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Air New Zealand says it may have to review its transtasman service "at a significant cost to consumers" because Australia's competition watchdog won't let it join forces with Qantas.
In a draft ruling yesterday, the Australian Competition and Consumer Commission said it would not approve the code-share agreement which Air New Zealand had hoped would save it tens of millions of dollars on the unprofitable route across the Tasman.
The news comes in a week when the airline has been battling unions over plans to outsource 1700 airport jobs.
"The limited benefits from the agreement will not outweigh what the ACCC considers will be significant detriment to consumers in the form of higher prices and reduced travel options at key times," ACCC chairman Graeme Samuel said.
Air New Zealand said it was "flabbergasted and astounded".
It also hinted that it would cut transtasman flights if the decision was finalised - a move likely to result in higher ticket prices.
The ACCC was "potentially forcing Air New Zealand to make capacity and route decisions that will come at a significant cost to consumers," said Air New Zealand chief financial officer Rob McDonald.
"We [the aviation industry] cannot continue to fly our current schedule on a route with the equivalent of 43 empty A320 aircraft [6300 seats] across the Tasman daily. Airlines are not a charity."
Air New Zealand's shock was at odds with the reaction from Qantas.
In its only statement yesterday, chief executive Geoff Dixon said: "Given the ACCC's track record on the proposal, we are not surprised at the decision."
It is the second time regulators have thwarted the efforts of the two airlines to share services.
In 2003 the ACCC and New Zealand regulators rejected a broader proposal which included domestic flights.
Mr McDonald said yesterday's ruling had flaws which Air New Zealand would raise with the ACCC before a final determination was made.
The ACCC said it appreciated that without a code share, Air New Zealand would continue to be constrained on the Tasman by competition from Virgin Blue and Emirates.
But these competitors faced barriers to expansion which meant they could not fill gaps in the "competitive dynamic" which would have disappeared under the agreement.
Mr McDonald accused the ACCC of accepting claims from vocal opponents of the deal such as Wellington Airport and its owner, Infratil.
Infratil director Tim Brown said he was sceptical of Air New Zealand's threat to cut services but the airline had made those decisions by itself.
"I hope Air NZ manages to stay and grow its business on the Tasman. But if its not working, that's life," he said.
In New Zealand, the decision on the code share was to have been made by the Minister of Transport rather than the Commerce Commission.
Opponents of the deal said this was wrong, as the Government was the majority owner of Air New Zealand with an 82 per cent stake.
The ACCC appeared to have spared the Government the need to to make the politically awkward decision, Mr Brown said.
"It was going to be egg on face no matter what they came up with," he said.
Air New Zealand shares dropped 7c to $1.38 yesterday. But one stock market analyst said the ruling would not make a big difference to the company's long-term future.
If the code share had been approved it would have been viewed as positive for the bottom line, said Forsyth Barr head of research Rob Mercer.
But the rejection amounted only to the continuation of the status quo.
"The investment case is still robust," he said.
Air New Zealand shares have risen 27 per cent since August because of falling fuel prices.
In relative terms, the investment the airline was making in its long haul routes - buying new planes and starting direct flights to Shanghai - was far more important to the bottom line than the code share, Mr Mercer said.
Two into one
* The code share meant the two airlines would stop competing for passengers on the Tasman route.
* Passengers would still book seats through their preferred airline, but would travel on either airline's planes depending on the timing of the flight.
* All income would be pooled and redistributed in a formula based on historical market shares.
* Air New Zealand said the proposal would remove excess capacity but maintain every-day fares.
* Critics said it would reduce choice for travellers, particularly from Wellington.
