Brian Fallow: Sticky business, this Tasman airline plan

The most mysterious thing about the proposal for a Tasman airline cartel is why the Government has allowed Air New Zealand to put it in such a politically invidious position.

The position, that is, of being asked to authorise an anti-competitive deal which arguably will cost Kiwis travelling to and from Australia dear.

And for no better reason than to bolster the airline's profits and fatten the Government's dividends from it.

That at least is how it looks. Bad.

Finance Minister Michael Cullen, the airline's shareholding minister since the $900 million bailout five years ago, was visibly angry when the Commerce Commission knocked back its earlier plan to form an "alliance" with Qantas.

Is it a case of being sent packing from the front door, so trying the back door?

The back door is provided by 1987 legislation amending the Civil Aviation Act which put certain "contracts, arrangements and understandings ... relating to international carriage by air" out of reach of the act's restrictive trade practices provisions.

So instead of the normal and expert competition authority, the Commerce Commission, it is up to the Minister of Transport to approve the deal or not, or maybe bits of it.

As it happens, the Transport Minister, Annette King, has passed the buck to her colleague, Pete Hodgson, who was acting Transport Minister when the application was made and so has some familiarity with the issues.

But it may not be all that easy to get around normal competition law.

Wellington International Airport has legal opinion from Professor Michael Taggart that elements of the airlines plan fall outside the minister's powers to authorise.

The airport company is almost certain to take the matter to court if the Government tries to "wave a magic wand of authorisation" over the deal.

And how embarrassing it would be if the Transport Minister approved the deal but the Australian Competition and Consumer Commission turned it down.

It could, in short, get messy.

If those are the downside political risks, what is the upside?

Air NZ, after all, is no longer the pale and sickly creature brought to its knees by the Ansett affair. It is the very model of a successful corporate turnaround.

Like every other airline in the world, its earnings are under pressure from rising oil prices.

It made a net profit of $46 million in the second half of last year. That was 55 per cent down on the same period in 2004, but its fuel bill had risen 55 per cent.

At the end of last year, it was sitting on $1 billion cash. It is modernising and expanding its fleet, buying 28 aircraft over this year and next.

But chief executive Rob Fyfe says the airline is losing "tens of millions of dollars annually" on the Tasman route.

On an Airbus 320, which typically would have 100 passengers in its 140 seats, "the difference between profit and loss is about five passengers".

The proposed cartel with Qantas will allow Air NZ to take two aircraft off the Tasman and the resulting savings of about $40 million will probably be enough for it to break even.

True, its load factors on the Tasman route have fallen. But Wellington airport says they have only fallen to the sort of levels considered normal in other international markets. They cite load factor data for fiscal 2005, the most recent publicly available, which show 77 per cent of Qantas and 72 per cent of Air NZ seats were occupied on Tasman routes.

Such numbers are in line with load factors for other international airlines flying to and from Australia for which the average load factor was 70 per cent.

"Only a market player with extreme expectations of load factor could suggest that the applicants' transtasman load factors are at such an unacceptable level that an anti-competitive arrangement should be authorised," the airport company says.

Though billed as a code-share agreement, what is planned goes well beyond what that term normally means.

Sometimes, it means one airline buys a block of seats in advance from another, does its best to sell them and bears the risk that it cannot.

Sometimes it means an airline sells tickets on another's flights as a service to its own customers, with the revenue all going to the airline operating the flight.

In both cases the aim is to effectively extend the network of the airline selling the ticket.

But what the Tasman Networks Agreement embodies is closer to a merger of the two airlines' Tasman business units.

They would collude on fixing capacity and fares and divide up revenue on an agreed basis. Only their operating costs would remain independent.

There would seem to be other options.

Air NZ could opt to unilaterally reduce its capacity on the route, weighing the opportunity cost of business it might forego on its connecting domestic flights against the savings from dropping loss-making Tasman flights.

Or it could look for a link-up with Virgin/Pacific Blue.

Perhaps the most troubling aspect of the affair is that it comes at a time when the Government has announced plans to review competition law - Parts IV and V of the Commerce Act, at least.

Announcing the review last month, Commerce Minister Lianne Dalziel ran the argument that in a country as small and remote as this, levels of market concentration that would be unacceptable in the United States, say, might be inevitable and necessary.

The Commerce Act permits mergers and arrangements which would substantially lessen competition if it can be shown that the the costs of that are outweighed by a public benefit.

"But is this enough when New Zealand looks out to the world?" she asked."Do our companies have the scale and scope to compete internationally?"

It all suggests the Government is susceptible to arguments along the lines that internal competition and the interests of consumers have to be sacrificed to international competitiveness and economies of scale. If that is where the Government is coming from it will be music to the ears of Air NZ but a shrill warning whistle to the rest of us.

How the Government handles the Tasman cartel application could be an important straw in the wind.