Qantas will always protect interests in NZ, says CE

New Zealand skies are just part of Qantas' home market and the Australian airline will always act to protect its interests here, says chief executive Geoff Dixon.

Speaking yesterday to a Commerce Commission conference investigating Qantas' plan to join forces with Air New Zealand, Dixon outlined what the airline would do should it be turned down.

Dixon, who made his submission by video link from Australia, said Qantas could not afford to be "picked off in its home market" and would have no choice but to continue "growing its markets" should the alliance plan be rejected.

Qantas wants to take a 22.5 per cent stake in Air New Zealand and integrate services operating to, from or within New Zealand.

The two airlines and their opponents have widely divergent views of what would happen if the alliance did not take place.

The airlines say one of them _ probably Air New Zealand as the weaker, smaller one _ would go out of business when faced with a new, low-cost rival such as Virgin Blue.

Opponents say this threat is being overplayed to help Qantas and Air New Zealand gain permission to form an anti-competitive cartel.

Asked why Qantas would expand in New Zealand when it was losing money on the routes, Dixon said it would do so because its home market was crucial.

Other routes lost money, but were useful because they brought passengers into its network.

The number one priority was always to ensure resources were made available for the home market.

Consolidation was a much better outcome than the collapse of the weakest, full-service airline in New Zealand, he said.

Virgin Blue would also do better if it was facing a combined Qantas-Air New Zealand rather than competing with them as two separate entities.

Virgin knew this, said Dixon, but had "overplayed its hand" in its earlier demands that Air New Zealand be forced to sell its Freedom Air subsidiary.

Dixon's counterpart at Air New Zealand, Ralph Norris, opened the conference by saying that despite changes at the airline, including the new "express" low-cost product, the business faced problems.

"The medium-term outlook for Air New Zealand is seriously adverse _ far more so than a focus on short-term outcomes might suggest.

" He said confidential material to be presented to the commission showed that without the alliance, Air New Zealand faced a struggle for survival _ one it was poorly placed to win.

One of the main thrusts of his submission was that when two full-service airlines (in this case Air New Zealand and Qantas) are joined by a value-based airline (Virgin Blue), then only one of the full-service airlines can survive.

Norris said it became clear to Air New Zealand early last year that it could become effectively squeezed in its core domestic markets between the expected growth of Qantas and Virgin Blue.

"There is only room in the New Zealand domestic market for two airlines, one FSA [full-service airline] and a VBA [value-based airline]," said Norris.

"One FSA will be forced to leave the market unless Air New Zealand and Qantas are able to sufficiently link their services such that, effectively, they become one FSA.

" A Canadian aviation economist, Michael Tretheway, told the commission that whether the alliance went ahead or not, the end result in New Zealand would be the same.

There would be one healthy, low-cost carrier _ in this case Virgin Blue _ and one healthy full-service airline.

This could come about by the two full-service airlines forming an alliance _ which is what Air New Zealand and Qantas want _ or it could happen by the weaker of the two airlines collapsing, with the resultant casualties and job losses.

Norris described previous attempts by Air New Zealand to seek some salvation from this looming competitive threat.

He said there had been talks with Virgin Blue about the possibility of an alliance, as a possible alternative to joining forces with Qantas.

It came to nothing, as any such deal with Virgin would have been only temporary because its entire business model was based around expansion.

A marriage between one airline that offered full services with another value-based airline would have been "quite impossible to consummate", he said.

Singapore Airlines was also approached with the idea of forming an alliance, said Norris, but it was not interested.

It had lost interest after the collapse of Air New Zealand's Ansett.

The conference continues for the rest of this week, with economists making submissions for both airlines today and tomorrow.

It is expected that alliance opponents such as Virgin Blue, investment company Infratil and the travel agents association will make their presentations on Thursday and Friday.

The commission expects to make a decision by the end of next month.