"The effect of the alliance would be to remove competition on that important route (the transTasman), and would be likely to raise prices and reduce services."
Both regulators rejected the alliance in its current form and the ACCC went further, questioning whether any concessions by the airlines would help change its view.
"The proposed alliance is highly anti-competitive and its benefits are small. Under these circumstances the potential for undertakings to make such a difference that authorisation could be granted is extremely limited," Professor Fels told a briefing.
He added that undertakings in the current proposal were heavily qualified, difficult to enforce and required monitoring.
Mr Belgrave said the alliance would erode competition in the New Zealand main trunk and provincial markets, the Tasman market, the New Zealand-Pacific market, the New Zealand-Asia market, and the New Zealand-US market.
The commission said it also had concerns about international and domestic freight markets.
He questioned the airlines' calculations that the detriments of the alliance, including harm done to consumers through higher fares, would be about $10.3 million at year three. The commission's preliminary view was that the detriment to the New Zealand public would be more like $202-$432 million a year.
The ACCC suspected Air NZ and Qantas were underestimating Air NZ's future ability to compete if the alliance doesn't go ahead.
"Air NZ is currently competing very strongly with Qantas. Management initiatives in the cost and fare structure areas have contributed to the airline predicting very good financial results for 2002/03," Prof Fels said.
"These projections were recently affirmed even in the face of the current challenging conditions."
Qantas shares were a cent weaker at A$3.06 ($3.42) following the announcement, while Air NZ was trading down 3 cents at NZ46 cents.
Air NZ chief executive Ralph Norris said the rejection was not a complete surprise, but said it was disappointing.
"We are disappointed that the commission has rejected totally the counterfactual that we put up and has also significantly discounted the tourism benefits that we put up," he told National Radio.
"We are very strongly of the view that the application we put up was a very strong one and we are obviously now considering our position going forward."
Despite the powerful opposition from regulators, Mr Norris still believes the deal can go ahead.
"It is now up to us to go back to the commission... and convince them of the validity of the numbers we've put forward."
He declined to go into possible concessions, like selling discount carrier Freedom Air, that the airlines might make to win regulatory approval for the deal.
"This is about the value of benefits, rather than an issue of undertakings at this point."
The Commerce Commission will take submissions from interested parties on its draft conclusions until May 9. It plans to hold a four-day conference on May 20-23 to answer questions on the draft decision and will release its final determination by the end of June.
Mr Belgrave said the commission agreed with the ACCC's view that Air NZ could survive as a standalone company. The commission expects a gradual recovery in Air NZ's financial position and sees the airline as viable in the medium term.
Mr Belgrave said that the current environment including the war in Iraq and the Sars scare would only emphasise the commission's position.
He said Qantas would not want to put further resources into New Zealand and engage in a war of attrition when it had challenges elsewhere. He also said that Air NZ had a lower cost structure because of smaller jets.
The commission said that if the alliance did not proceed, Australian discount airline Virgin Blue was likely to begin flying across the Tasman but only possibly enter the domestic New Zealand market.
Asked what the airlines would have to do to get their proposal accepted, Mr Belgrave said it was up to the applicants.
"They would have to have a fairly hard look at it," he said.
- NZPA
NZ Commerce Commission:
Qantas and Air NZ draft determinations
Air New Zealand news
Related links: Air New Zealand - Qantas merger
