Air NZ rebuts regulator's logic

By CHRIS DANIELS aviation writer

Air New Zealand is sticking to its guns in the latest round of its fight to convince the Commerce Commission to approve its Qantas alliance.

In its latest submission to the commission the airline has challenged the regulator's mathematics and economic assumptions, recruiting a Princeton professor to question its conclusions.

Despite having its application comprehensively rejected by the commission in April, Air NZ is sticking to its line that Qantas should be allowed to buy up to 22.5 per cent of the airline, and set up a joint agreement governing all their flights to, from and within New Zealand.

The commission estimates the cost to the New Zealand economy of between $245 million and $500 million a year. In its draft decision, it rejected a key plank of the airlines' application - that a destructive "war of attrition" would develop should they continue as rivals.

Air NZ says the economy will benefit by between $189 million and $256 million a year. It has now told the commission its experts have misinterpreted information, made invalid assumptions, or reached wrong conclusions.

A review by Princeton economist Robert Willig criticising the methods used by regulators forms the backbone of the latest Air NZ submission, the full text of which will be published this week.

The airline yesterday repeatedly raised the prospect of a need for state intervention in the New Zealand airline industry should its plans fail.

"If New Zealand wants to avoid the economic consequences of another near failure of Air NZ, future state intervention in shaping New Zealand's airline industry is likely to be inevitable if competition regulators in Australia and New Zealand decline the application by Air NZ and Qantas," said chief executive Ralph Norris.

The present head-to-head competition of Air NZ with Qantas was not sustainable, he said. With a budget airline added into the mix, consequences ranged between withdrawal and failure of one airline; Air NZ being "made vulnerable to a full takeover"; or further ongoing state support, "which is most unlikely to occur".

The Government owns 82 per cent of Air NZ, and has said it intends to remain a long-term shareholder.

"It's been made pretty clear the Government's not interested in fronting up with any more cash for Air NZ and I think the New Zealand taxpayer is probably keener to see Government write cheques for health and education than for an airline," said Norris.

The aviation industry had changed forever, and the old models were not working, he said. The airline was vulnerable and a rejection of its alliance would be "locking Air NZ into the past".

Virgin Blue, the Australian domestic airline most likely to start regular transtasman services and possibly domestic flights within New Zealand, has again told the commission the divestment of Air NZ's Freedom Air brand and aircraft was necessary for it to approve the deal.

Such a sale would have the same effect as the demise of Ansett Australia had, says the Virgin Blue submission: allowing it to expand fast.

If Freedom Air was sold, it would move market share of around 11 per cent away from the Qantas-Air NZ bloc and provide a "significant initial market share to Virgin Blue".

Air NZ yesterday insisted Freedom was essential to its strategy and dismissed Virgin's demands as "posturing in a transparent attempt to gain cheap control of the entire budget carrier segment through a forced sale of Freedom Air".

Fair access to airport facilities was another focus of the Virgin Blue submission, with it saying terminal space should be made available to it before any alliance is approved.

Qantas has begun recruiting pilots to fly its jets from Wellington and Christchurch to Australia under its NZ JetConnect unit. This is a cheaper operation than the rest of Qantas, paying lower wages, despite having the same livery on its planes.

* The Commerce Commission will release the full Air NZ submission within the next few days, with all interested parties having until Friday, July 18 to lodge cross submissions. A conference will be held in August, with a final decision from the commission likely in late September. Australian competition regulators the ACCC are likely to make a decision around the same time.