Airline merger risks monopoly say watchdogs

By MATHEW DEARNALEY AND CATHY ARONSON

Plans by Air New Zealand and Qantas to take on the world together ran into immediate challenges from Australia's competition watchdog and New Zealand consumer groups.

The boards of the two airlines yesterday ended six months of gruelling and occasionally tetchy negotiations by unveiling plans for a regional alliance that will give Qantas a hefty stake in its New Zealand rival.

In a day hailed by Air New Zealand chairman John Palmer as one of the most important in New Zealand aviation history, the airline applied to the Government as its 82 per cent owner for Qantas to buy a 22.5 per cent shareholding.

Qantas will pay $550 million for the privilege, subject to approval from competition authorities on both sides of the Tasman as well as the Government and Air New Zealand minority shareholders.

Gathering all the approvals could take up to nine months.

Qantas will gain two seats on Air New Zealand's board, and Air New Zealand will have one seat on the Qantas board.

In a particularly controversial aspect of the deal, Qantas will gain 50 per cent oversight of both airlines' operations in this country.

Air NZ says it has no concerns about the board arrangement, saying "there will be nothing in an operational sense to keep confidential from each other".

The Government is refusing to comment on the plan, saying that as a shareholder and regulator it must stay silent.

It has promised to make a decision in principle by December 18.

The Commerce Commission also refused to comment.

But its Australian counterpart was less reticent, declaring the plan would almost certainly reduce competition.

Australian Competition and Consumer Commission chairman Professor Allan Fels said it appeared to include "strong elements of anti-competitive arrangements including price-fixing and route-sharing".

"It will certainly need very close scrutiny," he said.

In New Zealand, Consumers' Institute chief executive David Russell said the deal created a virtual monopoly which "hasn't got a hope in hell in its present form".

"Obviously, they must have something else up their sleeve."

Lobbying by Air New Zealand has sold the Northern Employers and Manufacturing Association on the deal, as long as the airline lives up to promises to maintain competitive prices on passenger and freight routes.

Unions are buoyed by assurances that no jobs will be lost in either airline, and that Air New Zealand expects to employ 200 more aircraft engineers, mainly in Christchurch.

But Act MP Stephen Franks said that while Labour may earn the "valuable gratitude of union comrades", New Zealand passengers would pay the price in "Aussie-sized domestic airfares".

And Travel Agents Association president James Langton said his organisation would make submissions to the Commerce Commission about a lack of competition.

The two airlines wIll try to combat such concerns by claiming that extra services and more tourists will bring economic benefits to both countries.

Qantas and Air New Zealand say they will retain their distinctive brands and Mr Palmer denied his airline had "sold out".

"Nothing could be further from the truth," he told a packed press conference in Auckland.

"This is a decision that will lay a robust foundation for Air New Zealand, our national airline, and ensure it will continue to carry the koru proudly here and around the world."

It was an "absolute requirement" that the airline would be New Zealand-controlled and managed autonomously.

Air New Zealand would also handle the commercial management - including pricing decisions - of all operations of both airlines within, and to and from New Zealand.

This aspect of the deal is causing some of the greatest scepticism, especially as it will be governed by a six-member oversight committee, three from each airline.

Opposition Leader Bill English said the Australians had "got one over the New Zealanders in putting this deal together", and Government ally United Future spoke of a "black day" for aviation and travellers.

Qantas chief executive Geoff Dixon denied forcing Air New Zealand into the alliance with a threat to use his airline's financial muscle to crush it.

Every airline was struggling in a turbulent aviation market, and not even Qantas with 37,000 employees and about 190 aircraft was big enough to go it alone.

"So we are trying to work together."

Mr Dixon said Qantas would keep flying its own five Boeing 737 aircraft on New Zealand routes for now - although he would not guarantee previous plans to add two more - with separate booking arrangements and levels of service.

Air NZ chief executive Ralph Norris said Air New Zealand would retain the low prices of its new Express service, which had drawn many first-time flyers whom it wanted to keep as regular customers.

He explained later to the Herald that tourist traffic feeding into Air New Zealand from new code-sharing arrangements with Qantas would feed both airlines' domestic services.

Advisers were suggesting a $450 million increase in returns to the two airlines in the first three years of their alliance, including a $200 million share to Air New Zealand.

A separate analysis had predicted a $1 billion boost to the New Zealand economy over five years.

It was this aspect that the airline would highlight to convince the Commerce Commission that national-interest considerations should override concerns about a lessening of competition.

Mr Dixon said competition could not be maintained at the existing level, where the two airlines are involved in a price war in New Zealand skies. "But what you are doing is providing more consumer benefits," he said.

New routes would enable the two airlines to spread their services over longer periods rather than duplicating resources at certain peak times.

Mr Palmer said that only 12 months ago, Air New Zealand was faced with "the very real prospect of bankruptcy".

Bold and decisive action on domestic routes had produced a "magnificent recovery", but trying to go it alone as a minnow in a hard aviation world would be a high-risk path.

Key points


* Qantas buys 22.5 per cent of Air New Zealand for $550 million in three stages.

* Government's 82 per cent shareholding in Air NZ (bought from last year's $850 million taxpayer bailout) diluted to 64 per cent.

* Qantas appoints two members to Air NZ board. One Air NZ member joins Qantas board.

* New group with equal representation from the two airlines co-ordinates entire Air NZ network and Qantas flights to, from and within NZ.

* Air NZ manages all Qantas and Air NZ transtasman and New Zealand domestic services, including pricing and scheduling.

* Air NZ and Qantas retain own brands but codeshare on routes in New Zealand, Australia, across the Tasman, and to and from North America.

* Air NZ retains airpoints programme. Applies to Qantas services in time.

* Air NZ estimates deal worth $1 billion to NZ economy over five years.

* No job cuts but 200 more engineering jobs, mainly in Christchurch.

* Deal faces tough regulatory hurdles.

- Additional reporting: Vernon Small and Francesca Mold