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Qantas-Air NZ deal may never get off ground


Friday 29th November 2002

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After months on the tarmac, Qantas' buy-in to Air New Zealand headed for the runway this week, but there are serious doubts about whether the deal will or should fly.

A cacocophony of concern from consumer groups, opposition parties, some business and tourism industry parties has screamed against what will in effect be a monopoly within New Zealand.

The deal involves Qantas buying 22.5 percent of Air NZ for around $550 million. Air NZ will manage the two airlines' services to, from and within New Zealand.

A 50:50 company would be established to oversee those services, a feature of the deal which the National Party claims has given Qantas 50 percent control at half price.

Air NZ is arguing that without the deal it would wither into a financially struggling mainly domestic operator.

Without saying so, it seems the Government has accepted this line and this is why it is likely to gives its nod despite the unpopularity of the proposal.

When it makes its application to competition watchdogs here on December 9, Qantas will ask for an authorisation, which means it concedes the deal will lessen competition, but that public benefits over-ride that.

Qantas and Air NZ have chosen to be less than open and somewhat manipulative in trying to sell the deal.

They have commissioned a high powered Australian economic group Network Economics Consultation Group (NECG) to study the economic benefits but is withholding the report until December 9.

Initially, we have nothing but NECG's word that the marriage will result in $1 billion of economic benefits over five years, and stimulate 50,000 extra tourists a year to visit.

How many times have such benefits been touted only to evaporate because circumstances change?

Air NZ let a select group of business and tourism industry leaders in on the deal before it was announced and, as calculated, most quickly came out with statements of support.

A senior PR flack slammed this as appalling.

"They tried to get hold of some cheerleaders. That's dreadful PR because it smacks of cynical orchestration and has undone all the good work that has been done in the last year," he said.

"It puts them right back to where a lot of people suspected they were -- that is that they are bloody arrogant and not following good communication lines."

Polls have shown the deal is deeply unpopular and he said Air NZ should have anticipated concerns about the creation of a monopoly and immediately announced warranties to allay fears.

"They should have recognised there was going to be widespread public unhappiness about Qantas taking over."

Further bad publicity came a day after the deal announcement when it emerged that a Qantas director had to be a signatory of all Air NZ board resolutions.

The PR industry insider said Air NZ should have been upfront from the start.

"If you try and be manipulative and sly and have a selective disclosure of information, you are always going to get caught out," he said.

Illustrative of the poor PR strategy was the Air NZ handout where a question was put about what happens if the deal falls over.

"We believe that when the regulatory authorities examine the alliance in detail and the benefits that will accrue to the respective countries and airline, we will get agreement to proceed." Oh yeah?

In a similar lame vein, when questioned about what will happen to ticket pricing in a monopoly market, Air NZ tried the "trust us" approach which set journalists at the briefing laughing in disbelief.

Commerce Commission chairman John Belgrave refused comment on the deal fearing it was inappropriate but Australian Competition and Consumer Commission chairman Professor Allan Fels had no such compunction.

The crusty prof, who has for years been a thorn in the side of Australian big businesses wanting to consolidate markets and power and a hero to consumers, didn't hold back.

Rather, he waded in saying he had little doubt the proposal would lessen competition and the airlines would need to convince regulators that the public benefits outweighed the anti-competitive effects.

"It will certainly need very close scrutiny," he said.

Predictably, Consumers Institute boss David Russell sees little merit in the proposal which he labelled a virtual monopoly within New Zealand.

He called for protection measures through an extension of the Kiwi share to pricing and services as happens with Telecom.

"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.

"It hasn't got a hope in hell in its present form. Obviously they must have something else up their sleeve."

That something may be a willingness to sell off Air NZ's discount arm, Freedom, and or to sell Qantas' New Zealand operations, presumably to Virgin Blue.

When Air NZ was buying Ansett, Qantas vigorously argued to the Commerce Commission how important it was not to allow a domestic monopoly.

Its expert witness then, Professor Michael Tretheway of the University of British Colombia, said most new entrants in the North American market never actually got started while the rest either went bankrupt quickly or were profitable to begin with but went bankrupt within three years as costs of expansion and pricing behaviour of incumbent airlines caught up with them.

It will be amusing to watch Qantas argue the opposite this time around.

The Government is cleverly distancing itself from the decision, which will be left to the Commerce Commission. It will decide in less than a month whether Qantas can go the next step but it is widely expected Transport Minister Paul Swain will give the nod.

Qantas denied that it had heavied both Air NZ and the Government on this deal with threats it would use its financial muscle to bring Air NZ to its knees if the deal is not accepted.

An Air NZ senior executive told NZPA of the threat and given Qantas' past dirty tricks, its seems entirely credible.

In the last few years Canada has experienced a similar situation to that proposed here when Air Canada took over Canadian Air.

In 2000, a number of restrictions on ticketing, frequent flier programmes and destinations were placed on Air Canada and last year the Government added the threat of a $C15 million ($NZ20 million) fine for predatory pricing.

Debra Ward, a government-appointed, independent observer on airline restructuring said there is still no real competition in Canada with Air Canada having 73 percent of the market.

However, the emergence of discount operators had kept it honest on pricing and Air NZ's claim it is making more money out of its new discount Express service may allay some fears on that count.

The idea that competition watchdogs force Qantas to sell its New Zealand operations and Air NZ be forced to sell Freedom appealed to her.

She said the issue of Qantas and Air NZ being in different global alliances was crucial. With the demise of Air Canada, no oneworld carrier flies to the Pacific coast and that has severely dented inbound tourism.

Interestingly, Air NZ and Qantas are not saying what will happen with respect to their alliances. If Air NZ is forced out of the Star Alliance it would be a huge blow to tourism here, she said, and throw into question the claim of 50,000 extra tourists a year.

Ms Ward said the best solution would be if each could stay in their alliance and passengers get cross credited for frequent flier points.

Overall, she believes any acceptance of the deal would need plenty of written warranties.

"I would agree with the sceptics on the face of it."

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