Air NZ warns war of attrition could take years

12.00pm

Air New Zealand could withstand a war of attrition with Qantas for years, but it would eventually fall into Qantas' deeper pockets, Air NZ told the Commerce Commission today.

Air NZ chief executive Ralph Norris told a commission hearing on the proposed alliance with Qantas Airlines that it had created a relatively healthy position.

However, the outlook for Air NZ was "seriously adverse" if the proposed alliance with Qantas was not approved, despite Air NZ's strong network and the benefits of its city presence.

Mr Norris said there was only room for two airlines in New Zealand -- a full service airline (FSA) and a value-based airline (VBA), and the alliance with Qantas would create the equivalent of one FSA.

"Air NZ could withstand a war of attrition for some years, in the order of three to five or six years -- it may be sooner or it may be longer, it depends on the increasing capacity of the player with the deepest pockets."

A war of attrition would be a drawn-out increase of capacity above the market's level of growth, not a short-term strategy.

There was little likelihood of another chance to form an alliance with Qantas, because of the damage from a battle to build sustainable networks, Mr Norris said.

Unlike its predecessors such as Ansett New Zealand, Qantas was many times the size of Air NZ, and over time would gain a connectivity and city presence advantage over Air NZ.

"Air NZ faces a struggle for survival but one which it is poorly placed to win.

"The only way it can win is to be the sole FSA in New Zealand, an outcome it can only achieve on the platform of an alliance -- it will combine two strongly branded local airlines in a sustainable regional group."

Abusing their position would risk the Australian competition watchdog's renewal of permission for the alliance in the future, if it was granted.

Mr Norris said all evidence supported the imminent arrival of Virgin Blue, and Air NZ believed it would happen, allaying fears of a lack of competition and rising prices.

Air NZ's market was now "wide open" to challengers such as Virgin Blue as a result of the open skies agreement between Australia and New Zealand.

"...Virgin Blue sees the situation as one it could compete in very adequately ... I personally believe it will be easier for them to compete against the merged entity," Mr Norris said.

Air NZ still had a 10 per cent cost disadvantage compared with a "typical" VBA on its revamped, lower cost Tasman Express service.

A VBA typically had a 25 per cent cost advantage over a full-service carrier, and Air NZ estimated it had reduced costs by about 15 per cent on Tasman Express.

Despite reigning in costs in its domestic and trans-Tasman services, "the benefits are short term and derive from a time at which market conditions are relatively benign," Mr Norris said.

New Zealand's tourism industry was tied in with the future of Air NZ, which spends about $70 million annually promoting NZ as a tourism destination.

The airline did not believe another airline would necessarily spend as much promoting the country, or service all 24 New Zealand destinations.

Air NZ's domestic operations make up 25 per cent of business, and international comprised 75 per cent.

The commission was hearing evidence from interested parties during a six-day hearing in Wellington, before deciding late next month whether to allow Qantas to take a 22.5 per cent stake in Air NZ.

The commission's Australian counterpart has yet to make a decision.

- NZPA