KangKoru Airline Alliance Grounded For Now

The Commerce Commission has put the kibosh (albeit a “preliminary” one) on Qantas' proposal to take a 22.5% stake in the national carrier and enter into a strategic alliance with Air New Zealand.

IMAGE: Commerce Commission Chairman John Belgrave Faces The Cameras

At a press briefing in Wellington today, the commission issued its draft determination rebuffing the deal. Commission Chair John Belgrave, flanked by Deputy Chair Paula Rebstock, gave a presentation which outlined the commission’s grounds for opposing the transaction. Although Belgrave was at pains to emphasise that this was only a “preliminary” determination, the commission clearly has grave misgivings about the deal as it currently stands.

The commission’s brief is to assess whether the proposed alliance will result in substantially reduced competition. If so, the commission must then balance whether, notwithstanding this reduced competition, the public benefits outweigh the detriments. As Paula Rebstock explained, approval will only be given when the commission is “confident” that this is the case.

There is a wide gulf between the airlines’ and the commissions’ calculations. To bring the deal into territory where commission approval might be forthcoming, the airlines are expected to challenge the commission’s analysis and financial modelling, and start putting some concessions on the table. On the commission’s calculations, benefits totalling around $300 million will need to be found from somewhere.

IMAGE: You Do The Math

The commission was also not won over by the “war of attrition” argument presented by the airlines to justify the deal. This suggests that, if the deal does not go ahead, Qantas and Air New Zealand will go head to head to win control of the Tasman markets. The airlines set much store on the way this “aggressive capacity competition” would seriously damage both airlines.

The commission recognised Air New Zealand’s improved performance, and the fact that it has a lower cost per passenger than Qantas. When considered alongside factors like the SARS virus and the outbreak of war, which have depressed passenger volumes, and the stern domestic competition Qantas faces from low budget operator Virgin Blue, the commission felt that Qantas had more to lose in such a war.

Finally, the prospect of a value based airline (or VBA) entering into the Tasman markets to compete with Qantas/Air New Zealand lurked in the background. Speculation is rife that, as a concession, Air New Zealand may offer its budget subsidiary Freedom Air to Virgin Blue.

Meanwhile, the deal has also fallen foul of the competition watchdog across the Tasman. The Australian Competition and Consumer Commission (ACCC) also vetoed the deal today.

Air New Zealand managed to sound upbeat despite the news. An announcement said that it was “disappointed but not surprised” at the Commerce Commission and ACCC decisions, and emphasised that the airline wasn’t ready to walk away from the deal just yet. The release went on to state that “Our initial reaction is that the issues raised by the Commissions are not insurmountable…We remain confident that final regulatory approval is achievable, and will continue to press our case with the Commissions…”.

IMAGE: John Belgrave And Paula Rebstock – Don’t Ask Us What They Should Do

So where to next? Is the deal dead in the water or can the airlines refloat it and “make it fly”, asked a member of the media. John Belgrave would give nothing away when quizzed repeatedly on this point by the press. The ball is now firmly in the airlines’ court, he said. Expect a finessed proposal to be landing on the Commerce Commission's doormat sometime soon.

The airlines and any other interested party now have until May 9 to make submissions on the preliminary conclusions. Public meetings will be held in Wellington between 20 and 23 May, before the commission makes its final determination by the end of June 2003.

- Richard Scott is a Wellington freelance writer and student on the Canterbury University Journalism course.

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