Guide To Making AirNZ / Qantas Alliance Submission

This backgrounder has been prepared to give brief outlines of the “Debate Air New Zealand / Save Air Air New Zealand” group, the regulatory process, what the airlines are proposing, and some information about how interested parties may have a say before the Commerce Commission. The backgrounder has been prepared to encourage people who are likely to be impacted by the airline alliance to have a say. It does not describe the case against the transaction.

Debate Air New Zealand / Save Air New Zealand

The group was formed by people who were concerned that Government was railroading this transaction without inclusive debate. Hon Dr Michael Cullen arranged a decision making process designed to exclude rather than include interested parties; only two weeks deliberation, and no rights of submission, to the “Kiwi Share” decision, the management of the timetable over the Christmas period, the airlines’ relentless lobbying.

Now the decision has moved to the Commerce Commission and our focus has changed. We still want to have the transaction debated, but in the face of Government’s locomotive our priority is to apply the handbrake. The only way this can happen is for lots of impacted parties to express their concerns to the Commission, to their local MP, and to the media.

Air New Zealand is a very important company for New Zealand. So important that Government was willing to commit $850million to ensure it didn’t fail in 2001. Whatever else the future may hold for AirNZ, the worst possible outcome is for an amalgamation with its Australian rival at a time when that rival has only been included in the deal because of political pressure on our Government by the Australian government and because of Qantas’ absurd threat to “grind AirNZ into the dust”.

Co-Convenors of Save Air New Zealand are Mark Blumsky, former Mayor of Wellington and Dr Ian Prior, Epidemiologist and Public Health Physician Wellington.

Other members and supports are listed on the web site http://www.debateairnz.co.nz

The Commerce Commission’s Role

The Commission is to assess whether the airlines’ transactions are in the National Interest.

1. In respect of the operational arrangements, approval will be granted if the Commission is satisfied that they: “will in all the circumstances result, or be likely to result, in a benefit to the public which would outweigh the lessening in competition that would result, or would be likely to result or is deemed to result there from”. (section 61(6) Commerce Act 1986).

For the business acquisition, authorisation means being satisfied that the acquisition: “will result, or will be likely to result, in such a benefit to the public that it should be permitted“. (section 67(3)(b)).

2. The Commission’s approach to deciding if the transactions are in the National Interest is likely to entail breaking the impact down by markets. In its 1996 decision to allow AirNZ to acquire Ansett the Commission defined markets as:

Main trunk passenger. Provincial passenger. Transtasman passenger. Other International passenger. International airfreight. Travel distribution (travel agencies, etc.). Computerised information and reservation systems. Engineering services. Terminal and ground handling services.

3. A more pragmatic approach would be to look at all areas where the two airlines are active and see what the transactions’ impact would be in each area, eg.

- Air travel costs. The airlines acknowledge that passenger and freight costs will rise, the scale of the increase and the impact is at issue.

- Air services. Service frequency, destinations, in-flight facilities, booking facilities.

- Sponsorship. Both airlines are major sponsors of art and sport.

- The purchase of services. Will the airlines continue to buy the same goods and services and the same quantities in New Zealand?

- Marketing of New Zealand. Qantas is proposing an increased marketing role for the joint venture; selling New Zealand or Austalasia?

- Promotion of New Zealand culture. AirNZ features New Zealand music, wine, information, products on its flights.

- The forging/forcing of closer ties with Australia. Is coming under the Australian wing desirable? Is the loss of sovereignty meaningful?

In its analysis the Commission will rely heavily on information it receives in submissions. The Commission has a heavy workload and no specific aviation expertise. Further, the meaning of National Interest is subjective. A large number of submissions, submissions with substantive arguments, and submissions which counter the airlines evaluation of benefits and costs will make a difference to the outcome.

Commerce Commission Timetable /Programme

Stage 1. The Commission has received detailed proposals from the airlines, covering both the intended operational arrangements and the equity investment by Qantas.

By 14 February interested parties may make counter-submissions.

Counter-submissions are likely to have a critical influence on the outcome because the Commission devotes limited resources to authorizations and relies heavily on analysis submitted by interested parties. In the absence of comprehensive counter-submissions, the airlines’ application and report will provide the foundation for the Commission’s analysis.

Stage 2 The Commission will release a draft determination and invite further submissions. The draft determination will indicate approval or rejection of the application based on information received. The position of the Commission may result in either applicants or opponents deciding not to continue at this point.

Stage 3 The Commission will then hold a conference to enable interested parties to talk directly with the Commissioners and to provide cross-submissions. Commissioners can question parties presenting such cross-submissions.

Submission Form & Content

A submission may take many forms and address many issues. It may be directed at specific claims made by the airlines in their proposal (which is mostly available on the Commerce Commission web site http://www.comcom.govt.nz) or at some of the benefits claimed by the airlines (available on http://www.airnz.co.nz).

Alternatively it may be specifically on how individuals/companies/corporate bodies believe they may be adversely impacted by the transactions. To give some examples:

1. Airlines operate complex fare structures. Cheap deals are available care of bulk purchases. If there is only one seller of air travel operating in the New Zealand market will these discounts still occur?

If you are a sports club or a company that has access to fare-discounts, contemplate what it would mean if the discounts were no longer available.

As an individual, do you have an example where you have contacted an airline to take advantage of a discount offering only to find it not available on the particular flights you want?

2. Some years ago AirNZ ceased offering direct services to Germany and began code sharing them with Lufthansa. The number of German tourists coming to New Zealand was materially impacted.

Is your business reliant on certain international markets where on-the-ground AirNZ representation adds value?

3. AirNZ offers New Zealand wine and other products on its flights.

If this promotion of New Zealand product were reduced by the alliance, would it have an adverse consequence for New Zealand. Are there benefits to the New Zealand suppliers of such products beyond just the price received from AirNZ, eg. from being introduced to other consumers/markets?

4. AirNZ is a major sponsor of New Zealand sports, arts and cultural events. It offers cheap airfares, co-marketing, and cash sponsorship.

Are you involved with a body that benefits from this? Will you continue to benefit after the alliance. AirNZ’s actions after the transaction will reflect both the declined need to compete for customers and goodwill, and the fact that it may be disinclined to be seen to be competing with Qantas. Australian owned banks do not, usually, support New Zealand sports teams that compete with Australian sports teams.

Have A Say

To address your concerns to the Commission it is enough to write them down, giving as many facts and figures as possible, and post them in to:

Commerce Commission
PO Box 2351
Wellington
Attention Janet Whiteside

Or by email to:

Janet.Whiteside@comcom.govt.nz

What Is The Airline Case

The airlines’ proposal has two parts:

1. An investment by Qantas in 22.5% of AirNZ’s voting securities.

2. Arrangements whereby all AirNZ routes, domestically and internationally, become part of a joint venture. This joint venture to be controlled by a supervisory board with equal representation of each airline. Many key details of the management of this joint venture are not public and are difficult to infer. Michael Cullen has indicated that he requires AirNZ to be able to withdraw from the JV and AirNZ has indicated that it retains the right to establish new routes without reference to the JV. But the airline proposal to the ComCom seems to require that the two airlines’ operations are substantially integrated to achieve the cost savings identified, and of course Qantas would have perfect information about the AirNZ routes.

AirNZ’s experts identify certain costs and benefits over the next five years, being:

-------------> New Zealand ---- Australia
Benefits
Cost saving ---> $627m ---- $459m
Scheduling ---> $47m ---- $13m
New direct services ---> $58m ---- $58m
Tourism ---> $645m ---- $490m
Engineering ---> $174m ---- $0m
Freight ---> $11m ---- $4m
Detriments
Consumer loss & transfers ---> -$130m -$2m
Productive and dynamic efficiency losses ---> Not quantified

Total ---> $1,433m ---- $1,022m

These benefits and detriments relate to:

- Cost savings from reduced duplication and capacity. 82% of the cost savings relate to capacity reductions on North American and Singaporean routes.

- Improved scheduling from better coordination.

- Increased tourist numbers from joint promotion of New Zealand and Australia by AirNZ and Qantas.

- Increased freight capacity.

- Increased engineering work in New Zealand.

- A loss of consumer surplus from higher fares, and transfers to foreign airlines.

Comment On The Airline Case

The airline case (as summarized above) rests on a number of assumptions, both about how the airlines will act after the transactions, and how they will otherwise act if the transactions do not progress. Key assumptions are:

1. A “Value Airline” is more likely to enter the market if the transactions progress. This assumption allows the airline case to infer a strong competitive environment after the transactions.

Virgin Blue (the only Value Airline on the horizon) has stated that it sees its entry to the New Zealand market being more likely if the transactions do not progress.

2. If the transactions do not progress there will be ruinous competition.

A more plausible competitive environment without a transaction is that competition continues as at present, which seems particularly unruinous for AirNZ, yet has certainly lowered domestic (not Tasman) airfares recently.

3. The additional tourist numbers forecast to result from predictions that Qantas will spend increasing sums promoting New Zealand and from the new point-to-point services that are forecast to result from the transactions.

The assumption that the transactions will result in a further 50,000 tourists a year coming to New Zealand is crucial to the merits of the transaction. Yet rationalised air services and higher fares would intuitively seem more likely to result in fewer visitors. Further, if visitor numbers are sensitive to marketing, it is difficult to not conclude that AirNZ, as now constituted, is much more incentivised to effect this marketing than will be the joint AirNZ-Qantas.

4. AirNZ’s engineering operations are forecast to gain substantive new work from Qantas.

There is nothing binding about this forecast and nor is there any commitment from the Australian unions that they would allow Qantas to transfer high value work to Christchurch.

Further Information

There is a great deal more information on the proposed transaction, perhaps too much. If you have a query please post it on http://www.debateairnz.co.nz and we will endeavor to respond.

In its 18 January 2003 edition The New Zealand Listener carried an article by Gordon Campbell which addressed many of the key AirNZ / Michael Cullen claims. This article is subtitled “Fish need bicycles as much as Air New Zealand would seem to need a “strategic alliance” with its archrival, Qantas”. It can be read on http://www.scoop.co.nz/mason/stories/HL0301/S00098.htm

ENDS

© Scoop Media