Trans-Tasman airlines to fly in "strategic alliance"

By NZPA

Monday 25th November 2002

Airline competition within New Zealand will effectively end under a proposed deal outlined by Air New Zealand and Qantas today.

It will also be heavily curtailed across the Tasman as the two local heavyweights fly in formation in a "strategic alliance" that will see Air NZ manage the airlines' operations to, from and within New Zealand.

Under the deal that needs the approvals of Government and competition watchdogs on both sides of the Tasman, Qantas will in three stages buy up to 22.5 percent of Air NZ which will run both airlines' services here and across the Tasman.

Qantas will pay around $550 million for its holding and the struggling national airline could receive another $200 million under a planned rights issue to all shareholders early next year.

Air NZ chairman John Palmer said the deal would be good for the travelling public and denied Air New Zealand had sold out to its nemesis.

"Nothing could be further from the truth," he said.

He denied a suggestion from a senior Air New Zealand source that Qantas told Air NZ and the Government to accept the deal or it would use its superior financial muscle to crush the New Zealand carrier.

Air NZ chief executive Ralph Norris tried to give an assurance on airfares, saying if Air NZ indulged in price gouging it would create opportunities for potential new entrants such as Virgin Blue.

His comment that if no new airline entered the domestic market "you can assume the fares are competitive" caused a burst of laughter among the journalists and analysts being briefed on the deal.

"I can definitely understand cynicism," he said, adding that the recently introduced Express service relied on growing the market and price increases would cut passengers and put the airline on a negative cycle.

Consumers' Institute chief executive David Russell called for controls against "a virtual monopoly" and said it "hadn't a hope in hell" of getting approval except on national interest grounds.

Air New Zealand would be responsible for all pricing and scheduling for both airlines within New Zealand and from New Zealand.

"If indeed it is shown to be in the national interest, then there must be some firm commitment to the vague promises that have been made so far about fare structures and schedules and the level of service."

He suggested the Government should widen the powers of its Kiwi share as occurs with Telecom so that pricing and servicing commitments are retained.

Mr Palmer said it was "total nonsense" that Qantas' holding, which will give it two of the nine board seats, amounted to control. The Government retained its controlling Kiwi share, and its shareholding would still be a controlling 64 percent from 82 percent after the issue of new shares to Qantas. Air NZ will get to sit on the Qantas board.

Qantas chairman Margaret Jackson called the alliance a "partnership of equals". The key difference from when Qantas held 19.9 percent when it was privatised in 1990 was that this deal was supported by Air NZ's board and management, she said.

This deal, 12 months in gestation and likely to take another six to nine months to complete, was one of mutual self-interest and she was confident it was also in the national interests of both New Zealand and Australia.

Mr Norris said board strife would be reduced as "there will be nothing in an operational sense to keep confidential from each other".

Mr Palmer is selling the deal as "one of the most positive developments" in the history on an airline that was starkly staring at bankruptcy last year.

The deal was no forgone conclusion that needed "tough and at times tetchy" negotiations. Alternatives were investigated but again Air NZ would not detail these and analysts doubt any are realistic.

Mr Palmer said the deal allows Air NZ to retain its autonomy and focus on its next stage of development, having secured its domestic market and achieved the long-desired goal of a major feeder airline in Australia.

The airlines claim $1 billion in potential economic benefits from the deal, including:

* 50,000 additional tourists per year

* enhanced freight services, and

* the creation of at least 200 skilled jobs at Air NZ

Qantas will apply to the Commerce Commission for an "authorisation" rather than a "clearance", which could allow the watchdog to okay the deal on national benefits even if there is a substantial lessening of competition.

The commission wasn't commenting today as it has yet to receive an application, but Australian Competition and Consumer Commission chairman Professor Allan Fels had little doubt it would lessen competition.

He said it appeared to include "strong elements of anti-competitive arrangements, including price-fixing and route-sharing".

The ACCC was unlikely to reach a decision for some months.

"I think it would be likely to lessen competition. I don't have a great deal of doubt about that, although we will have to talk to the parties about it," Prof Fels said.

Virgin Blue has said it wants to enter the New Zealand market and fly across the Tasman but has put plans on hold until the outcome of the Air NZ-Qantas deal is decided.

It will submit against the deal to the watchdogs.

"We will be identifying basically why we believe the deal has no competition benefits, has no consumer benefits," said Virgin's commercial head, David Huttner.

"There is no justifiable reason to approve this deal unless you believe that looking out for the Qantas shareholders is the mandate of the competition authorities."

"With Air New Zealand's domestic penetration across the Tasman and Qantas' financial muscle, plus Air New Zealand being a state company, we have to ask ourselves: is this really where we want to go?" Mr Huttner said.

The Government said it would let the airlines know by December 16 or 18 if they could go to the next stage and seek regulatory approvals.

All opposition parties other than NZ First opposed the deal.

ACT leader Richard Prebble said it was anti-competitive while National Party leader Bill English said Qantas was effectively gaining 50 percent control for a quarter of the price and he would try to mobilise opinion against the deal.

NZ First leader Winston Peters said, though, it was premature to judge.

Unions and business generally supported the deal.

Investors approved, sending Air NZ's shares up 12 percent, or six cents to 56 cents against the 44.5 cents Qantas will pay for its initial 4.99 percent stake.

Air NZ gave some assurances on the protection of its frequent flyer programme. It said no decision had been made about its future in the Star Alliance.

Comments from our readers

No comments yet