The Australian Competiton and Consumer Commission (ACCC) has proposed to approve the alliance between Air New Zealand (ANZ) and Virgin Australia for a further three years, albeit with conditions previously opposed by the two airlines.
"The ACCC considers that the alliance is likely to result in material public benefits by allowing the airlines to link Virgin Australia's domestic Australian network and sales presence with Air New Zealand's domestic New Zealand network and sales presence to contribute to the formation of a second integrated Australasian network," says ACCC commissioner Dr Jill Walker.
ANZ and Virgin entered into an alliance in December 2010 after receiving authorisation from the ACCC to cooperate on trans-Tasman routes for three years. The two carriers applied for an extension of the alliance in March.
That application came as the ACCC granted authorisation to Qantas and Emirates to also work together on the trans-Tasman market, as part of their wider international alliance.
In a statement, the ACCC says that it considered that without reauthorising the alliance ,Virgin would be particularly disadvantaged on the trans-Tasman market. It also noted that the alliance is unlikely to reduce competition on the major routes, such as Sydney-Auckland, Melbourne-Wellington and Sydney-Christchurch
However, it adds that on eight other routes - including Christchurch-Melbourne, Wellington-Brisbane and Dunedin-Sydney - that the "alliance may affect competition". To remedy this, the ACCC has proposed to impose conditions requiring the carrriers to maintain a base level of capacity on those routes, and also provide certain data to the ACCC to allow it to assess the impact of the alliance on competition on those routes.
Similar conditions were also placed on the two carriers in the 2010 authorisation.
"The ACCC notes that the weighing up of likely public benefit and detriment was finely balanced and it was only with the proposed conditions that the ACCC reached the preliminary view that the alliance is likely to result in a net public benefit," says Dr Walker.
In their application submitted in March, ANZ and Virgin argued strongly against capacity conditions. They said that the removal of conditions would allow them to respond faster to major changes in the market, such as natural disasters.
While it welcomes the intention to approve the alliance, ANZ has indicated that it will continue to push for the capacity conditions to be dropped.
"The airline considers that in the current market structure, capacity conditions are not necessary to maintain strong competition in the trans-Tasman market and will work with the ACCC to understand its rationale for requiring such conditions and the limited three year authorisation period," it says.
The ACCC is proposing to reauthorise the alliance for only three years, less than the five years requested by the two carriers.
Virgin says that it "welcomes the ACCC's draft approval of the proposed alliance" and that "It will review the period of the proposed authorisation and the proposed conditions and respond to the ACCC as soon as possible."
The regulator has invited interested parties to make submissions before 24 July, and is expected to make its final determination in September.
The alliance will also require approval from New Zealand's Ministry of Transport. ANZ says it expects a decision from that agency around the time of the ACCC's final decision in September.
ANZ is the largest shareholder in Virgin with a 23% stake. It is also seeking permission from the ACCC and the Foreign Investment Review Board to take a further 3% stake in the company.