Merger block displays faith in NZ airline

By GREG ANSLEY in Canberra

An upbeat assessment of Air New Zealand's strength and ability to ward off a cut-throat assault by Qantas has played a significant part in Australia's draft decision to block an alliance between the two airlines.

The assessment also rebuts the airlines' warning of a hugely costly fight to the death if the alliance was not approved.

The Australian Competition and Consumer Commission said in its decision that the airlines' prediction of massive increases in capacity to wage war on New Zealand, transtasman and Pacific routes "reflects on the lack of realism" in their argument.

It said that, despite turmoil in the international aviation market, Air NZ was performing strongly compared with most other airlines in the world.

"The commission considers that the ability of Air NZ to compete against Qantas should not be underestimated," it said.

The decision said the proposed alliance would be highly anti-competitive and offer little benefit.

"It would be the end of competition," said the commission chairman, Professor Allan Fels.

He said the Tasman was Australia's largest passenger route, accounting for about 16 per cent of international travel, and a Qantas-Air NZ alliance would jointly control more than 90 per cent of the market.

The entry of Virgin Blue would make little difference.

Fels said the proposed alliance would also deter Air NZ from re-entering the Australia-North America market and providing critical competition to Qantas if United Airlines or Air Canada disappeared. Both North American airlines are under bankruptcy protection.

In Australia, Qantas' domestic flights would capture Air NZ international passengers, increasing its market share and power.

Fels rejected the two airlines' undertakings to preserve competition, describing them as limited, heavily qualified and difficult to enforce.

A key factor in the commission's decision was its scepticism about forecasts of a brutal capacity war that would inevitably reduce Air NZ to a small domestic carrier at best, eliminated at worst.

Predictions of an Air NZ collapse were based on the far greater size of Qantas and Air NZ's vulnerability to international crises: Qantas earns 63 per cent of its revenue on domestic routes, Air NZ 22 per cent.

Qantas said Australia and New Zealand could not support two major airlines and without an alliance it would boost capacity on transtasman and Auckland-Los Angeles routes to squeeze out the Kiwi airline.

But the commission said that although confidential data supported Qantas' claims that it would boost capacity in New Zealand by 60 per cent with two more Boeing B737 jets in the next thee years, it did not back suggestions of a similar capacity war on international flights.

Similarly, the commission doubted Air NZ claims that it would have to lift transtasman capacity by 5 per cent over the next three years to compete with Qantas if the alliance was blocked, leading to a worst-case scenario of an Air NZ collapse.

The commission said Air NZ was bolstered by domestic market dominance, strong brand loyalty and its aviation services division.

It said the airline could continue to improve its underlying business and strong financial management and could reposition itself in other markets.

NZ Commerce Commission:

Qantas and Air NZ draft determinations

Air New Zealand news