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Collision course

By Duncan Bridgeman

Friday 23rd May 2003

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Benjamin Franklin once said necessity never made a good bargain. Air New Zealand chief executive Ralph Norris finds himself arguing in the opposite corner.

Mr Norris' challenge is to persuade Commerce Commission chairman John Belgrave his airline will be relegated to the "Air Fiji" league if the competition regulator torpedoes the proposed alliance with Qantas.

The problem is, those pesky facts keep getting in the way. Air New Zealand's operational performance and financial position have improved steadily throughout the drawnout application process and it is coping better than Qantas or practically everybody else with the effects of the war in Iraq and the Sars outbreak.

According to industry observers the two airlines' Round Two concessions to the commission and its Australian counterpart, the ACCC, have closed the gap between what the regulators want and what the airlines can concede from 100km to a mere 90.

With a regulatory veto looking increasingly like a foregone conclusion, attention has turned to a political solution.

But while Australian politicians appear to be at odds over whether to push their competition regulator into approving a deal, the New Zealand government is standing firm.

Finance Minister Michael Cullen said this week the government's position had not changed; if the commission turned the airlines down the government would not overrule it.

It is not even seeking to influence the commission through the open process available through the Commerce Act.

In a letter released under the Official Information Act to Chapman Tripp partner Grant David, Commerce Minister Lianne Dalziel confirmed the government would not issue an airline policy statement under section 26 of the act.

The section says the commission must "have regard to" such statements but it is not bound to follow it.

"That's pretty clear and unequivocal," Mr David said. "However much [the government] or the Australians may want the merger/alliance to go ahead, it at least is not prepared to intervene directly as it did with the dairy industry."

Australian Transport Minister John Anderson has said he would pass legislation if necessary but he was quickly overruled by Treasurer Peter Costello, who effectively told him to shut up and let the ACCC do its job.

Despite Air New Zealand's improving position Dr Cullen accepts the argument its best option is a Qantas tie-up. But he doesn't necessarily buy the doomsday scenario.

"The issue is not whether Air New Zealand will survive without the alliance," he told The National Business Review this week, "but rather the sort of steps it would have to take in the absence of the alliance to secure its survival, particularly with respect to its long-haul operations."

Therein lies the catch-22. The government doesn't want to see the national carrier go downhill, nor is it prepared to inject any more cash. But to push the Qantas alliance through by political means now would be a massive backdown by Dr Cullen regardless of what the Australians do.

Air New Zealand chief executive Ralph Norris said yesterday he would not be asking the government to intervene on the deal as he understood that was not an option.

"I think the government has made it pretty clear that it wouldn't intervene, so that would be somewhat pointless."

Mr Norris was heartened though by comments from the ACCC that suggested the airlines' updated undertakings would require further close scrutiny. "Regardless of what happens, the status quo as it currently stands is not good enough for this company to compete effectively in the future," Mr Norris said.

Air New Zealand and Qantas are expected to present virtually the same concessions they gave to the ACCC to the Commerce Commission next month.

The list of 10 undertakings was submitted to the ACCC after both authorities ruled the "countervailing public benefits" claimed for the alliance would be outweighed heavily by the damage to competition.

The only entirely new features were restrictions on Air New Zealand's low-cost subsidiary, Freedom Air, flying from Australian to New Zealand main hub destinations, capacity reduction restrictions on those routes and voluntary price caps.

Despite what the New Zealand government has said to date, market watchers are dismissing the second set of undertakings as a charade and believe a Fonterra-style bypassing of completion law is still on the cards, in Australia at least.

"It's a Clayton's deregulation ­ the politicians intervene every time something goes wrong," Centre for Asia-Pacific Aviation managing director Peter Harbison said.

That said, ACCC chairman Allan Fels only needed a quick look to comment that there appeared to be significant new considerations in the new proposals.

One of the revised undertakings presented to the ACCC included the facilitation of a third party into both the domestic and transtasman operations. Air New Zealand has said it has no intention of selling its subsidiary Freedom Air but the low-cost airline is considered a major sticking point for the competition regulator.

The issue has sparked a war of words with rival budget carrier Virgin Blue, which is waiting in the wings, hoping to snaffle Freedom and the entire discount sector for itself.

Since he presented the revised submissions, Mr Norris said Air New Zealand had already been approached by at least three parties apart from Virgin Blue that were interested in cashing in on the restrictions to Freedom's capacity.

"There are parties out there who think those concessions are valuable enough to encourage them to enter the market."

Mr Norris said the impact of the Sars virus underlined the volatility of the international airline industry and while it did not affect Air New Zealand as much as some other airlines it still had a significant impact and created uncertainty.

Air New Zealand has cut capacity serving Asia, including Japan, which had a flowon effect to domestic traffic levels, he said. "It re-emphasises what this industry faces and from my perspective underscores the validity of the alliance option."

The regulatory environment here is vastly different from Australia's.

The amount of lost competition that would occur in Australia would be relatively small compared with the benefit for Qantas of a deal going ahead. And competition regulation is less formal and less transparent across the Tasman than it is here, according to Chapman Tripp's Mr David.

Infratil chief executive Tim Brown, a spokesman for a group of New Zealand companies opposing the deal, said it was interesting that given the relatively small dilution of competition in Australia, the ACCC still saw it as significantly outweighing the benefits in its first draft determinations.

"It seems to me like a deal that's a bit of a lay-down misere for the Australians. They are saying, 'Hey, it looks good for us. Let's give it a big tick.'"

Such is the cynicism in the market at the moment that Mr Brown said he would not be surprised if the regulators' decision was actually reversed, either by direct political involvement or by a "push and shove" type of arrangement.

"In terms of the New Zealand process we believe that political pressure from a whole range of different types is likely to be exerted and we are, needless to say, very concerned about that."

Mr Brown questioned whether Air New Zealand was in as bad a shape as it made itself out to be and whether the airline had looked at all the options.

The airline was making a good return in New Zealand, beating its cost of capital while Freedom was doing very well across the Tasman, he said.

"The Norris mantra is very reminiscent of Jim McCrae saying we had to buy Ansett ­ without Ansett we are toast. Well, we all know the outcome of that."

That view is shared by former Eagle Air boss and current Dorchester Pacific managing director Brent King, who says an alliance with Qantas is like tying up to a sinking ship.

"If Qantas needs Air New Zealand to survive I would take that as meaning it has even bigger problems over there. Air New Zealand should concentrate on the international routes that it does well."

The ACCC is expected to make a decision on the airlines' secondary undertakings before the end of June. Qantas has already asked the ACCC for a speedy decision so it can appeal to the Australian Tribunal, a quasi-judicial body with the power to overturn ACCC decisions.

At that point it will become clear what lengths the governments on both sides of the Tasman are prepared to go to to get an alliance off the ground.

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