Air New Zealand and Virgin Blue have won approval from Transport Minister Steven Joyce to cooperate on routes across the Tasman Sea.
The decision follows approval being granted by Australia's antitrust regulator this month, reversing its preliminary view, after the two airlines gave guarantees on growth in capacity.
Joyce was also swayed by their commitment to maintain passenger numbers on the Tasman, according to his statement.
The two airlines will code share on Tasman and connecting domestic flights and offer reciprocal frequent flyer and lounge access agreements. Their alliance was in response to Qantas Airways Ltd.'s two-airline strategy where its low-fare Jetstar unit operates domestically in New Zealand and links to longer-haul flights on its parent.
Shares of Air NZ rose 0.7 per cent to $1.50 on the NZX and Virgin Blue rose 1.1 per cent to 45.5 Australian cents on the ASX.
Joyce said other airlines on the Tasman "will continue to provide strong competition for the alliance on most routes within and between both Australia and New Zealand."
He authorised the alliance for a period of three years and said the time limit "will place a strong incentive on the two airlines to operate in a competitive manner."
"How Air New Zealand and Virgin Blue implement the alliance, as well as the state of the market, will be taken into account in deciding whether further authorisation is given," he said.
Air New Zealand has just issued a press release saying it "welcomes today's decision" to approve the alliance.
"The Minister has recognised the benefits and value created for consumers by the alliance," said airline chief executive Rob Fyfe.
"I'm pleased that formal approval has been given, which combined with the Australian Competition and Consumer Commission's approval last week enables us to implement the alliance and deliver benefits to customers.
"Air New Zealand and Virgin Blue will now form a team to ensure we move ahead quickly with bringing the alliance to life over the coming months. We look forward to being able to connect our customers between all Australian cities served by Virgin Blue and all towns and cities where we operate in New Zealand."