The Network Economics report, commissioned by both airlines, will back up Qantas' application to buy its $550 million, 22.5 per cent stake in Air New Zealand.

Air New Zealand pointed to the collapse of Ansett in Australia last year as a portent of what was likely to happen when a discount operator started in New Zealand.

It said a one-off cash injection for Air New Zealand did not provide the answer "nor does an alliance with another airline which simply expands Air New Zealand's international network outside Australasia".

Based on economic modelling, said Network Economics, domestic airfares were likely to rise by 3.1 per cent in three years on average if the deal went ahead, and transtasman fares by 1.7 per cent.