Qantas and Air NZ: The odd couple

By JIM EAGLES and CHRIS DANIELS

If they made a film of the relationship between Qantas and Air New Zealand, who would get the starring roles? Probably a pairing like Spencer Tracy and Katharine Hepburn.

Old-movie fans will remember that the first sign those two were meant for each other was when they started scrapping like cats and dogs.

Whether Air NZ and Qantas will live happily ever after remains to be seen. But they've certainly done the scrapping-like-cats-and-dogs bit.

All three areas of business put into the alliance announced this week - New Zealand domestic, Auckland-Los Angeles and transtasman - have been the subject of bitter and often destructive competition on both sides.

New Zealanders, as the proud parents of Air NZ, tend to see the deal as their airline being forced into the embrace of the ugly Aussie.

There is some truth to that. Qantas and Australia Inc played a big part in Air NZ's Ansett debacle, and they certainly chased away the airline's other possible suitor in Singapore Airlines.

But Qantas, for all its deeper pockets, has not come out of the bickering unscathed. That is demonstrated by the fact that Air NZ's domestic services are the only part of the new alliance which really make money.

Air NZ chief executive Ralph Norris acknowledges that last year the airline lost just under $80 million on its transtasman routes, and $150 million on the rest of its international operations.

Only the domestic service, the engineering business and the ground handling and general services provided to other airlines kept it in profit. That is fairly much how it has been for most of Air NZ's life.

Qantas chief executive Geoff Dixon is a bit more circumspect about financial details, although he acknowledges losing money in New Zealand.

But the travel industry reckons that Qantas has done just as badly as Air NZ on the transtasman and Auckland-Los Angeles routes, and will have dropped a pile of money on its foray into New Zealand.

Norris smilingly agrees. "We've got our estimates of what they're losing and I wouldn't want to be losing that amount of money."

The reasons for those losses are not hard to find.

Worldwide, the aviation industry lost about $20 billion last year, as airlines with too many planes desperately chased a declining number of passengers.

Locally, that has been exacerbated by the tit-for-tat competition between Air NZ and Qantas - Qantas enters the New Zealand domestic market with a full-service airline offering cut-price fares; Air NZ steps up the activities of its low-cost transtasman subsidiary Freedom; Qantas puts more capacity on transtasman routes and slashes fares; Air NZ puts more capacity on the Los Angeles route and discounts fares ...

Each move has succeeded in reducing both airlines' profits.

Small wonder that Qantas and Air NZ can see more benefit in working together than in continuing to cut each other's throat.

Under the proposed arrangement, instead of going head to head on most services, and cutting prices to below cost in order to fill seats, Air NZ will manage prices, scheduling and marketing for both airlines.

One fairly painless result, from a consumer viewpoint, would be a wider range of services.

Both airlines have been reluctant to look at new routes or even extra time slots on existing routes because of the knowledge that the other would immediately match it and make the service uneconomic.

But, working together, they would be able to reorganise timetables so that instead of, say, both airlines flying from Auckland to Sydney around 6am there could be one flight at 6am and another at 11am.



The alliance should find it easier to develop new routes from New Zealand, knowing it is unlikely to face head-to-head competition.

There are also plans to considerably upgrade the airfreight business.



The airlines have agreed on the rules as to which of them will operate any new services.

It boils down to which airline can do the job at the lowest cost - a formula which could be expected to favour the leaner Air NZ operation - and which of the two brands is preferred by potential customers.

Setting fares is an altogether trickier issue.

Norris, who would preside over the new alliance, is adamant that the basic fare structure for Air NZ's Express domestic service would not be affected - subject to changes in fuel prices or exchange rates.

But what about those uneconomic Qantas fares in New Zealand?

Norris says that would be a matter of asking, "Okay, what is the cost of providing this service and what is the margin that is needed to cover the aircraft charge and to procure a return on the capital?"

Does that imply Qantas fares are likely to rise? "Well," replies Norris, "I suppose that's a conclusion you could draw ... "



No one would be greatly surprised if Qantas pulled out of the New Zealand domestic scene, since it would no longer have any reason to stay here. That would solve the problem for the alliance, if not for the travelling public.

What about any other uneconomically low fares the airlines may have got into as a result of their battle? Would they be reviewed too?

"Absolutely," says Norris, who makes no secret of his view that "international airfares are too cheap".

But if that sounds worrying for passengers, there are two bits of good news. Freedom's low-cost transtasman flights are making money so its future seems secure (unless the competition authorities require it to be sold).

And, Norris says, "We are working on a new product for the Tasman and the aim of that is to allow us to realistically provide lower fares on a more sustainable basis."

The overriding aim in all this is to get Air NZ making solid profits because, he says, that is the only way to secure the airline's future.

Norris, a newcomer to aviation after a successful career in banking, is perhaps more aware than industry insiders of how unstable global aviation is.

"If you look at motor manufacturing, the six largest makes control 80 per cent of the output. In global aviation, the six biggest providers probably have less than 30 per cent of the market. That just can't continue."

Dixon, with his longer experience in aviation, says the industry has changed dramatically for the worse since the Australians last wanted a piece of Air NZ.

"There is a whole different feeling. I think we now know this is the toughest business in the world and there's survival for us all at stake."

Norris says that when he took over as chief executive, he quickly realised that New Zealand and Australia would not be immune from the pressures towards consolidation.

So early on, he had a long, hard look at potential partners for Air NZ.

"When we sat down and seriously contemplated which airline as a cornerstone shareholder delivers the greatest value there was just no doubt that - putting aside the past and all that - that is Qantas.

"When you look at the synergies, the overlaps, the way we interact, the proximity of our countries and all the rest of it, there is no other arrangement that comes anywhere near providing the value to both airlines as us two getting together."

Norris and Dixon say that during the prolonged negotiations the two of them, and their teams, have developed an excellent working relationship.

Dixon acknowledges that last time Qantas took a stake in Air NZ, the relationship "did not take off at any stage".

But he is confident this time will be different.

"I know that this is going to be successful through personal relationships ... we are banking on that."

This time, too, the agreement has safeguards.

There is the requirement that a Qantas director must be present for the Air NZ board to have a quorum.

But there are also rules to stop Qantas trying to unreasonably stymie any Air NZ decision.

"We've worked through the details very carefully," says Norris, "and I'm confident that what we have is an agreement that is fair, practical and safeguards the interests of both sides."

But before the two airlines can work together, some big hurdles have to be jumped.

The factors that make the alliance so commercially attractive also ring alarm bells with consumers and consumer watchdogs.

It will control probably 95 per cent of transtasman capacity, 95 per cent of New Zealand domestic capacity and 65 per cent of Auckland-Los Angeles capacity. As well, Qantas has about 85 per cent of Australian domestic capacity.

"I'm not in any way going to fudge the competition issues," says Norris. "They are there, and they have to be addressed."

The forums for doing that will be the New Zealand Commerce Commission and the Australian Competition and Consumer Commission to which the airlines will be formally applying on December 9 for approval.

The arguments there may well boil down to whether national interests outweigh questions of competition.

Australia's Deputy Prime Minister, John Anderson, has already declared that the interests of consumers should not be paramount.

"I believe Australia needs to think carefully about how we may make certain that as many international airlines disappear over the next few years Australia still has a flag carrier, and a strong flag carrier."

Air NZ will doubtless take a similar view, pointing out that it won't do much to protect consumers if the airline goes bust.

It is also putting great store on an economic analysis by Australian consultants Network Economics Consultation Group saying that the alliance will generate net economic benefits for New Zealand of around $1 billion over five years, including 200 extra jobs with Air NZ, 50,000 extra tourists a year, enhanced freight services and more effective promotion of New Zealand overseas.

That is an impressive dowry.

But, as Tracy and Hepburn could testify, the wrong relationship can be very damaging, especially to all the dependants.