Government share puts Air NZ service at risk

By BRIAN FALLOW

The risk of higher fares, fewer flights and worse service would be a high price to pay to maintain the value of the Government's shareholding in Air New Zealand, says a report on the proposed Qantas shareholding in the airline.

The report by Law and Economics Consulting Group (LECG) was commissioned by Wellington International Airport.

One of the authors, LECG principal and former Treasury Secretary Dr Graham Scott, said that though no one had said so in a formal way, "there's a definite feeling about that the authorities have a view that New Zealand is not able to sustain two competing airlines and that some sort of arrangement that acknowledges that is sensible".

But the travelling public had done well over a long period from a competitive airline situation, even if the airlines' shareholders had not.

"We should not pre-empt the question of whether that is sustainable," Scott said.

"If Air New Zealand is going to get together with Qantas the Government should be highly sceptical about them competing vigorously on domestic routes."

This is a matter for independent and rigorous consideration by Commerce Commission - the more so because the Government has a wider interest in being above suspicion.

"Investors may become wary of making long-term investments in industries such as the electricity sector if the Government uses its formal or informal influence over competition policy to protect its equity interests from competitive pressure."

In yesterday's speech from the throne, the Government said: "Any proposal from the board of Air New Zealand to change its present ownership profile will have to meet national interest tests and pass existing competition tests without any intervention by the Government."

Five years ago the commission rejected an application by Air New Zealand to take over Ansett New Zealand and since then the Commerce Act has been amended to debar acquisitions that would substantially lessen competition in a market, a more exacting test.

But this time what is apparently being considered is a minority stake by one carrier in its competitor rather than an outright purchase.

"So the question is, is that sufficient to over-ride the arguments they considered were right last time around?" Scott said.

The commission considered then that the barriers to entry in the New Zealand aviation market were high.

Another disquieting aspect of the proposal is that it could imperil the current access that New Zealand travellers have to two of the international alliances, the Star Alliance through Air New Zealand and One World through Qantas.

The tourist industry, 10 per cent of the economy, benefits from being able to draw on the global catchment areas of both alliances.

"By pursuing a British Airways/Qantas/Air New Zealand tie-up now, Qantas will possibly end up as the linchpin in a consortium with a dominant position in the region similar to the one it was concerned about with Singapore's prospective position," LECG said.

"Whether the Government's decision to invest in Air New Zealand was justified on national interest grounds is largely irrelevant. That decision has been made and, now that it has an equity interest, the Government should be very careful to keep the public interest paramount over its fiscal interest as a shareholder. Governments can make easy money by investing in companies and protecting them from competition, as occurs in many countries."