Air NZ Should Think About Throwing In The Towel

There was little doubt that the Commerce Commission was going to reject the airlines’ Alliance proposal, but the character of the decision makes it uncertain whether the airlines will even bother to go into the next round.

The decision is a victory for common sense. As Commission Chair, John Belgrave, advised at the press briefing, “The airlines certainly need to have a hard look at it”.

The Airline case was based on their calculation of approximately $1,500 million of benefits from the Alliance over the next five years. The Commission found a cost to the Nation of up to $2,000 million for the same period.

The most import aspect of the Commission’s decision is their view that Air New Zealand is not likely to fail merely because it does not do this deal. The Commission’s forecast for how the aviation world will look without an Alliance entails a viable, recovering, Air New Zealand that will continue to have the support of the NZ Government, normal competition from Qantas, and the eventual entry of Virgin Blue.

They see this world as a great deal better for international and domestic travellers and users of airfreight than the monopoly environment that would ensue from an Air New Zealand – Qantas alliance.

Along with rejecting Air New Zealand’s case that it may fail without an Alliance, the Commission also rejected all of the airlines other arguments in favour of the transaction namely:
1. Air New Zealand will fail without a deal -- rejected.
2. The deal will result in huge cost and waste savings -- only small cost savings were accepted by the Commission.
3. Airline users will not be much harmed -- rejected.
4. An alliance makes a new entrant more likely -- rejected.
5. Qantas will engage in ruinous competition in NZ --rejected. The Commission noted that not only does Air New Zealand have lower costs but the prospect of Qantas investing great resources in New Zealand was slight.

While all interested parties will now be considering the implications of the Commission’s decision, those with the most thinking to do are Air New Zealand’s CEO, Chairman and main shareholding Minister.

Have they painted themselves into a corner. They expressed the view that this was the deal the airline had to have, but now they can’t have it. No doubt we will hear of their disappointment and dismay, but fundamentally their judgement must now be in question. To have promoted so doomed a deal must raise issues about their competence as the people running the National Airline.

ENDS

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