Key Points:

Ozjet has confirmed that the trans-Tasman service to replace Freedom Air from Palmerston North has been cancelled, due to a takeover bid for the Australian airline.

Our Airline, previously Air Nauru, is bidding for Ozjet, which had proposed initially operating four days a week from Brisbane and Sydney to Palmerston North, starting on Monday.

"Ozjet announces with regret that due to recent merger talks which are nearing completion it is unable at this time to commence operations as envisaged on the 31st March, 2008," Ozjet chief executive Willie O'Neill said.

"The potential for trans-Tasman services and the opportunities that the Manawatu connection presented was first class and it regrettable that we can not move forward at this time."

All passengers booked on Ozjet services to and from Palmerston North will be fully refunded.

Ozjet contacted Palmerston North Airport on Wednesday, and was in meetings with Our Airline this afternoon, airport chief executive Garry Goodman said.

There was no immediate replacement, although the airport had been looking at its options.

"The biggest concern for me is the dent in consumers' confidence given that our confidence is still there for the operation of services. We've got caught up in something else that is nothing to do with the New Zealand sector," Mr Goodman said.

Ozjet also flies from Perth to the northern Australian settlement of Derby and to Bali, and from Norfolk Island to Brisbane, Melbourne, Newcastle and Sydney.

Ozjet took over the Air Nauru route between Norfolk Island and Australia after Air Nauru's sole Boeing 737 was seized by creditors.

The tiny island state of Nauru later relaunched the service as Our Airline with help from Taiwan.

Ozjet operates a fleet of Boeing 737-200 aircraft, which can carry up to 110 passengers.

Palmerston North airport had approached other Australian airlines last year to find a replacement for Freedom Air, which pulled out of Palmerston North citing a lack of demand. The move was part of Air New Zealand's revamp of its Tasman and Pacific Island services.