Wirraway
24th Jun 2003, 03:12
Tues "Melbourne Age"
The ball is in Virgin's court
June 24 2003
There was more than a tinge of desperation in Ralph Norris's plea to competition regulators yesterday to approve the controversial alliance between Qantas and Air New Zealand. Norris, Air NZ's chief executive officer, knows the chances of the NZ Commerce Commission and Australian Competition and Consumer Commission withdrawing their opposition to the alliance are almost non-existent.
Less than a fortnight ago the NZCC revised its estimate of net detriment to consumers as a result of the alliance from its original estimate of $NZ155-$NZ402 million within three years ($A135-$A350 million) to $NZ195-$NZ466 million.
That revision was sufficient to convince most observers of the airlines that the slim hope of a clearance had vanished, despite the proposed entry of Emirates Airlines to the NZ industry and Virgin Blue's application for rights to fly to NZ - an application conditional on the nature of the regulators' final ruling.
Norris warned yesterday that, without the $400 million a year of cost savings from the alliance and the $500 million of capital from Qantas that would cement it, his airline was acutely vulnerable.
The present head-to-head competition between Air NZ and Qantas was unsustainable, he said.
If a budget airline (read Virgin Blue) were to be launched in NZ, the consequences would range from the withdrawal or failure of one airline to Air NZ being made vulnerable to full takeover or forced to rely on ongoing state support.
Norris and his team have done a remarkable job of stabilising Air NZ and improving its competitive and financial positions, given the difficult conditions within the global industry.
His dire warnings of the prospects for Air NZ if the regulators' maintain their stances could be regarded as cynical and/or alarmist.
Air NZ has, however, had a preview of what might happen in NZ if it can't secure a big brother.
Ansett was run down and ill-prepared for the fare wars that broke out when Impulse and Virgin Blue mounted their assault on the Australian domestic market and destroyed it and wounded its parent, Air NZ. Air NZ is better managed and government-controlled, but remains undercapitalised and, post-Ansett, over-reliant on a tiny domestic market.
Virgin Blue could trade a contribution to helping to get the alliance approved for a profitable piece of a competitive duopoly.
The lesson from Ansett's demise is that in a contest between two full-service airlines and a budget airline start-up, the weaker of the full-service carriers is vulnerable. If Virgin Blue launches an NZ campaign, or a credible third player emerges with a budget airline strategy, Air NZ will have no room to manoeuvre.
It would be dependent on its ability to secure open-ended access to new capital from the New Zealand taxpayer, which Wellington has said it will not provide.
Both the NZ and Australian Governments are supportive of the alliance and its potential to secure their national flag carriers' medium-term futures within a volatile and unprofitable global industry.
While Norris indicated that Air NZ and Qantas had made further submissions to the regulators, which include challenges to the economic assumptions on which the regulators have based their opposition (Air NZ says the alliance would generate $NZ189-$NZ256 million, or $A164-$A223 million, of annual net benefits) it is improbable that the airlines could prove no competitive detriment from operating in tandem within the NZ market and on the cross-Tasman routes.
Virgin Blue has been careful not to help them make their case, indicating its attitude towards entering the market is conditional on the terms of access and, in particular, the fate of Air NZ's discount airline, Freedom Air (which Virgin Blue would like to buy or see shut down).
Norris made it clear that Freedom's role in his business was non-negotiable, although he and Qantas have offered undertakings they claim would facilitate Virgin Blue's entry.
Unless and until Virgin Blue makes a commitment to entering the market in a meaningful fashion, the regulators will remain unconvinced that the alliance won't produce an effective monopoly in NZ and on the trans-Tasman routes and increase Qantas's dominance of the Australasia/US routes.
The dilemma for the airlines and the regulators is that they are probably both right. The alliance, in isolation, would be highly anti-competitive and threaten the interests of consumers in both jurisdictions, but without it Air NZ could be wiped out if Qantas decides to turn the competitive heat up and/or Virgin Blue entered the market.
The reconciling item, the development that would provide comfort for the regulators, is a long-term commitment from Virgin Blue to the NZ market.
Virgin Blue is far too street smart to provide that commitment in support of the alliance unless the quid pro quo is overwhelmingly attractive.
Virgin Blue doesn't have to enter the NZ market, but if it does it knows that without the alliance both Air NZ and Qantas, but Air NZ in particular, will find it more difficult to respond to its pricing strategies.
If they were to get approval, even if it weren't given the opportunity to acquire Freedom in a forced sale or see it shut down Virgin Blue would receive substantial concessions and an opportunity to build the sensibly competitive and mutually profitable relationship with them that it has with Qantas in this market.
Neither the NZ Commerce Commission nor the ACCC will want to risk their national flag carriers. They need a circuit breaker as much as Air NZ or Qantas do, although Qantas does have the option of competing Air NZ into the ground.
At this stage, however, only Virgin Blue can provide the solution that enables the alliance to proceed without the risk of material consumer detriment.
It could sit on the sidelines and wait for the conclusive rejection of the alliance and have the option of joining Qantas in the assault or waiting for the dust to settle. Or it could trade a contribution to helping to get the alliance approved for a profitable piece of a competitive duopoly.
[email protected]
=========================================
The ball is in Virgin's court
June 24 2003
There was more than a tinge of desperation in Ralph Norris's plea to competition regulators yesterday to approve the controversial alliance between Qantas and Air New Zealand. Norris, Air NZ's chief executive officer, knows the chances of the NZ Commerce Commission and Australian Competition and Consumer Commission withdrawing their opposition to the alliance are almost non-existent.
Less than a fortnight ago the NZCC revised its estimate of net detriment to consumers as a result of the alliance from its original estimate of $NZ155-$NZ402 million within three years ($A135-$A350 million) to $NZ195-$NZ466 million.
That revision was sufficient to convince most observers of the airlines that the slim hope of a clearance had vanished, despite the proposed entry of Emirates Airlines to the NZ industry and Virgin Blue's application for rights to fly to NZ - an application conditional on the nature of the regulators' final ruling.
Norris warned yesterday that, without the $400 million a year of cost savings from the alliance and the $500 million of capital from Qantas that would cement it, his airline was acutely vulnerable.
The present head-to-head competition between Air NZ and Qantas was unsustainable, he said.
If a budget airline (read Virgin Blue) were to be launched in NZ, the consequences would range from the withdrawal or failure of one airline to Air NZ being made vulnerable to full takeover or forced to rely on ongoing state support.
Norris and his team have done a remarkable job of stabilising Air NZ and improving its competitive and financial positions, given the difficult conditions within the global industry.
His dire warnings of the prospects for Air NZ if the regulators' maintain their stances could be regarded as cynical and/or alarmist.
Air NZ has, however, had a preview of what might happen in NZ if it can't secure a big brother.
Ansett was run down and ill-prepared for the fare wars that broke out when Impulse and Virgin Blue mounted their assault on the Australian domestic market and destroyed it and wounded its parent, Air NZ. Air NZ is better managed and government-controlled, but remains undercapitalised and, post-Ansett, over-reliant on a tiny domestic market.
Virgin Blue could trade a contribution to helping to get the alliance approved for a profitable piece of a competitive duopoly.
The lesson from Ansett's demise is that in a contest between two full-service airlines and a budget airline start-up, the weaker of the full-service carriers is vulnerable. If Virgin Blue launches an NZ campaign, or a credible third player emerges with a budget airline strategy, Air NZ will have no room to manoeuvre.
It would be dependent on its ability to secure open-ended access to new capital from the New Zealand taxpayer, which Wellington has said it will not provide.
Both the NZ and Australian Governments are supportive of the alliance and its potential to secure their national flag carriers' medium-term futures within a volatile and unprofitable global industry.
While Norris indicated that Air NZ and Qantas had made further submissions to the regulators, which include challenges to the economic assumptions on which the regulators have based their opposition (Air NZ says the alliance would generate $NZ189-$NZ256 million, or $A164-$A223 million, of annual net benefits) it is improbable that the airlines could prove no competitive detriment from operating in tandem within the NZ market and on the cross-Tasman routes.
Virgin Blue has been careful not to help them make their case, indicating its attitude towards entering the market is conditional on the terms of access and, in particular, the fate of Air NZ's discount airline, Freedom Air (which Virgin Blue would like to buy or see shut down).
Norris made it clear that Freedom's role in his business was non-negotiable, although he and Qantas have offered undertakings they claim would facilitate Virgin Blue's entry.
Unless and until Virgin Blue makes a commitment to entering the market in a meaningful fashion, the regulators will remain unconvinced that the alliance won't produce an effective monopoly in NZ and on the trans-Tasman routes and increase Qantas's dominance of the Australasia/US routes.
The dilemma for the airlines and the regulators is that they are probably both right. The alliance, in isolation, would be highly anti-competitive and threaten the interests of consumers in both jurisdictions, but without it Air NZ could be wiped out if Qantas decides to turn the competitive heat up and/or Virgin Blue entered the market.
The reconciling item, the development that would provide comfort for the regulators, is a long-term commitment from Virgin Blue to the NZ market.
Virgin Blue is far too street smart to provide that commitment in support of the alliance unless the quid pro quo is overwhelmingly attractive.
Virgin Blue doesn't have to enter the NZ market, but if it does it knows that without the alliance both Air NZ and Qantas, but Air NZ in particular, will find it more difficult to respond to its pricing strategies.
If they were to get approval, even if it weren't given the opportunity to acquire Freedom in a forced sale or see it shut down Virgin Blue would receive substantial concessions and an opportunity to build the sensibly competitive and mutually profitable relationship with them that it has with Qantas in this market.
Neither the NZ Commerce Commission nor the ACCC will want to risk their national flag carriers. They need a circuit breaker as much as Air NZ or Qantas do, although Qantas does have the option of competing Air NZ into the ground.
At this stage, however, only Virgin Blue can provide the solution that enables the alliance to proceed without the risk of material consumer detriment.
It could sit on the sidelines and wait for the conclusive rejection of the alliance and have the option of joining Qantas in the assault or waiting for the dust to settle. Or it could trade a contribution to helping to get the alliance approved for a profitable piece of a competitive duopoly.
[email protected]
=========================================