Air NZ clears sky for Virgin

By CHRIS DANIELS

Air New Zealand is promising not to use its clout to shut out any new discount competitor when it joins forces with Qantas.

It outlined the commitment yesterday accompanied by a tally of financial benefits for New Zealand if Qantas is allowed to buy 22.5 per cent of the company.

New Zealand's Commerce Commission and the Australian Competition and Consumer Commission have received formal applications from the two airlines asking for approval of their intended union.

With these requests was an economic analysis of the deal, which says great things will come as a result of the relationship.

But included in the list of negative impacts was a prediction of a 3.1 per cent increase in domestic fares and a 1.7 per cent jump in transtasman fares within three years.

Air New Zealand chief executive Ralph Norris revealed details of the promises the airline will make to help gain Commerce Commission blessing - promises designed to smooth the way for a no- frills competitor into New Zealand airspace.

The airline will enter into "enforceable commitments" with the regulators that will include a promise not to restrict access to terminals, ground services and engineering facilities for new entrants.

It will also promise not to take "unreasonable actions" relating to capacity and prices on routes where it is the sole operator and will "ensure the specific delivery of public benefits negotiated with regulators".

Virgin Blue, widely seen as the most likely new entrant into the transtasman and domestic market, has had problems in Australia gaining access to terminal facilities.

Norris said he expected such a "value based airline" to be flying the Tasman within one year and operating domestically within three.

He stressed that the arrival of such an airline would happen more quickly under the proposed alliance with Qantas than if the two continued competing.

The economic analysis, conducted by the Canberra-based Network Economics Consulting Group, paints a grim future for Air New Zealand in the tumultuous world aviation market.

"There can be little doubt that these challenges, which define the commercial context for the alliance, are especially acute for Air New Zealand.

"The reality is that since the 1990s, Air New Zealand has rarely even been able to cover the opportunity cost of the capital invested in it," it says.

"Since 1997, its realised rate of return has been substantially below its weighted average cost of capital. Even excluding the impact of the Ansett acquisition, since 1997, investors in Air New Zealand have accumulated a loss, in economic terms, of some $560 million at today's prices."

Confidential planning information supplied to the economists by Qantas and Air New Zealand shows, says the report, that Qantas will substantially increase its capacity by up to 30 per cent across the Tasman and on New Zealand domestic routes.

It says Air New Zealand would then have to increase its capacity, as it could not afford "to be accommodating on these routes which account for so large a share of its operations".

This kind of increase would raise costs, reduce load factors and/or yields, followed by a cut in profits.

"Qantas is a formidable competitor," said Air New Zealand chairman John Palmer. "In the absence of an alliance with them we face a lengthy war of attrition to maintain our viability in the domestic market and on key international routes."

It was not this threat of battle with the mighty Qantas that forced Air New Zealand into doing the deal, said Norris.

"Qantas was by far and away the best choice of partner going forward. It was not a situation where they sat over the top of us with a bat threatening us."

The economists say benefits of the deal flow from increased tourism - 53,000 extra visitors each year, generating at least 2500 extra tourism jobs; increased engineering services leading to 200 more jobs in New Zealand; and increased freight capacity - an additional 247 tonnes a week along with new direct flights, possibly Auckland-Hobart, Auckland-Adelaide and Auckland/Wellington to Canberra.

While these benefits have been touted by Qantas and Air New Zealand in the past two weeks, they have now been made more specific, with total net benefits adding up to $1.43 billion over five years.

Another, much shorter list provided by Air New Zealand is the catalogue of public disadvantages expected to result from the buy-in.

They are: a possibility of a rise in airfares and hence reduction in number of travellers, reduction of competition and restrictions on Air New Zealand's capability to grow into the Australian domestic market and beyond. Also included in this list was the "perceived loss of national ownership of the flag-carrying airline".

Competition regulators on both sides of the Tasman have warned they will not be rushed into a decision. The Commerce Commission has announced a mid-February deadline for submissions, followed by a public conference.

At its core, the proposed deal entails all airline activities of Air New Zealand being combined with those parts of Qantas that operate to, from or within New Zealand.

Commercial management of these activities will be the responsibility of Air New Zealand. Qantas will, over time, take up to a 22.5 per cent stake in the airline, investing some $550 million. The New Zealand Government will continue to be the airline's major shareholder with 64 per cent of its shares.

An announcement from Transport Minister Paul Swain is due next week on whether the Government agrees with the deal in principle.

Exactly how the competition regulators will develop a system of checks and balances on the new arrangement is unclear.

Keeping a close watch on fares and pricing will be difficult, given the industry's complex pricing and seat allocation systems.

Norris said yesterday the biggest hurdle the airline faced was gaining public acceptance of Qantas as its partner. "If Air New Zealand could choose any airline in the world with which to form a commercially viable alliance, our first choice would be Qantas."