Editorial: Up to airlines to prove public won't suffer

Air NZ's alliance with Virgin Blue will allow the two airlines to co-ordinate a range of flight issues. Photo / Brett Phibbs

Persistence has paid off for Air New Zealand.

After failing to obtain regulatory approval for a codeshare link with arch-rival Qantas, it has finally secured Australian Competition and Consumer Commission authorisation for a similar arrangement with Virgin Blue in the transtasman market.

The watchdog's decision is something of a surprise in that it overturns the comprehensive rejection of the airlines' plan in its draft determination. The commission has a strong reputation for putting the interests of the travelling public first when such arrangements are proposed. As such, some comfort is to be derived from the conditions it has placed on Air New Zealand and Virgin.

The tie-up will allow the two airlines to co-ordinate a range of issues, including pricing, revenue management, schedules, capacity and routes. The aim is for them to compete more effectively against Qantas and its offshoot, Jetstar, on fiercely competitive routes across the Tasman, thereby extracting profitability and growth.

Air New Zealand sees particular gains in access to domestic Australian services. With Virgin, it has managed to change the commission's mind - in essence, convincing it the public benefits of the alliance outweigh any detriments - by providing guarantees of increased capacity on certain routes. Now, the watchdog sees likely benefits for passengers in route choice and frequencies, and potentially lower fares.

It is clear, however, that this was a close-run thing. The commission gave conditional authorisation for only three years, not the requested five. It also noted it was "still concerned that the alliance may affect competition on a number of routes between Australia and New Zealand, particularly routes involving Wellington".

The airlines must, therefore, maintain and increase the number of seats flown on routes where competition issues have been identified. This is intended to restrict the ability to raise fares by limiting capacity.

The commission's approval effectively clears the way for the alliance to proceed. The only authorisation outstanding is that of New Zealand's Minister of Transport. A quirk of competition law means Steven Joyce will make a decision on a proposal from an airline that is majority owned by the Government and which says the link with Virgin is crucial to its viability. Unsurprisingly, his approval is expected within days. This process should itself be overturned with alacrity. It is farcical that the Transport Minister approves an application from a Government-owned airline.

Air New Zealand and Virgin will now command some 55 per cent of the transtasman market. Alliances, by their nature, aim to diminish competition and, in the normal course of events, reduced competition in any market does not deliver increased public benefits. The airlines maintain, however, that this one is all about increasing their market presence, not reducing capacity and saving costs. At least some grist to their mill is provided by the fact that they see the alliance as advantageous even with the commission's caveats, which must reduce its profitability.

Air New Zealand and Virgin say the alliance is a low-risk proposition. If after three years, they are not providing a better service than they were as independent operators, it can be revoked. The commission's record provides some reassurance that travellers will benefit. Several interested parties, such as Auckland and Wellington airports, say the conditions it has imposed have allayed most of their concerns. Now it is up to the airlines to prove that, in this instance at least, the removal of competition will not mean service will suffer.