Wirraway
10th Sep 2003, 00:47
Wed "Melbourne Age"
Competition will finally rule the skies
September 10, 2003
The most interesting reaction to the Australian Competition and Consumer Commission's decision to deny approval for the proposed Qantas-Air New Zealand alliance has come from Virgin Blue.
David Huttner, Virgin Blue's head of commercial operations, said the rejection would delay the ramp-up of his airline's NZ business.
It will do more than that as, in their attempts to win regulatory approval, the incumbents offered a raft of concessions and undertakings to smooth Virgin Blue's entry to the trans-Tasman market and provide it with insulation from a competitive onslaught by the allies.
Now there is no near-term prospect of the alliance being formed, those concessions will be whipped off the table and Virgin Blue will have to build its NZ business from scratch and in the expectation that Air NZ and Qantas will defend their patches aggressively.
That won't deter Virgin Blue, which has confidence in its business model and its ability to take on full-service competitors, but it will make for a slower and rougher take-off of its NZ operations.
The ACCC's decision was expected, given the strength of its previous opposition to the proposal. Allan Fels didn't leave his successor, Graeme Samuel, much room to manoeuvre even if Samuel were inclined to be more sympathetic to the flag carriers' appeals to their national interests.
Not that Samuel would be expected to be sympathetic. Any conventional competition assessment would have found unpalatable the prospect of a link between Australasia's big two carriers.
But aviation, of course, is anything but conventional. The global industry is structurally unsound, chronically unprofitable, undermined by carriers that fly for national pride not profit, extremely sensitive to external shocks and highly leveraged to volatile volumes.
Traditional full-service airlines are ill-prepared to compete with the new value-based airlines such as Virgin Blue. Indeed they have yet to develop an effective response.
The alliance offered Air NZ and Qantas time, $400 million a year of cost savings and reduced competition within the full-service sector of the trans-Tasman and NZ domestic industry to offset the inroads Virgin Blue would make in the price-sensitive segments.
While the carriers have said they will appeal against the ACCC decision to the Australian Competition Tribunal, and are optimistic that the NZ Commerce Commission will be more open-minded, effectively an alliance simply is not feasible for at least another year or two.
It will only become feasible if there is demonstrated structural change in the market; if they can show that one or both of them have been badly damaged by new competitors and that the new competitors are entrenched.
That is possible. Virgin Blue's entry to the trans-Tasman and NZ markets will ignite a three-cornered contest, the effects of which will be exacerbated for the carriers - particularly Qantas - by Emirates' recent entry to the trans-Tasman market.
Qantas's chief executive, Geoff Dixon, knows there is an alternative route to the same objective of establishing dominance on both sides of the Tasman, albeit a more costly and traumatic one.
He has the balance sheet and breadth of operations to, in conjunction with Virgin Blue, beat up Air NZ so badly that the regulators accept that an alliance is better than the alternative.
Air NZ's domestic base is small and its reliance on international operations, where it has no meaningful competitive advantage and where conditions are volatile and profitability poor, is too large to give it much flexibility.
As its chairman, John Palmer, told the NZCC last month, it has neither the business structure nor balance sheet to cope with the shocks that routinely batter the industry, let alone with a pincer attack from Qantas and Virgin Blue.
In Qantas's case its scale and the breadth of its network, and in Virgin Blue's case its cost advantages, would confer threatening and probably decisive competitive advantage.
Air NZ's chief executive, Ralph Norris, has referred to a "short window of opportunity" for the airline to solve the threat to its medium and long-term survival posed by value-based carriers and its current business structure. The ACCC has just slammed shut that window.
Unless the NZ Government, which owns 81 per cent of Air NZ after rescuing it from the verge of collapse, wants to write blank cheques for the foreseeable future, Air NZ is now acutely vulnerable.
Virgin Blue probably would have preferred the more leisurely, less combative entry to the market that the alliance and the supporting undertakings would have provided. They would have created a market structure similar to that shared by Qantas and Virgin Blue in Australia.
It knows from its Ansett experience, however, that it can finesse its way profitably through a confrontation with two full-service airlines and bring immense pressure to bear on the weakest of those full-service competitors.
And, by the time it has entrenched itself in the NZ market and destabilised Air NZ sufficiently for the competition regulators to be more receptive to the concept of alliance, the alliance will produce a significantly weaker competitor than would have been the case had the initial Qantas-Air NZ application been approved.
It is difficult to argue against the ACCC's stance in the short term.
In the long term, however, the sensitivities of Australia's competition policy are likely to be overwhelmed by the brutal reality of competition itself.
[email protected]
============================================
Wed "Sydney Morning Herald"
Fares dogfight looms as Qantas merger refused
By Cosima Marriner and Scott Rochfort
September 10, 2003
The airline industry is bracing for a protracted and bloody trans-Tasman airfare war after the competition watchdog yesterday refused to accept Qantas's plan for an alliance with Air New Zealand.
The Australian Consumer and Competition Commission ruled the proposed merger would inevitably result in higher airfares and less choice for travellers.
Despite that finding, the Federal Government remains an ardent backer of the marriage.
The Transport Minister, John Anderson, said he supported the argument of the two airlines that the recent entry of Emirates and planned entry of Virgin Blue would ensure the trans-Tasman route remained competitive.
Qantas and Air New Zealand will appeal to the Australian Competition Tribunal.
But Qantas is already working on its own low-fare battle plan to match Air New Zealand's no-frills Tasman Express service, which begins on October 29. The budget service involves discounts of up to 26 per cent.
Industry sources said Qantas would announce within the next fortnight a replication of the domestic fare structure it introduced on July 1, which did away with minimum-stay requirements and reduced its fare types from 11 to five.
Like Tasman Express, which offers a one-way Sydney-Auckland fare for $243, Qantas is expected to introduce heavily discounted one-way tickets, which can only be bought over the internet.
Mr Anderson reiterated his support for the $490 million deal, which he said would ensure "stronger locally based carriers" and enable Qantas to boost its position in the international market.
But, presenting a near carbon-copy of the commission's preliminary findings in April, the ACCC's new chairman, Graeme Samuel, said: "The commission does not believe that you build strong, efficient and competitive airlines [by] allowing anti-competitive alliances.
"Air New Zealand told the commission only last week that even if the alliance does not go ahead, it will be competing strongly on the trans-Tasman route in the medium term. That would be competition lost to consumers if the alliance proceeded."
The New Zealand Commerce Commission will make its own ruling on the planned alliance later this month. Many in the industry expect a positive result.
Several tourism industry lobby groups have called on Mr Anderson to intervene to ensure the ACCC's decision is reviewed.
The head of Qantas sales and marketing, John Borghetti, accused the watchdog of taking a short-term view of the industry and failing to take into account the ramifications of its decision.
Mr Borghetti questioned whether the regulator was waiting until the industry was broken before acting to fix it.
============================================
Competition will finally rule the skies
September 10, 2003
The most interesting reaction to the Australian Competition and Consumer Commission's decision to deny approval for the proposed Qantas-Air New Zealand alliance has come from Virgin Blue.
David Huttner, Virgin Blue's head of commercial operations, said the rejection would delay the ramp-up of his airline's NZ business.
It will do more than that as, in their attempts to win regulatory approval, the incumbents offered a raft of concessions and undertakings to smooth Virgin Blue's entry to the trans-Tasman market and provide it with insulation from a competitive onslaught by the allies.
Now there is no near-term prospect of the alliance being formed, those concessions will be whipped off the table and Virgin Blue will have to build its NZ business from scratch and in the expectation that Air NZ and Qantas will defend their patches aggressively.
That won't deter Virgin Blue, which has confidence in its business model and its ability to take on full-service competitors, but it will make for a slower and rougher take-off of its NZ operations.
The ACCC's decision was expected, given the strength of its previous opposition to the proposal. Allan Fels didn't leave his successor, Graeme Samuel, much room to manoeuvre even if Samuel were inclined to be more sympathetic to the flag carriers' appeals to their national interests.
Not that Samuel would be expected to be sympathetic. Any conventional competition assessment would have found unpalatable the prospect of a link between Australasia's big two carriers.
But aviation, of course, is anything but conventional. The global industry is structurally unsound, chronically unprofitable, undermined by carriers that fly for national pride not profit, extremely sensitive to external shocks and highly leveraged to volatile volumes.
Traditional full-service airlines are ill-prepared to compete with the new value-based airlines such as Virgin Blue. Indeed they have yet to develop an effective response.
The alliance offered Air NZ and Qantas time, $400 million a year of cost savings and reduced competition within the full-service sector of the trans-Tasman and NZ domestic industry to offset the inroads Virgin Blue would make in the price-sensitive segments.
While the carriers have said they will appeal against the ACCC decision to the Australian Competition Tribunal, and are optimistic that the NZ Commerce Commission will be more open-minded, effectively an alliance simply is not feasible for at least another year or two.
It will only become feasible if there is demonstrated structural change in the market; if they can show that one or both of them have been badly damaged by new competitors and that the new competitors are entrenched.
That is possible. Virgin Blue's entry to the trans-Tasman and NZ markets will ignite a three-cornered contest, the effects of which will be exacerbated for the carriers - particularly Qantas - by Emirates' recent entry to the trans-Tasman market.
Qantas's chief executive, Geoff Dixon, knows there is an alternative route to the same objective of establishing dominance on both sides of the Tasman, albeit a more costly and traumatic one.
He has the balance sheet and breadth of operations to, in conjunction with Virgin Blue, beat up Air NZ so badly that the regulators accept that an alliance is better than the alternative.
Air NZ's domestic base is small and its reliance on international operations, where it has no meaningful competitive advantage and where conditions are volatile and profitability poor, is too large to give it much flexibility.
As its chairman, John Palmer, told the NZCC last month, it has neither the business structure nor balance sheet to cope with the shocks that routinely batter the industry, let alone with a pincer attack from Qantas and Virgin Blue.
In Qantas's case its scale and the breadth of its network, and in Virgin Blue's case its cost advantages, would confer threatening and probably decisive competitive advantage.
Air NZ's chief executive, Ralph Norris, has referred to a "short window of opportunity" for the airline to solve the threat to its medium and long-term survival posed by value-based carriers and its current business structure. The ACCC has just slammed shut that window.
Unless the NZ Government, which owns 81 per cent of Air NZ after rescuing it from the verge of collapse, wants to write blank cheques for the foreseeable future, Air NZ is now acutely vulnerable.
Virgin Blue probably would have preferred the more leisurely, less combative entry to the market that the alliance and the supporting undertakings would have provided. They would have created a market structure similar to that shared by Qantas and Virgin Blue in Australia.
It knows from its Ansett experience, however, that it can finesse its way profitably through a confrontation with two full-service airlines and bring immense pressure to bear on the weakest of those full-service competitors.
And, by the time it has entrenched itself in the NZ market and destabilised Air NZ sufficiently for the competition regulators to be more receptive to the concept of alliance, the alliance will produce a significantly weaker competitor than would have been the case had the initial Qantas-Air NZ application been approved.
It is difficult to argue against the ACCC's stance in the short term.
In the long term, however, the sensitivities of Australia's competition policy are likely to be overwhelmed by the brutal reality of competition itself.
[email protected]
============================================
Wed "Sydney Morning Herald"
Fares dogfight looms as Qantas merger refused
By Cosima Marriner and Scott Rochfort
September 10, 2003
The airline industry is bracing for a protracted and bloody trans-Tasman airfare war after the competition watchdog yesterday refused to accept Qantas's plan for an alliance with Air New Zealand.
The Australian Consumer and Competition Commission ruled the proposed merger would inevitably result in higher airfares and less choice for travellers.
Despite that finding, the Federal Government remains an ardent backer of the marriage.
The Transport Minister, John Anderson, said he supported the argument of the two airlines that the recent entry of Emirates and planned entry of Virgin Blue would ensure the trans-Tasman route remained competitive.
Qantas and Air New Zealand will appeal to the Australian Competition Tribunal.
But Qantas is already working on its own low-fare battle plan to match Air New Zealand's no-frills Tasman Express service, which begins on October 29. The budget service involves discounts of up to 26 per cent.
Industry sources said Qantas would announce within the next fortnight a replication of the domestic fare structure it introduced on July 1, which did away with minimum-stay requirements and reduced its fare types from 11 to five.
Like Tasman Express, which offers a one-way Sydney-Auckland fare for $243, Qantas is expected to introduce heavily discounted one-way tickets, which can only be bought over the internet.
Mr Anderson reiterated his support for the $490 million deal, which he said would ensure "stronger locally based carriers" and enable Qantas to boost its position in the international market.
But, presenting a near carbon-copy of the commission's preliminary findings in April, the ACCC's new chairman, Graeme Samuel, said: "The commission does not believe that you build strong, efficient and competitive airlines [by] allowing anti-competitive alliances.
"Air New Zealand told the commission only last week that even if the alliance does not go ahead, it will be competing strongly on the trans-Tasman route in the medium term. That would be competition lost to consumers if the alliance proceeded."
The New Zealand Commerce Commission will make its own ruling on the planned alliance later this month. Many in the industry expect a positive result.
Several tourism industry lobby groups have called on Mr Anderson to intervene to ensure the ACCC's decision is reviewed.
The head of Qantas sales and marketing, John Borghetti, accused the watchdog of taking a short-term view of the industry and failing to take into account the ramifications of its decision.
Mr Borghetti questioned whether the regulator was waiting until the industry was broken before acting to fix it.
============================================