On a wing and a prayer

By CHRIS DANIELS

Samoan-born travel agency owner and former MP Arthur Anae was delighted to hear Air New Zealand and Qantas had abandoned their two-year battle for a coalition this week.

The alliance would have created a monopoly on many Pacific Island routes. Pacific Islanders, who have long complained about what they saw as extortionate airfares and poor service, could have seen fares between, say, Auckland and Nadi increase by 11 per cent.

In short, the alliance risked destroying all the gains recent competition had brought to island travellers - new cheap fares, better services and, more importantly, more people flying and increased tourism and foreign currency earnings.

"We've proved that reducing the price, the seat numbers have gone up - more people are travelling and the market is there," Anae says.

"I've always maintained that [if] the price rises, the market goes ... That was the scary thing - had they merged, they would have dominated the market."

Now, with the alliance laid to rest, routes between New Zealand, Australia and the Pacific Islands are set to become the next big battleground for the airlines.

Low-cost carrier Pacific Blue - which makes no secret of being "opportunistic" - is now looking to the Pacific Islands, rather than New Zealand's domestic travellers, for its future growth. Air New Zealand's budget wing, Freedom, is expected to expand its fleet of five planes to as many as 12.

High Court judge Rodney Hansen and lay specialist Kerrin Vautier delivered the death blow to the alliance this week, upholding last year's Commerce Commission ruling that the move would result in a substantial lessening of competition.

But the writing had been on the wall for some time. Air NZ and Qantas revealed as much when they abandoned, on appeal, many of their previous arguments of the plan, which would have seen Qantas buying 22.5 per cent of Air NZ for $550 million, the airlines co-ordinating services and sharing profits on all their flights to, from and within New Zealand.

The airlines said any potential damage to consumers would be offset by the potential for competition from a low-cost airline - primarily Virgin Blue's New Zealand operations, Pacific Blue.

Air NZ chief executive Ralph Norris and Qantas chief executive Geoff Dixon swallowed this week's decision with more than a hint of resignation.

Nursing a $20 million bill from their legal and other advisers, they protested it failed to recognise the trend for big airlines to merge.

Dixon nonetheless said it was time to "move on". Norris was less equivocal: " ... the alliance in the form that it was proposed is now dead."

The two men met in Sydney yesterday to take their first step down a new path of greater co-operation. This new-look alliance will be forged across the whole business, just so long as it does not break competition laws.

Plans for shared engineering, spare parts stockpiles, back office support (and the inevitable labour strife that will accompany such co-operation) are now being developed.

All this should mean that the cheaper domestic airfares, unveiled as part of Air NZ's "express" strategy, will stay, but the prospect of a Qantas-Air NZ price war is less likely than ever.

Closer to home, the death of the alliance dream is unlikely to have a dramatic impact on the New Zealand domestic aviation market, which since deregulation has been notable for the vast sums of money lost and regular financial ruin of its airlines.

In its arguments to the commission, Air NZ hyped up fears of Qantas destroying it in a price war - by dumping airline seats and taking big losses in order to gain market share.

We no longer hear such horror predictions from Air NZ, which says it now enjoys a good relationship with its former arch-rival.

Qantas is now expected to be happy just leaving Air NZ alone, keeping to its main trunk service and putting aside any expansion plans into the regions (if they ever existed).

If the two airlines had joined forces, commission economists expected fares on the Auckland-Wellington-Christchurch main trunk to jump 24 per cent.

This all leaves Nelson-based Origin Pacific - our second biggest airline - in the middle.

The reforging of a friendly relationship between Qantas and Air NZ has hit Origin hard. The cancellation of a crucial contract to carry Qantas passengers tipped it into near collapse in May.

New part-owner Mike Pero says any bad blood caused by this contract ending is now over and it is time to start talking to the Australians.

"We could form a relationship without any Commerce Commission problems with either one of those airlines. At the moment, Qantas would look like the most likely one," he says. "Qantas has a reasonable main trunk service, but nothing outside there.

"Between them and us, we could provide a damn good network as an alternative to Air New Zealand. Logic says that should happen - whether it does or not is probably totally in Qantas' hands," says Pero.

"It would be logical for them and us to talk again - our door is open, it would make sense because they are not offering people the ability to get to the regions.

"They will never grow unless they have a full network - we can provide that and have in the past."

Qantas, if its public relations and marketing machine is anything to go by, is in little hurry to expand domestic presence in New Zealand. Business Herald inquiries this week went unanswered, with regular phone calls to its Sydney headquarters not even returned.

The Australian flag carrier may prefer to concentrate on its long-haul business and its lucrative business flying European and North American travellers to and from Australia. Unlike Air NZ, it is protected from rivals by the Australian Government, which restricts the landing rights of foreign carriers such as Singapore Airlines.

Long-haul travellers should be little affected by the death of the alliance.

Competition to Asian destinations is keen, with Singapore Airlines, Cathay, Emirates, Garuda, Malaysian, Korean Air and Asiana all fighting for market share with Air NZ.

North American routes - where only Air NZ and Qantas fly nonstop - would have been dominated by the alliance, which would have turned the route into a monopoly. The commission expected alliance fares to jump by at least 14 per cent.

It said total New Zealand tourism would drop by more than 106,000 visitors a year, as travellers were put off visiting here by higher fares.

Speculation is now growing about whether Qantas may abandon its "oneworld" airline alliance and join Air NZ in the Star Alliance.

Star has a nearly 25 per cent share of world air travel. Oneworld carriers fly a little over 15 per cent. British Airways recently sold its 18.25 per cent shareholding in Qantas, freeing up the Australians to look more seriously at leaving oneworld.

But behind it all is the role of the New Zealand Government, which owns 82 per cent of Air NZ. Does it have an exit strategy? Finance Minister Michael Cullen said he was disappointed at the alliance being rejected and made it clear he did not want to remain the airline's owner forever.

In the long term at least, it seems clear that decisions made in the Beehive, not the airline boardrooms, will be the key to the future of New Zealand aviation and our national flag carrier.