Treasury reveals advice on Qantas

Hundreds of pages of documents on the Government's initial approval of the Air New Zealand-Qantas alliance were released yesterday on the Treasury website.

They show the advice the Government relied on before giving its blessing in December to their plan to replace competition by co-operation.

Some of the major concerns were about Air NZ's ability to withdraw from any alliance without too much damage.

The Treasury told Finance Minister Michael Cullen on December 6 that approval would bring "significant benefits to the Crown from an ownership perspective".

"We recommend that you write to the Air NZ board setting out your expectation that Air NZ will retain the capacity to operate autonomously in the event the strategic alliance terminates."

The only part of Air NZ's flying business that was turning a profit was its domestic service, which was vulnerable to Qantas competition.

Air NZ's recent improvement in profitability was largely driven by factors out of its control, such as better oil prices and a strong dollar.

"Air NZ's weak balance sheet makes it extremely vulnerable to changes in these factors and to other uncontrollable factors - particularly to competition from Qantas and from value-based airlines that may enter the market."

Without a strategic partner, said the Treasury, there would be continuing risk that Air NZ would need further shareholder support.

"Several alternatives to the strategic alliance have been considered. None can offer the benefit that an alliance with Qantas can."

A report by Government adviser First NZ Capital said that despite Qantas' unsustainable position in the New Zealand domestic market, it was not likely to leave.

In fact it was more likely to expand - especially since Air NZ had just removed business-class seats and hot food, leaving Qantas the only full-service airline flying domestically.

New Zealand was a logical market for Qantas to expand into, as it was close, had a known brand and terminals and it was an important destination for Australian travellers.

Qantas, said First NZ Capital, was expected to start making a profit in New Zealand in the medium term.

Competition regulators on both sides of the Tasman have yet to approve the alliance plans. Submissions close tomorrow.

Treasury - Air New Zealand Qantas Strategic Alliance