Air NZ on back foot against competition, report says

1.50pm

Air New Zealand will be faced with a war of attrition which it is not well placed to win if its alliance with Qantas does not proceed, an economic consulting report on the deal said today.

The report, by an Australian economic firm NEGC (Network Economic Consulting Group), said it was inevitable that a discount carrier would enter the New Zealand market within about three years and that carrier would knock out either Qantas or Air NZ from the domestic market.

"Air NZ 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."

Air NZ also agreed it was not well placed to battle Qantas in the medium term.

The New Zealand carrier said it could not afford to lose its domestic market while at the same time Qantas' operations in New Zealand were "far from profitable".

"In order to reverse that position, it must either progress the alliance with us or increase capacity in order to provide better frequency."

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

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

NGEC's report, commissioned by both airlines, will back up Qantas' application to buy 22.5 per cent of Air NZ for $550 million, which is expected to be made to the Commerce Commission on Friday.

Based on economic price modelling, the NECG said that should the deal go ahead, domestic airfares were likely to rise by 3.1 per cent in three years on average, and by 1.7 per cent on trans-Tasman routes.

That forecast conflicts with the experience in Canada, where domestic airlines were merged and airfares rose substantially.

The NECG said the alliance would create 200 new jobs in Air NZ and a minimum of 2500 additional jobs in the tourist industry.

The new jobs within Air NZ would be in engineering operations in Christchurch and Auckland.

Air NZ said that it expected Qantas' growth and the alliance to result in an increase in outsourced heavy maintenance work from Qantas, creating an estimated 124 new jobs.

In addition, Air NZ would invest $100 million in new engineering infrastructure, which would allow it tender for more maintenance work from other airlines.

That would boost the engineering workforce overall by 200.

The new jobs in tourism would come from an additional 53,000 tourists who would visit New Zealand as a direct consequence of the alliance, NECG said.

Qantas would be actively marketing Air NZ, and New Zealand as a tourist destination, in markets in which it has strong presence.

NECG said that the accepted tourism industry ratio of one new job in tourism for every 14 tourists would amount to 3786 new jobs, "so the NECG estimate of 2500 additional jobs in tourism is extremely conservative".

The report estimates the alliance would boost New Zealand's economy over the next five years by $1.4 billion. It identifies new routes opening between Auckland and Adelaide, Auckland and Canberra, Auckland and Hobart, and Wellington and Canberra.

"The formation of the alliance will not see the end of affordable airfares in New Zealand or across the Tasman."

NECG said it would be difficult for Air NZ to turn its new Express Class domestic operations into a full discount model.

"That would be totally incompatible with the remainder of Air NZ's international network, rendering that remainder unsustainable."

NECG said that from a business perspective, the international network was reliant on domestic operations.

"In that circumstance, and despite its New Zealand cost base being relatively efficient by international standards, Air NZ would cease to be the flag carrier, promoting and supporting New Zealand's tourism and export industries -- both crucial to New Zealand's economy."

- NZPA