The Australian Competition and Consumer Commission today issued a draft decision proposing to deny approval to a proposed alliance between Qantas Airways Limited and Air New Zealand Limited.
"The proposed alliance would be highly anti-competitive and offer little benefit", ACCC Chairman, Professor Allan Fels, said today.
The two airlines sought authorisation* for an alliance under which both would agree on matters such as flight schedules and fares on routes where both operate, including the trans-Tasman. Qantas would also take up to 22.5 per cent equity in Air New Zealand.
"The trans-Tasman route is Australia's largest passenger market. It accounts for more than 16 per cent of all travel to and from Australia. Qantas and Air New Zealand are the only effective competitors. Qantas has around 39 per cent of the market and Air New Zealand, including Freedom Air, around 52 per cent. The two airlines compete strongly and consumers benefit.
"If the proposed alliance goes ahead they will jointly control more than 90 per cent of the market. The market would move from a two-airlines market to an effective one-airline market. Passengers will be denied choice and increased air fares will be inevitable. Even if Virgin Blue enters the alliance would still dominate the market.
"The proposed alliance would also be anti-competitive in the Australia – North America market where Air New Zealand was a major player until it departed the route recently. The alliance would deter Air New Zealand from re-entering the route and providing critical competition to Qantas if either of the other operators, United and Air Canada, falters as is currently conceivable.
"In Australia, the proposed alliance would see Qantas domestic operations capture those passengers flying internationally with Air New Zealand. Qantas would increase its domestic market share and market power. The alliance would therefore shrink the portion of the domestic market available to other carriers and constrain them from entering or expanding that market.
"While their dominance of trans-Tasman air freight is not as great as for passenger travel, Qantas and Air New Zealand still hold around 73 per cent of the market. Qantas has 36 per cent and Air New Zealand 37 per cent. The next largest operator has seven per cent. The proposed alliance is very likely to result in upward pressure on freight rates. This would not be a good outcome for Australian importers and exporters".
The ACCC must examine the claimed public benefits of the proposed alliance as well as competition aspects.
Professor Fels said that on the benefit side the ACCC is not convinced that cost savings would be realised to the extent claimed by the airlines or be passed on to consumers in the less competitive environment under the alliance.
The airlines claim that if the alliance does not proceed they will engage in a “wasteful capacity war”, each adding significant numbers of aircraft to routes on which they compete. Most of the claimed cost savings arise from not engaging in that war. The Commission does not consider this a likely proposition.
The ACCC and tourism bodies agreed that the proposed alliance is unlikely to result in increased tourism or benefits to the economy from tourism.
Professor Fels said that the ACCC had examined undertakings proposed by Qantas and Air New Zealand and other parties to reduce the anti-competitive effects of the alliance. The airlines offered to negotiate undertakings in the areas of facilitating new entry on the trans-Tasman, and in relation to capacity and locking in claimed public benefits.
The Commission considered that the ability of the undertakings offered to control the behaviour proposed under the proposed alliance is limited. The undertakings offered were heavily qualified, difficult to enforce and required monitoring.
"The proposed alliance is highly anti-competitive and its benefits are small. Under these circumstance the potential for undertakings to make such a difference that authorisation could be granted is extremely limited".
The ACCC also considers that Qantas and Air New Zealand have underestimated Air New Zealand's future ability to compete if the proposed alliance does not proceed.
"Air New Zealand is currently competing very strongly with Qantas. Management initiatives in the cost and fare structure areas have contributed to the airline predicting very good financial results for 2002/03. These projections were recently re-affirmed even in the face of the current challenging conditions".
Following the release of the ACCC's draft determination the applicants and interested parties have the opportunity to call a conference to make oral submissions to the ACCC before a final decision is made. If a conference is called it will be held in Sydney on Thursday 2 May 2003. Final written submissions from the applicants or interested parties will need to be lodged with the ACCC by Thursday 9 May 2003.