Air NZ-Qantas merger rejected by High Court

1.20pm

The High Court at Auckland today ruled against the proposed tie-up of Air New Zealand and its Australian competitor Qantas.

Air NZ and Qantas were appealing an earlier Commerce Commission ruling that blocked their proposed alliance.

No details of the High Court decision were immediately available, although Air NZ confirmed in a statement to the sharemarket that its appeal had been unsuccessful.

Under the proposal, Qantas was to take a 22.5 per cent stake in Air NZ for $550 million.

The two airlines would co-operate on New Zealand domestic routes and those across the Tasman.

The Government owns 82 per cent of Air NZ.

The commission turned down the alliance, saying it would lessen competition and lead to higher airfares for consumers.

Both Air NZ and Qantas said the alliance was necessary as there was increasing competition within the industry.

Air NZ, which had its shares placed on a trading halt this morning, has said the deal was critical to its long term survival.

Today, Air NZ chief executive Ralph Norris said he was disappointed the court had not upheld the appeal, especially since it had disagreed with the commission on many issues.

"The alliance application put forward by Air New Zealand and Qantas has been a complex and challenging process for all concerned," Mr Norris said in the statement.

Air NZ was in a stronger financial and competitive position than when it first lodged an application for the alliance in December 2002, he said.

However, "compelling reasons for an alliance still remain with many of our predictions now a reality with ever-intensifying levels of competition in the Australasian aviation market and fares at all time lows".

Mr Norris said airlines in Europe had faced similar challenges, yet had been given regulatory approval to consolidate and form a more sustainable environment.

"It is disappointing however that the High Court has not allowed Air New Zealand and Qantas to take this opportunity to introduce some rationality into a market that in recent years has been anything but rational."

He said the there were too many airlines competing for a limited pool of passengers on trans-Tasman routes.

Air NZ would review the decision and discuss possible options with Qantas, which might include "other forms of an alliance and opportunities that do not conflict with the Commerce Act."

The commission said the court decision came after Air NZ and Qantas failed to show the commission had erred in its finding.

Commission chairwoman Paula Rebstock said in a statement the decision was an important one that preserved competition in the airline market.

Air NZ and Qantas have 20 working days to appeal the court's decision, but would have to seek leave before taking it to the Court of Appeal, Ms Rebstock said.

Finance Minister Michael Cullen said he was disappointed by the decision.

"As shareholding minister I had hoped for a different outcome, but this is the court's decision," Dr Cullen said, noting the Government would not seek to overturn it.

Today's judgement said the quantification of tourism benefits involved a number of unverifiable assumptions.

"There are few certainties. There is no single correct answer."

Judge Rodney Hansen and Kerrin Vautier, a lay specialist in competition law, specially brought in for the case, said in their ruling they had to consider if the approach by the Commerce Commission provided a justifiable approximation of the tourism benefits which the commission attempted to quantify.

"We think it does. "

The ruling said while there was clearly room for different views on the assumptions and the methodology, the "commission's approach has not been shown to be critically in error."

It said the alliance between the two airlines showed a net reduction in overseas visitors to New Zealand "even on the appellants' case."

It said the increased tourism numbers the two airlines relied on came from an assumed increase in domestic tourism by New Zealanders.

The substantial public benefit was attributable in a large part to the value "placed on this expenditure by a model which we are satisfied the commission was entitled to reject.

"We are in no doubt that the appellants' methodology significantly exaggerated for comparative purposes, the potential benefits to New Zealand from any increase in tourism."

However, the ruling also said the Commerce Commission figures should also be treated with caution.

They also relied in unverifiable assumptions. They were based on price rises which were likely to be higher in the Tasman market than those of a revised model corrected fore error and could reduce the commissions calculations on the number of tourists lost.

"On this account the commission's calculations may understate likely benefits from tourism."

Meanwhile, Mr Norris said Air NZ had worked hard to reduce costs, improve competitiveness and focus on customers.

It had announced a programme that would see $245 million a year saved over the next three years.

"While we are disappointed with the appeal decision, Air New Zealand's Board and management believe a robust platform has now been built to enable the airline to continue growing in the short to medium term," Mr Norris said.

"While we are cautiously confident that initiatives in train over this period will provide for the long term, given the inherent volatility and intense competition in this industry, this will be a considerable challenge," he said.

Air NZ shares had commenced trading by 1.55pm, and were down 1c at $1.84 on light volume.


- NZPA