Air NZ says no alternative partners to Qantas

6.00pm

Air New Zealand considered forming an alliance with Australian cut-price flier Virgin Blue but decided it would not have been satisfactory long-term.

Air NZ chief executive Ralph Norris today told the Commerce Commission's hearing into its proposed alliance with Qantas there were no alternative partners.

Qantas wants to buy a 22.5 per cent stake in Air NZ for $550 million, resulting in Air NZ managing all flights to, from and within New Zealand, and giving the combined entity a market share advantage on nearly all trans-Tasman routes.

Air NZ told the commission its position had improved since it was almost dragged down by the collapse of its Ansett Australia business in 2001, but it would not survive in its current form if Qantas launched a war of attrition.

Mr Norris said two full service airlines could not continue if a low cost, value-based airline such as Virgin Blue entered the trans-Tasman market.

When asked if it had considered an alliance with Virgin Blue instead of Qantas, Mr Norris said "a full service airline/value-based airline alliance would be almost impossible to consummate".

Air NZ concentrated on offering a seamless network. Price was also a consideration, but the airline had higher costs.

A value-based airline concentrated on low price fares, point-to-point traffic, and timeliness.

There would be temporary benefits, but Virgin Blue would not be a satisfactory alliance partner with Air NZ long-term and would not offer the same benefits to the New Zealand economy or consumers as would a deal with Qantas.

"The unanimous view of the management team and of the board is that not only would an alliance with Virgin Blue not save Air NZ from the problems it faced, but that Virgin Blue required growth to promote itself and achieve a public offering" Mr Norris said.

The commission's strongly negative draft determination in April was "severely tainted" by the belief that a significant competitor would not enter the market within two years.

However, Air NZ said today it believed that Virgin Blue would start flying in New Zealand well before that.

Air NZ's generally loss-making international business was expected to make a small profit this year on the back of New Zealand's image as a safe destination after the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome (Sars).

Qantas chief executive Geoff Dixon, addressing the hearing from Australia, said Qantas needed the alliance with Air NZ but repeated the probability of a war of attrition if it did not proceed.

"Why not let the two full service airlines fight it out and the most efficient one win? If that's the way people want it, scorched earth policy and... red ink everywhere...

"I believe that consolidation when you've got two such important companies as Qantas and Air NZ is a much better outcome..."

"Should the alliance not be authorised, Qantas will have no choice but to continue growing its markets."

The previously loss-making Tasman route had become profitable in the last year, Mr Dixon said. Its New Zealand domestic business was "certainly not profitable", but Qantas considered it an important part of its home market and would compete vigorously to increase its market share.

Air NZ and Qantas accepted that their proposal would reduce competition, but argue the public good from an increased 50,000 tourists to New Zealand outweighed the detriments.

However, the commission in its draft determination did not accept the airlines' economic model that there would be a public benefit of $256 million a year after three years.

It found the alliance would cost the public a net $467 million a year after three years.

The Commerce Commission also estimated fares would rise up to 48 per cent if the alliance went ahead.

The hearing is scheduled to take a week.

Air NZ shares closed up 1c at 50c today.

- NZPA