Cartel plays 'national-interest' card

By Graeme Kennedy

Friday 29th November 2002

Air New Zealand and Qantas will play the "national-interest" card against reduced competition in their bid to gain regulatory approvals for the $550 million strategic alliance announced this week.

With Qantas taking 22.5% of Air New Zealand to create a regional airline grouping big enough to take on the world, the carriers are stressing the economic advantages which they expect to flow from the deal.

At the core of the agreement is the creation of a single division to co-ordinate all Air New Zealand and Qantas flights operating within New Zealand and on transtasman routes, all of which would be code-shared.

Although headed by a small team with an equal number of representatives from each carrier, the alliance would be run commercially by Air New Zealand alone with responsibility for pricing, capacity, scheduling, routes and marketing. The airlines would be responsible for their own flight operations including aircrew, maintenance and passenger services.

Qantas has a similar arrangement with shareholder British Airways on the Sydney-London Kangaroo Route which has increased revenues and market share for both carriers. That alliance received regulatory approvals.

Air New Zealand president and managing director Ralph Norris said that while there was no doubt competition between the region's two major carriers would be lessened by the arrangement, merging the New Zealand domestic and transtasman markets would provide opportunities for other players to come in.

"The market will be much more stable rather than two vicious competitors going head to head," Mr Norris said.

"The problem is that with a relatively small market of 3.8 million people there is no sustainable argument for two full-frequency airlines operating head to head.

"In that situation the carriers will lose money as has been seen with Ansett New Zealand, Qantas New Zealand and Qantas itself and in the end who will continue to write blank cheques for the luxury of maintaining competition in a market not big enough to maintain head to head operations?

"If they are not getting the returns, they cannot invest in the business over time."

And the market will not get any easier. Mr Norris said that over the past 30 years New Zealanders' purchasing power compared with other economies had been reduced while the New Zealand dollar had slipped against the US dollar the worldwide currency of the aviation industry.

He said it was important to have a structure to provide stability and reasonable returns to fund a quality New Zealand airline business.

Both carriers expected another domestic or Tasman entrant into the market as several international airlines already flew various sectors and could expand their operations. He said Virgin Blue had also talked a lot about the Tasman although the Branson carrier might be deterred from the New Zealand domestic market by the track records of previous second airlines operating here.

Virgin commercial manager David Huttner told The National Business Review recently the carrier had put its New Zealand and Tasman plans on hold until after the regulators' decision on the Air New Zealand-Qantas deal.

Mr Huttner said Virgin, although an aggressive competitor ready to take on either carrier, would think twice before entering a market against "a 1000lb gorilla."

"We will see a lessening of competition although both Air New Zealand and Qantas will continue flying here," Mr Norris said. "Qantas itself will determine what their domestic product will be, perhaps continuing with two classes while we have our new and highly successful Express service so customers will still have a choice of product and better frequencies as we don't have to fly head to head.

"Pricing would depend on the cost of the product. We will introduce a two-class Express service on the Tasman next year and expect to see fare reductions from that while Qantas' pricing will depend on the cost of its product."

Mr Norris said the regulators, New Zealand's Commerce Commission and the Australian Competition and Consumer Commission, would apply a national-interest benefit test to the applications which will be filed on December 9.

"They will look at the detrimental aspects such as less competition and the positives we have had an independent economic analysis done which shows the economic benefits to New Zealand over five years at $1 billion."

That cash inflow would be generated by up to 50,000 more tourists annually, enhanced air freight services, more and better overseas promotion of New Zealand as a destination and the creation of 200 more skilled jobs in New Zealand.

The economic benefit to Australia over the same period would be around $800 million, Mr Norris said.

A major benefit for Air New Zealand in the alliance package is the ability to code-share on all Qantas domestic flights in Australia and Qantas services which connect with Air New Zealand's to give the carrier the vital passenger feed it lost with the collapse of Ansett. Both airlines will also codeshare on each other's New Zealand-US flights.

Mr Norris said becoming part of a major airline grouping in the region was the second of Air New Zealand's three-stage strategy for the future.

The first was restructuring its domestic services with Express Class and still to come was up-grading its long-haul services.

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