Air ownership rules must go

CHRISTOPHER KISSLING* and CHRISTOPHER FINDLAY* reflect on the implications of the proposed Qantas-Air New Zealand deal.

The proposal for Qantas to buy a 22.5 per cent holding in Air New Zealand will present consent authorities on both sides of the Tasman with tricky questions.

The most obvious is the market dominance in Australia and New Zealand of two carriers that seek to co-operate rather than compete head-to-head. But it's a dilemma based on an artificial distinction.

Qantas has manoeuvred adroitly to place Air NZ in a tight corner. What other airline would want to buy into a carrier with a cap on its shareholding while it faces both international and stiff domestic competition from Qantas as allowed in the aviation agreement between Australia and New Zealand? The foreign ownership limit comes from the rules of the international regulatory system on air transport.

Some analysts have suggested that Singapore Airlines would be a better alternative suitor. At least it is in the same Star Alliance as Air NZ.

Putting aside the bad blood generated by the Ansett Australia failure, what would Singapore gain?

The New Zealand market is small. Singapore Airlines has access to any New Zealand international airports if it wishes to exercise those rights under the Singapore-New Zealand liberal bilateral air service pact.

It could also fly across the Pacific under a multicountry agreement which includes the United States and New Zealand. It has little need of domestic feeder traffic from provincial airports in New Zealand.

But it needs a domestic network within Australia. Air NZ stymied Singapore's earlier move to get one by exercising its option to acquire 100 per cent of Ansett Australia. The price was too high. Now that airline is history. Air NZ almost followed.

Ansett Australia is not there to provide a domestic network linked with Qantas' foreign competitors. Air NZ lacks the resources to enter the Australian domestic market as Qantas has done in New Zealand.

Australia and Singapore could conclude a more open air services agreement allowing Singapore Airlines to operate freely to New Zealand or to the US. But it still needs a domestic Australian network to be an effective competitor.

Under Australian foreign investment rules, it could set up a wholly owned subsidiary to operate the domestic system and provide its own feed into its international services. It has the brand name and other assets to succeed, but it would have to take on both incumbents.

That could be messy and expensive. Qantas has its low-cost subsidiary Australian Airlines available to thump an entrant if retaliation is required. The threat of doing so, and of starting a real war, might be enough to deter pretenders.

What about Virgin Blue? It has been making noises about going international now it has a bigger Australian ownership. But for now it will probably play the regulatory game and see what it can get out of the conditions competition authorities impose on the merger.

So right now there's not much of a real threat of entry into the transtasman market from another full service carrier like Singapore Airlines, even if that right is granted by the consent authorities to encourage continued competition on Tasman and Pacific routes. And because of this, the regulator may balk at approving the deal.

But that, too, creates a problem. The consolidation of Qantas and Air NZ is the sort of adjustment we might have expected in an open market. It makes the whole business even more attractive to other foreign buyers.

So the challenge is to maintain competitive conditions. We don't have to accept that we should put up with a monopoly to get more effective competition later.

We must challenge the limits on foreign ownership of international carriers which come out of the dinosaur-like rules on international aviation and move to a more liberal rule on who is allowed to fly.

One popular option is the principal place of business rule. Under it, a carrier setting up a substantial Australian or New Zealand domestic business would be able to fly internationally too. It's a contradiction that there is no limit on foreigners in domestic operations in Australia or New Zealand but there is a limit on foreigners participating in carriers flying internationally from Australia or New Zealand.

Our new carrier could take a regional view. This rule would also open up the bidding for regional aviation assets, including Air NZ.

Meanwhile, use up your Air NZ airpoints faster than your Qantas frequent flyer points.

* Christopher Kissling is Professor of Transport Studies, Lincoln University, and Christopher Findlay is Professor of Economics, Asia Pacific School of Economics and Management, Australian National University.