QANTAS/Air New Zealand Alliance 'Not in Public Interest'

The Australian Competition and Consumer Commission today issued a final decision denying approval to a proposed alliance between Qantas Airways Limited and Air New Zealand Limited.

ACCC Chairman, Mr Graeme Samuel, said today that the ACCC saw no good reason to depart from the view expressed in the ACCC's April Draft Determination.

"The proposed alliance would be highly anti-competitive and offer little benefit to the Australian public", he said.

The two airlines sought authorisation* for an alliance under which both would agree on matters such as flight schedules and fares on routes where both operate, including the trans-Tasman. Qantas would also take up to 22.5 per cent equity in Air New Zealand.

Mr Samuel said that the ACCC had examined undertakings proposed by Qantas and Air New Zealand to reduce the anti-competitive effects of the alliance. The ability of the undertakings offered to control the behavior proposed under the proposed alliance is limited. The undertakings offered were heavily qualified, difficult to enforce and required monitoring.

"The trans-Tasman route is Australia's largest passenger market. It accounts for more than 16 per cent of all travel to and from Australia. Qantas and Air New Zealand have for some time been the only effective competitors. Qantas has around 39 per cent of the market and Air New Zealand, including Freedom Air, around 52 per cent.

"The two airlines are both profitable and competing strongly. Consumers are benefiting from that competition as can be seen by their very positive reaction to the new Tasman Express services recently introduced by Air NZ.

"The ACCC is aware that Emirates has recently entered the market and Virgin Blue is poised to enter. However the ACCC finds it hard to agree with the proposition that at this point in time the new airlines provide an immediate effective competitive constraint on the proposed alliance.

"It remains to be seen whether Emirates emerges as a permanent feature of the market. Depending on the rate and scale of Virgin Blue's entry the alliance could be expected to dominate the market for some time. Passengers would be denied choice and increased air fares would be inevitable for many passengers under the alliance.

"In Australia, the proposed alliance would see Qantas increase its domestic market share and market power by capturing those passengers flying internationally with Air New Zealand. The alliance would therefore shrink the portion of the domestic market available to other carriers and constrain them from entering or expanding in that market.

"While their dominance of trans-Tasman air freight is not as great as for passenger travel, Qantas and Air New Zealand still hold a combined share of more than 70 per cent of the market. The next largest operator has seven per cent. The proposed alliance is very likely to result in upward pressure on freight rates to the detriment of Australian importers and exporters".

Mr Samuel noted that while the ACCC recognized the proposed alliance as being overall highly anti-competitive, the level of detriment associated with such alliances can change over time.

“The ACCC appreciates that the aviation industry and markets such as the trans-Tasman are dynamic and subject to change. It is possible that where such change occurs it could lead to the ACCC at another time reaching a different conclusion as to the anti-competitive impact of an alliance.

Mr Samuel said the while the public benefits associated with an alliance are also subject to change, at this stage the ACCC is not satisfied that significant public benefit would flow from the alliance between Qantas and Air New Zealand.

“The ACCC is not convinced that cost savings from the alliance would be realised to the extent claimed by the airlines. Most of the claimed cost savings arise from not engaging in what the airlines describe as an inevitable 'war of attrition' if the alliance does not proceed. Under this scenario each airline would add significant capacity to routes on which they compete.

“The ACCC is not convinced that strong competition between Qantas and Air New Zealand featuring capacity increases, and the resultant claimed cost savings, are likely in the face of Virgin Blue's entry into the trans-Tasman and New Zealand domestic markets.

“The ACCC and tourism bodies agree that the proposed alliance could not be relied upon to produce increased tourism or benefits to the economy from tourism.

Mr Samuel also noted that the ACCC did not believe that the alliance would improve the global competitiveness of Qantas or was in the national interest as claimed by the applicants.

"Given the relative small size of Air New Zealand and its route network the alliance would only marginally improve the global competitiveness of Qantas".

Mr Samuel also observed that both airlines are performing strongly and profitably, as confirmed by their recent financial results, at a time when many other airlines around the world are struggling.

"Under the circumstances the ‘national interest’ would seem better served by continued competition between Qantas and Air New Zealand than an alliance. Both parties have indicated publicly that neither airline is realistically in danger of failure even in the medium term.

"The proposed alliance is highly anti-competitive and its benefits are small. The overall anti-competitive nature of the proposed alliance is reflected in the range and complexity of the undertakings offered by the applicants. The ACCC does not believe that undertakings can redress the identified anti-competitive detriment associated with the proposed alliance to the extent that authorisation could be granted".

*The Trade Practices Act 1974 prohibits certain forms of anti-competitive arrangements including arrangements between competitors which limit their ability to deal with whom they choose or on the terms they choose (including price) and arrangements which substantially lessen competition. The ACCC's authorisation process provides immunity from court action under the Act arising from certain anti-competitive agreements. Authorisation can only be granted where the ACCC is satisfied that the public benefit arising from the conduct outweighs any anti-competitive detriment.