Airlines spell out deal

By PAM GRAHAM

It's official. Air New Zealand and Qantas are putting their businesses together in a deal they said yesterday was driven by mutual self-interest.

They now have to sell the alliance brokered in "tetchy" talks to the Government, regulators and customers.

Analysts say it is unlikely to make it past regulators in its present form.

Air NZ will manage scheduling, pricing, route planning and marketing of all flights by the two airlines to, from and inside New Zealand.

Each airline will still look after its own aircraft, staff and brands. An advisory group of three members from each airline will oversee the arrangement and disputes will go to the two chief executives.

Subject to approval from the Ministry of Transport and regulators, Qantas will eventually own 22.5 per cent of Air New Zealand after buying shares in three steps, at 44.5 cents a share. That will dilute the Government's stake to 63.5 per cent, down from 82 per cent at present.

Air New Zealand will be able to offer flights inside Australia with its own codes on them, achieving the goal that nearly brought about its collapse when it owned Ansett.

Qantas gets two seats in the Air NZ boardroom and Air New Zealand gets one seat at the Qantas table.

Air NZ chief executive Ralph Norris said the "the current airfare structure is here to stay" and Air New Zealand would keep its no-frills express-class domestic service, Freedom Air service to Australia, and present air points arrangements for customers. A decision about global airline alliances will be made later.

The two airlines clearly believe they can boost traffic, while cutting costs. Air New Zealand says its express class has boosted the number of travellers by 20 per cent.

Qantas chief executive Geoff Dixon estimated that the two airlines would jointly benefit to the tune of $450 million a year from the synergies.

Air NZ chairman John Palmer said there would be internal competition within the grouping. For instance, he said, if it was decided to start a new service it would go to the airline with the best business case.

The airlines say they will openly share their thinking on issues that affect each other and co-operate on new initiatives.

Still, Norris was blunt. "In future Air New Zealand and Qantas will not see each other as fierce rivals."

The competitive focus would be on other competitors who were "undoubtedly on their way".

"Qantas and Air New Zealand have been drawn to the alliance by mutual self-interest and, as we will demonstrate, we are also confident that we will service the national interest in both Australia and New Zealand," said Qantas chairwoman Margaret Jackson.

Ewan Wilson, founder of former Air New Zealand competitor Kiwi Airlines, was not convinced.

He said the airlines would reduce overall capacity on the transtasman route because Qantas would be happy to shift spare planes to the Australian domestic market, where Virgin Blue is still a small player.

"Five years down the line you'll see a comfortable duopoly between two well-run and ruthless airlines and airfares in excess of $700 transtasman."

He said regulators were "limp" and could not ensure competition because it was too difficult to prove anti-competitive behaviour.

Ian Thomas, a senior consultant at the Centre for Asia-Pacific Aviation, said the alliance was similar to a deal Qantas had with British Airlines which had worked pretty well.

"It's the only viable option that Air New Zealand has to give it a future," he said. The alternative was a less strong collective relationship with several carriers.

Under the alliance, Qantas could also code-share between New Zealand and the West Coast of the United States. At the moment it code-shares with American Airlines between Australia and the Pacific.

He said the million-dollar question was whether Allan Fels, the chairman of the Australian Competition and Consumer Commission, would approve.

"I doubt very much whether the regulatory authorities will approve it in its present form."

Based on the 44.5c price, the 22.5 per cent stake implies about $550 million of new capital for Air New Zealand. Air New Zealand says it will also consider holding a rights issue to raise $200 million next year.

Shareholders, at least, approved of the alliance. Air NZ shares rose 6c to 56c and Qantas shares rose 1c to A$3.94.

"We are doing what the law requires us to do. Act in the best interests of the company," Air NZ's Palmer said.

Cameron and Co advised Air New Zealand on the deal and Macquarie Bank advised Qantas.