Any Qantas-Air NZ marriage will depend on Commerce Commission

By NZPA

Wednesday 9th October 2002

Shares in Air New Zealand rose 6 percent today on an Australian newspaper report tipping the airline to formally announce an engagement to Qantas at its annual shareholder meeting on October 29.

"The two are said to have agreed a broad framework and only decisions relating to competition regulators' concerns remain to be agreed," the West Australian paper said.

However, consummation of the marriage in which Qantas will take a 20-25 percent stake will be highly dependent on whether competition watchdogs, the New Zealand Commerce Commission and Australian Competition and Consumer Commission (ACCC), approve.

Shareholders who bid Air NZ's shares up on the West Australian newspaper's report are gambling the watchdog will give Qantas the nod. The stock closed up 3c at 52c.

JB Were sharebroker Murray Rutherford said investors were becoming progressively confident a Qantas marriage would be consummated.

"I think people are assuming that will happen now and I don't think that was the case initially," he said.

Despite that confidence, at least one observer advised investors not to bet their houses on the proposal going through.

The Government, 82 percent owner of Air NZ, has got cold feet over the airline after the chairman John Palmer said it still did not have a viable capital structure despite the Government's $885 million injection and a return to operating profits.

Although the Government has pledged another $150 million, it seems that amount will still be well short of requirements.

In the words of one senior broker it has come to the realisation that New Zealand is just too small to run a full international airline.

The Government said in its speech to the throne this year that any proposal on Air NZ would "have to meet national interest tests and pass existing competition tests without any form of intervention by the Government".

Because an Air NZ-Qantas tie-up would effectively end current domestic and trans-Tasman competition, the only way the Commerce Commission is likely to approve a deal is if there is a realistic alternative.

That is most likely to come from Virgin Blue which today made it clear it will not make the commission's job easy.

"While we are likely to fly to New Zealand, we, like everyone else are awaiting the outcome of the Qantas-Air NZ discussions," Virgin's commercial head David Huttner said.

"We don't want to be used as a fig-leaf of competition to allay the concerns of the various competition authorities."

The commission said it was unable to approve deals dependent on a third party's activities.

Commission competition director Geoff Thorn said, though, the commission may decide "certain things are more rational than others.

"We would look at all of the market conditions and look at what we think is expected to happen, which may or may not include the possibility of somebody entering the market," Mr Thorn said.

"That's obviously the question the commission has to address."

A public conference on the issue was highly probable.

Qantas can get approval by arguing public benefits outweigh the detriment of reduced competition.

Commerce law allows Government to state its policy on the issue, and the commission must regard the Government while not being bound by it.

According to the West Australian, Qantas would get two seats on the board and Air NZ's Mr Palmer would be offered a seat on Qantas' board.

Qantas would have no management say, and the Australian airline had also made significant commitments on feeding tourist traffic into New Zealand from European markets not directly served by Air NZ.

Some analysts expressed surprise at the possibility Qantas would not get management control. Government has said it wants a cornerstone shareholder with aviation expertise, given its lack of knowledge and Singapore Airline's back seat role.

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