Expected Air NZ-Qantas deal raises alarm over competition

By NZPA

Monday 25th November 2002

Air New Zealand will today announce the sale of a 25 percent stake to its nemesis, Australian airline Qantas, sources said.

The airline has called a news conference at midday and suspended trading in its shares on both sides of the Tasman until then.

Air NZ has been waging a fierce price war with Qantas-owned Qantas New Zealand and there are concerns the move will destroy consumer choice in New Zealand and across the Tasman.

"There will be no real competition after this," said David Huttner, the head of commercial operations at Qantas's budget rival, Virgin Blue. "You'll have a virtual monopoly across the Tasman, Qantas will be dictating the shots, I'm sure."

Virgin Blue has said it wants to enter the New Zealand market but has been sitting on the sidelines, waiting to see if a Qantas-Air NZ alliance was formed, and has said it would not be bridesmaid for the marriage of its rivals.

If the deal was approved by competition regulators on both sides of the Tasman, Virgin Blue would have to reconsider that move, Mr Huttner told National Radio today.

Media reports have suggested Qantas will pay between $NZ400 million and $NZ450 million for an issue of new Air NZ shares.

The share price Qantas paid was crucial, said Forsyth Barr Frater Williams executive director Don Turkington.

He did not offer a suggested price but market speculation is that the price will be between 45 and 50 cents per share. Air NZ's shares were being bid at 55c this morning and offered at 51c compared with its 50c close on Friday.

In addition to approval from competition regulators, the deal requires the support of the Cabinet , and such a move is expected to be politically unpopular.

Regulatory approval will be no doddle. Competition watchdog the Commerce Commission has become more aggressive lately and the Australian Competition and Consumer Commission (ACCC ) has always stringent in protecting competition.

Air NZ is 82 percent state-owned after the New Zealand Government spent $885 million last year bailing out the national carrier out following the crash of its Australian arm, Ansett.

The Government has repeatedly distanced itself from any Qantas decision, saying any move would have to be weighed by the Air NZ board first.

The Government is understood to back the deal despite its unpopularity. An Air NZ source has told NZPA that Qantas had heavied the Government into support, telling it that it would otherwise use its financial muscle to crush Air New Zealand.

The public can expect a major PR campaign to sell the deal.

Graham Scott, a former Treasury secretary now consultant, has said Qantas and Air NZ were very adept at managing their public image and to date had "done brilliantly on this proposal in backfooting anyone who wants to look at it".

Already opposition MPs are mounting an attack.

"No matter what the terms of sale ... we need to be asking if this is in the strategic interests of New Zealand," National party leader Bill English said yesterday.

"Almost no one, except Labour, appears to support the sale."

But Air NZ has hinted in the past that its tentative financial comeback and a depressed aviation industry worldwide make an alliance with Qantas inevitable.

Analysts agree a partnership has benefits for both airlines. For a start it would probably reduce the amount of domestic competition Air NZ faces from Qantas NZ.

It could also provide substantial revenue and cost benefits, as well as strategic benefits, said Jane Boyle, an aviation writer for the Australian Financial Review told National Radio.

"Qantas has indicated that it plans to build an Australasian airline alliance and New Zealand would obviously provide an important plank of that. For Air NZ, it rebuilds links with the Australian market after Ansett collapsed."

But Shareholders Association chairman Bruce Sheppard said the deal made no competitive sense.

"Quite clearly Qantas are Air NZ's major market competitor. They are an aggressive competitor, they have been a very effective competitor over a long period of time and a leopard doesn't change its spots."

Mr Sheppard said Air NZ's brand might survive, but over years the airline would be subsumed into Qantas.

"The issue is the strength of that brand and its robustness in serving New Zealand."

Experts say Qantas harbours dreams of being a truly Pacific airline. If Singapore Airlines -- a small stakeholder in Air NZ -- bought British Airways' 17 percent stake in Qantas, it could be linked with Qantas and Air NZ to become a powerful Asia Pacific carrier, the Dominion Post newspaper reported this morning.

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