4.15pm
UPDATE - The Commerce Commission today ruled against the proposed Air New Zealand alliance with Qantas.
Under the proposal, Qantas would have taken a 22.5 per cent stake in Air NZ for $550 million, and Air NZ would have gained control of both airlines' flights to, from and within New Zealand.
In a statement to New Zealand Exchange at 2pm today, the commission said the $500 million alliance would damage competition.
It would also harm consumers and was "therefore not in the interests of New Zealanders", the statement said.
Commission acting chairwoman Paula Rebstock said the alliance would have substantially lessened competition in a number of markets.
"For the travelling public that could mean airfares that were, on average, up to 19 per cent higher, as well as reduced quality of service and fewer flights," Ms Rebstock said.
"That can be justified in circumstances where there are sufficient economic benefits overall to New Zealand," Ms Rebstock said.
The commission did not believe there would be sufficient benefits to outweigh the detriment resulting from the loss of competition.
"Although Virgin Blue's entry on Tasman and New Zealand main routes, and the presence of other international airlines on the Tasman route, have some impact on the relevant markets, the competition provided by these carriers is not sufficient to allay all of the commission's concerns," she said.
Approving the alliance would not have produced a tourism benefit.
The increase in fares would result in a net decrease in foreign tourists despite proposed increased tourism efforts by Air NZ and Qantas.
The regulator also found 190,000 New Zealanders would be deterred from travelling overseas by the fare increases.
The commission could not accept the airlines' case that there would be a net benefit to New Zealand because New Zealanders would not be able to afford to travel overseas and would therefore holiday at home.
"The commission's view is that the overall detriment expected to result from the proposed alliance would clearly outweigh the expected benefits.
"The detriments are likely to be $195 million, and benefits $40.5 million in year three, largely due to cost savings." Ms Rebstock said.
The commission ruled against the alliance because, if it went ahead, there would be a third year loss to the public of $154.5 million.
Air NZ chairman John Palmer expressed disappointment at the decision.
He and chief executive Ralph Norris were to comment further on the decision at a media briefing at 4pm.
Qantas chief executive Geoff Dixon said discussions would be held with Air NZ over the next few weeks before deciding on a future direction for the two airlines' proposed alliance.
"We still believe an alliance between Qantas and Air New Zealand is in the best interests of aviation in this region and would deliver significant benefits to travellers and tourism," Mr Dixon said in a statement.
The Commerce Commission, like the ACCC , had taken a very narrow view of competition and consumer interests, "and either ignored or underestimated the significant structural challenges facing the aviation industry.
"The decisions of the NZCC and ACCC are at odds with what is occurring around the world."
In Europe, Air France and KLM had just signed a merger agreement that would see them operate 540 aircraft and employ 106,000 people.
Other European airlines were holding discussions, and the United States have begun talks about dropping barriers between their markets.
"There are simply too many airlines in the world today, and it is inevitable that there will be further pressures towards consolidation and some very large and powerful groups could emerge."
Qantas would look for suitable opportunities in the changing environment while continuing its strategies of driving down costs, setting up a low cost airline in Australia and investing in, and growing, both its domestic and international airlines, he said.
The proposal had to gain approval from the competition commissions on both sides of the Tasman to proceed and Air NZ has not said if it will appeal the ruling at the High Court.
In September, the Australian Competition and Consumer Commission ruled against the Air NZ tie-up with Qantas.
Both airlines have applied for review of the decision by the Australian Competition Tribunal (ACT), but that process looks set to take some time.
However, it has been publicly supported by the Australian government and Air NZ's majority shareholder the New Zealand Government.
Forsyth Barr head of research Rob Mercer yesterday said that without the alliance, Air NZ would have to raise about $200 million through a rights issue to reduce debt and finance the upgrading of its long-haul international fleet.
The Government would be called on to underwrite the capital raising, using the $150 million, Mr Mercer said.
The airlines say consolidation among the world's airlines is inevitable and that without the alliance they will enter a "war of attrition" that Air NZ could not win.
Yesterday, Air NZ said it expected to match last financial year's $220 million profit before tax and unusual items again this year.
Last week, it unveiled elements of its four-year business plan, including slashing its 10,000-strong workforce by 1500. It forecast annual savings of $245 million by 2007.
Commerce Commission final determination (full report)
Related links: Air New Zealand - Qantas merger
- NZPA