The Commerce Commission rejected one of the central platforms of their application to join forces: that a cut-throat war of attrition on New Zealand domestic routes would begin should the airlines stay rivals, and the much bigger Qantas would Air New Zealand by expanding capacity and absorbing losses until its smaller rival cracked.
On the other side of the coin, the commission said the proposed alliance would result in "a substantial lessening of competition in a number of markets" for both freight and passengers.
The ACCC, in its draft decision, also expressed the view that Air New Zealand was well placed to compete strongly with Qantas.
Air New Zealand chief executive Ralph Norris said while obviously disappointed in the decision, he was not surprised.
The airline "strongly believed" that a war of attrition would result from the alliance being rejected, and would now build up this case.
There were examples of this happening overseas which could be used.
"We are relatively relaxed about addressing that issue," he said.
Whether or not a "value based airline" - read Virgin Blue - would fly to and within New Zealand was another bone of contention.
The two airlines said that if they joined forces, such an airline would start flying the Tasman, and it would have no barriers to start flying local domestic routes, both main trunk and branch.
Not so, say the regulators. In their view if the alliance does not proceed, then Air New Zealand's fortunes will gradually improve. It would continue to have Government support, along with the "incremental entry of Virgin Blue being likely on the transtasman route, with a possible expansion onto NZ main trunk".
Commission deputy chairwoman Paula Rebstock said Air New Zealand appeared to have a lower cost per passenger, due in part to its smaller jets. This would apply even to running a full service airline, let alone Air New Zealand's new express service.
She said that an airline would have to recoup losses after any "war of attrition" and this seemed unlikely, especially if, as the two airlines claim, a value-based airline also entered the domestic market.
Recent problems in the aviation industry, such as the effect of the war in Iraq and the Sars virus, had only served to "weaken the credibility of a war of attrition".
Air New Zealand's position could strengthen against Qantas, she said, as the Australian airline was more exposed to international events.
The Commerce Commission also took issue with some of the numbers used.
The airlines said that by the end of three years of an alliance, the benefit to the nation would be worth $226 million. The commission suggested that taking $500 million off that figure would take them closer to the truth.
There would be a net detriment to the economy of somewhere between $155.7 million and $401 million - with the commission most happy with a $300 million figure.
Negative effects would be caused by the loss of innovation due to the delay in a rival airline starting up and a loss of incentives to cut costs.
The commission also disputed Air New Zealand's claims about the great tourism benefits caused by joining up with Qantas. Increased fares and Air New Zealand's possible exit from the Star Alliance could mean a drop in tourism, it said.
But Finance Minister Michael Cullen - speaking as the 82 per cent owner of Air New Zealand - said he was "a little surprised" at some of the Commerce Commission's analysis, "particularly its assumption about the availability of capital for the company given the turbulent financial environment surrounding the aviation industry at the present time and the foreseeable future".
The commission seemed to assume that "some kind of fairy godmother is going to appear in the wings at some date within the forseeable future," he said.
"Given the number of fairy godmothers in bankruptcy at the moment, that doesn't seem terribly likely."
NZ Commerce Commission:
Qantas and Air NZ draft determinations
Air New Zealand news
Related links: Air New Zealand - Qantas merger
