Infratil disputes benefits of AirNZ-Qantas alliance

By NZPA

Friday 21st March 2003

Infrastructure investor Infratil says some benefits claimed by Air New Zealand and Qantas about their proposed alliance are implausible.

Infratil, 66 percent-owner of Wellington International Airport, stands to lose money if the alliance, which involves Qantas taking a 22.5 percent stake in Air New Zealand, proceeds.

The Government has given conditional support to the deal, and the Commerce Commission and its counterpart, the Australian Competition and Consumer Commission (ACCC), are due to deliver draft determinations next month.

Infratil said in an update today that its own economic advisers found that the transaction outcome would result in a significant net cost to New Zealand.

Economic and financial analysts LECG estimated cost savings as modest to nil, as opposed to the airlines' assessment of cost savings of $627 million.

LECG said the benefits to the engineering and maintenance divisions was $5 million, as opposed to the airlines' assessment of $174 million, and there would be a "significantly negative" net benefit.

"The airlines claim that if the transaction progresses Qantas will spend an additional $14 million per annum marketing New Zealand, which will increase annual tourist numbers by 50,000 and provide the country with a benefit of $645 million over five years," Infratil said.

"Why Qantas should spend this money is not explained. Nor is it explained why Air New Zealand isn't chasing these people now rather than waiting for Qantas.

"But if Qantas does spend $280 to get another person to fly on Air New Zealand, and Qantas owns 22.5 percent of Air New Zealand, Air New Zealand will have to make $1244 after-tax profit from that passenger for Qantas to break even (22.5 percent of $1244 is $280). The figures are implausible."

The impact of such an alliance on Wellington Airport was uncertain, although fewer air travellers would reduce income.

"The detriment will also depend on whether competitors emerge, or Air New Zealand-Qantas establish `fortress New Zealand'."

Infratil also said it was unlikely Qantas would carry out its threat to grind Air New Zealand into the dust if the deal did not receive regulatory approval on both sides of the Tasman.

"Not least because predatory pricing is illegal, and Qantas is under investigation in Australia by the Australian consumer watchdog over allegations that it used predatory pricing against Virgin Blue."

Infratil is managed by investment banker Lloyd Morrison's Morrison and Co, who led the charge in the middle of last year to oppose Qantas taking a cornerstone stake in Air New Zealand. Opponents warned the deal would effectively create a monopoly.

"Competition is the only way airlines are incentivised to innovate and provide excellent, frequent, cheap services to places people want to go," Infratil said today.

"The Air New Zealand-Qantas transaction is about rationalising services and obliging passengers to use the aircraft the airlines want to make available."

However, Air New Zealand chief operating officer Andrew Miller said the war in Iraq underpinned the airlines' reasons for a partnership.

While Air New Zealand had seen forward bookings drop by up to 10 percent on some routes as a result of the conflict in Iraq, the airline had cut costs with the introduction of its no-frills domestic class and still flew the Tasman with its value-based airline Freedom.

United States aviation expert Nawal Taneja, currently in New Zealand as a guest of Air New Zealand, said today that the company was better placed than most airlines to emerge relatively unscathed from the war on Iraq.

"...Even with lower fares they're able to make a return because they really have taken the process and cut the costs on a structural basis."

Professor Taneja is the chairman of the Aerospace Engineering and Aviation Department at Ohio State University.

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