Profit blocks impetus for merger

By GREG ANSLEY

CANBERRA - In a twist to the continuing saga of Qantas' bid for 22.5 per cent of Air New Zealand, the return of black ink to the Kiwi carrier's accounts has helped blot out the airlines' argument for merger.

Canberra's new competition watchdog, Australian Competition and Consumer Commission chairman Graeme Samuel, has followed the line of his predecessor, Alan Fels, and rejected the airlines' claims of impending doom if their alliance was blocked.

He said financial results had confirmed that both carriers were performing strongly and profitably at a time many other airlines around the world were struggling.

"The commission does not believe that its decision to deny authorisation of the alliance will impact on the viability of the two airlines, even in the medium term," Samuel said.

"Qantas is one of the strongest airlines in the world and the alliance would do little to improve its global competitiveness.

"Air NZ told the commission only last week that even if the alliance does not go ahead it will be competing strongly on the transtasman route in the medium term.

"That would be competition lost to consumers if the alliance proceeded."

The commission's decision, released yesterday ahead of the still-to-be-announced finding of New Zealand's Commerce Commission, confirmed widespread expectations of a refusal and largely repeated the conclusions of Fels' draft decision in April.

In essence, the commission believes the airlines' joint 90 per cent domination of the key transtasman routes, especially given Qantas' domination of the Australian domestic market, holds far more dangers in an alliance than with the two airlines as rivals.

Samuel said that neither the newly arrived Emirates nor the imminent launching of Virgin Blue on transtasman and domestic New Zealand routes as yet provided an effective counterweight, nor could they at this stage be regarded as a permanent feature of the market.

"In Australia, the proposed alliance would see Qantas increase its domestic market share and market power by capturing those passengers flying internationally with Air NZ," he said.

"The alliance would therefore shrink the portion of the domestic market available to other carriers and constrain them from entering or expanding in that market."

Samuel said the proposed alliance would be highly anti-competitive and would lead to increases in fares and decreases in capacity and quality of service.

Cut-price competitors such as Virgin - largely a point-to-point carrier - would not be able to match network connections, and loss of competition would hit business travellers with service priorities.

Contrary to the airlines' arguments, a merger would not significantly lift global competitiveness given the relatively small size and network of Air NZ, nor would Qantas gain by winning full access to Air NZ's domestic network.

Samuel said Qantas already had access to most of the New Zealand market through its existing local fleet, its arrangements with Origin Pacific on regional routes and its transtasman city pair combinations.

Further, the cost of transtasman air freight was likely to rise given the two airlines' combined 70 per cent share of the market. Little public benefit could be expected from forecast cost efficiency savings.

"Any such savings are more likely to accrue to shareholders - with around 50 per cent of Qantas' equity foreign-owned - than consumers in an environment of reduced competition," Samuel said.

But he held open the prospect of an eventual alliance.

"The [commission] appreciates that the aviation industry and markets such as the transtasman are dynamic and subject to change.

"It is possible that where such change occurs it could lead the [commission] at another time reaching a different conclusion ... "