Air NZ, Virgin Blue 'should join'

Air New Zealand should consider an alliance with Virgin Blue to cut costs and create a stronger competitor to Qantas Airways, say analysts at Australia's Macquarie Group.

A tie-up, through a takeover or "significant" investment by Air New Zealand in Virgin Blue, would improve profitability on routes and save money by eliminating duplicated engineering and maintenance functions, analysts led by Russell Shaw told clients.

Macquarie said Virgin Blue, Australia's second-largest carrier, which operates Pacific Blue in New Zealand, was battling losses from its startup of flights to the US, while the airline's domestic market share was threatened by larger rival Qantas.

Air New Zealand last month announced it will cut capacity and staff amid slumping demand for business and leisure travel.

"With both airlines struggling in the current environment, we believe a merged entity or even some level of corporate investment by Air New Zealand in Virgin Blue would give these carriers improved longer-term prospects," Shaw wrote.

A combined company "would stand a far greater chance of remaining competitive against regional powerhouse Qantas longer term".

Macquarie maintained its "neutral" rating on Air New Zealand and "underperform" recommendation for Virgin Blue.

Air New Zealand declined to comment yesterday.

Selling new shares to fund the deal might also dilute the Government's 75 per cent stake in Air New Zealand, making it more attractive to domestic and foreign investors, Macquarie said.

Qantas and Air New Zealand scrapped plans to share flights across the Tasman in 2006 after objections from Australia's antitrust regulator.

Macquarie does not expect a tie-up to face the same opposition with Qantas competing on both domestic routes. Air New Zealand shares closed steady at 91c yesterday.

- BLOOMBERG