Sat "Weekend Australian"
Airline deal needs help to get off the ground
April 11, 2003
THE Australian and New Zealand Governments will have to twist their trade practices regulators' arms if the proposed Qantas-Air New Zealand alliance is to come to fruition.
Yesterday, the Australian Competition and Consumer Commission and the NZ Commerce Commission both knocked back the proposal – which includes an injection of $500 million for a 22.5 per cent stake in the Kiwi airline.
In separate draft determinations, both said it would be highly anti-competitive, substantially lessen competition, and any benefits would be far outweighed by detriments.
And the ACCC did not think it was in the national interest.
The airlines could offer undertakings in an attempt to obtain authorisation. But while the NZCC left that door open, the ACCC virtually slammed it shut. Using surprisingly strong language outgoing ACCC chairman Allan Fels said there was "extremely limited" potential for undertakings to make such a difference that authorisation could be granted. That statement has a ring of finality about it.
Qantas and Air NZ offered to negotiate undertakings for facilitating new entries on the trans-Tasman route and in relation to capacity and locking in claimed public benefits. The ACCC didn't think much of them. It thought they'd do little to alleviate its concerns and that they were heavily qualified, difficult to enforce and required monitoring.
This suggests that whether or not the NZCC changes its mind, the ACCC is unlikely to. The proposal cannot proceed unless it is approved by both.
The hard-line approach of both regulators is surprising, given that both the Australian and NZ Governments favour the alliance. The NZ Government is particularly interested in the outcome, because it was forced to pump in $NZ855 million ($780 million) to rescue Air NZ after the collapse of its Australian offshoot, Ansett Airlines. It's reluctant to commit further public funds.
Qantas and Air NZ might have to ask their governments to "persuade" their respective regulators that the proposal is in the national interest. The ACCC has statutory independence but has always been a politically savvy organisation.
But Fels is due to depart for academe shortly and may be hard to deflect. He may see this as his last hurrah. The ACCC has had some reverses recently, including the fiasco of its investigation into Caltex, Mobil and Shell, and its High Court losses to Boral over predatory pricing and to shopping centre landlords over unconscionable conduct. Fels may think he's on a winner this time.
As a last resort, the governments could consider legislation – the NZ Government used it to restructure its dairying industry through the merger of the major co-operatives to form Fonterra. But it must be wondered whether the Australian Government would go that far.
Qantas's national interest appears to be that the commercial alliance is necessary to ensure a viable Australasian aviation industry.
Neither airline resorted to the "failing firm" argument: that Air NZ would collapse if the alliance didn't proceed. That would have been hard to argue, given that the NZ Government has deep pockets. It might be reluctant to commit more funds to the Kiwi airline, but it has the capacity to do so.
But that doesn't necessarily mean that the NZ airline would have carte blanche to feed off the public purse. It may be that if the proposal doesn't go ahead, the NZ airline will find itself on drip feed.
Air NZ's concern is that if the proposal doesn't proceed it will inevitably be squeezed between any new entrant and Qantas, particularly if the new entrant is a discount fare operator such as Virgin Blue. That was Ansett's fate. Faced with competition from discount operators, the weakest of the full service airlines collapsed.
Qantas chief executive Geoff Dixon yesterday attacked both regulators, claiming it was remarkable they both seemed to ignore the continuing crisis in the global aviation industry, and the realities of the marketplace.
Fels is unlikely to be swayed. As proposed, the alliance would result in Qantas and Air NZ co-ordinating schedules and pricing for all flights to, from and within NZ. They would essentially operate as a unit.
That would effectively turn an oligopoly into a monopoly and give them control of more than 90 per cent of the passenger market, and more than 70 per cent of the air freight market, The ACCC believes that result would be higher charges.
The NZCC's analysis further demonstrates why the chasm between the airlines and the regulators will be so difficult to bridge. The airlines estimated the benefits of the alliance would total $236 million per annum by year three, and the detriments only $10,3 million: a net benefit of $226 million.
But the NZCC estimates the benefits at only $30.2 million to $46.3 million, resulting in a net detriment of between $155.7 million and $401.8 million.
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