Qantas 'unlikely to attack Air NZ domestic business'

9.30am

Qantas is unlikely to attack Air New Zealand's domestic business despite the collapse of a proposed alliance, but could strike on the Tasman route, analysts said yesterday.

Air NZ has enjoyed a two-year respite from the full might of Qantas' competition while the two worked toward an alliance.

On Monday, however, the High Court in Auckland threw out an appeal against a block on the deal by the Commerce Commission.

The airlines said they would not appeal.

Air NZ shares fell 7c to $1.80 yesterday in the wake of the High Court setback and as Air NZ indicated it would proceed with a rights issue.

Qantas would have to make some tough strategic decisions on how it would deal with its counterpart across the Tasman, Centre for Asia Pacific Aviation Studies managing director Peter Harbison said yesterday.

For Qantas, the alliance would have "removed a fairly irritating competitor from the scene".

It was possible that it would now try to achieve through competition what it failed to achieve through the planned alliance, Mr Harbison said.

But he believed Qantas would not increase its New Zealand domestic presence, which is limited to jet services on the main trunk and tourism routes.

It could instead focus on applying pressure on the Tasman by putting on more flights between small cities, he said.

Qantas has already pre-empted Air NZ by launching an Auckland to Adelaide service, which had been promised under the alliance.

Forsyth Barr head of research Rob Mercer said the airlines would now focus on growing revenues.

"When you get irrational competition then... the revenue model deteriorates and you get a big downward shift in profitability."

Instead, the two dominant players in their respective markets would act rationally to reduce the volatility of earnings, Mr Mercer said.

Qantas would continue to provide an efficient niche service in New Zealand, aimed at attracting international passengers and maintaining brand awareness.

Qantas has less than 20 per cent of the domestic market.

"There is a reality of making sure that you find your optimal size to achieve your overall strategy," Mr Mercer said.

"I would be surprised if you saw any major attack on the domestic market."

Mr Harbison said political pressure could also be brought to bear to constrain Qantas from competing too aggressively with taxpayer-owned Air New Zealand.

Air NZ could retaliate by resuming a direct service between Sydney and Los Angeles.

It suspended such a service in April last year.

Under the alliance it would have been left to Qantas.

Air NZ managing director Ralph Norris also indicated at a recent industry conference that budget arm Freedom Air would be unshackled and allowed to compete more aggressively.

Air NZ and Qantas have said that consolidation was a worldwide trend and that an alliance was inevitable in the future.

"Airlines in Europe are facing similar challenges, yet have been given regulatory approval to consolidate to form a more sustainable environment," Mr Norris said.

But Mr Harbison said the comparison with Europe was irrelevant to the trans-Tasman market, where flying was the only option.

European airlines competed with all other modes of transport, including bullet trains and the ability to drive between major centres.

It might be time for the New Zealand and Australian governments, which had both favoured the alliance, to work out a way that Qantas and Air NZ could come together in the future, without needing regulatory approval, Mr Harbison said.

But Finance Minister Michael Cullen said after the High Court decision that the Government "has no intention of attempting to overturn it".

Mr Mercer said it was also not genuine for the airlines to claim that they were not making money on the Tasman.

The Tasman was an integral part of the network and their New Zealand domestic operations would be much less profitable without it, so it came down to the allocation of profits.

- NZPA