Air NZ in merger talks by end of year, says aviation think tank

'Relentless pressure' from the likes of Emirates will push Air NZ into merger talks, says the Centre for Asia Pacific Aviation.

An aviation industry think tank is expecting to see Air New Zealand in merger talks with another airline by the end of the year.

Air NZ's strategy of cutting capacity to remain profitable had worked up to the early part of 2009, the Centre for Asia Pacific Aviation said in its 2009 Aviation Outlook.

"Whether this strategy can continue to keep the airline intact during what looks like being a prolonged downturn for the New Zealand economy will depend on just how long and deep that proves to be," Capa said.

"Unless there are more positive new developments for Air NZ, and with current consensus that recovery is unlikely before 2010, it seems likely that merger talks will again be on the table by the end of this year."

Capacity reduction was the "unavoidable option" for Air NZ and the only way forward for the airline to protect its earnings base, Capa said.

That base was under relentless pressure from expanding long-haul carriers, such as Emirates, and short-haul low-cost carriers Pacific Blue and Jetstar, domestically, on the Tasman and in the Pacific.

Air NZ would be forced to cut back in the domestic market, as well as on international routes including the high volume Australian market.

For the airline's majority owner the New Zealand government, which pumped in more than $800 million to save the airline after the failed Ansett involvement in 2001, the current state of affairs seemed like a reasonable outcome, Capa said.

Despite a more than 50 per cent fall in its capital value, Air NZ appeared to have stabilised its financial position.

At the same time, the burden of growing the country's inbound and domestic tourism markets was progressively being shifted to other airlines.

"This has reduced the national carrier's risk and helped it re-focus on the better yielding corporate travel markets and niche long-haul services -- the only strategy amid the current downturn," CAPA said.

"From here on, the risk is that Air NZ will become so marginalised in the current downturn and competitive upheavals that its returns and value will steadily diminish over time.

"And if fuel prices begin an upward march again, the survival equation could dissolve."

- NZPA