ANALYSIS: A trans-Tasman duopoly emerges

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In the space of only a few months, Australia's competition regulator has made two major decisions that will determine the dynamics of the trans-Tasman market for at least the next three years.

In March, the Australian Competition and Consumer Commission approved the proposal by Emirates and the Qantas group - which includes Qantas's budget subsidiary Jetstar Airways - to extend their alliance to trans-Tasman services.

That came as Virgin and Air New Zealand (ANZ) made their application to the ACCC seeking to extend their authorised alliance on trans-Tasman routes. They also sought to loosen a capacity condition that required the two airlines to maintain a base level of capacity across the market.

The ACCC has now issued a draft determination in which it proposes reauthorising the alliance until the end of 2016. Assuming that this determination is formalised in September as the ACCC expects, the market will largely be dominated by the two groups of carriers.

Data from Flightmaps Analytics shows that the two alliances combined will account for 96% of all seats between Australia and New Zealand, with the remaining 4% from fifth-freedom carriers LAN Airlines and China Airlines. ANZ accounts for 38%, Qantas 20%, Virgin Australia 15%, Emirates 14% and Jetstar Airways 9%.

However, Flightmaps also shows that the two alliances have vastly different reaches.

The Qantas-Emirates alliance's capacity is concentrated on services linking Australia's east coast to Auckland and Christchurch (see below).

The Virgin-ANZ alliance reaches more cities, such as Perth, Dunedin and Rotorua (see below).

The data also shows that Virgin, which has fewer seats than even Emirates across the Tasman, has a significant role in counterbalancing the Qantas-Emirates alliance. That may have been a factor in the ACCC's earlier approval of the latter alliance and certainly played a large role in the current determination, particularly in consideration of the business market.

The ACCC "considers that the Alliance is likely to have improved, and is likely to continue to strengthen, Virgin Australia's ability to contest the business traveller segment of the trans-Tasman, and that this is likely to result in material public benefits", it says.

While both ANZ and Virgin have said that they welcome the draft determination, there are subjects on which they are likely to push the ACCC before the regulator issues a final determination.

The most contentious relates to the capacity conditions for eight routes: Christchurch to Brisbane and Melbourne; Wellington and Queenstown to Brisbane; Auckland-Gold Coast; and Dunedin to Brisbane, Melbourne and Sydney.

ANZ and Virgin, in their March submission to the ACCC, argued strongly that capacity conditions should be dropped altogether. They cited circumstances, such as the 2011 Christchurch earthquake, that meant they were not permitted to make capacity adjustments without ACCC permission, leading to short-term losses for the two carriers.

However, it seems that the ACCC will have little choice but to impose such a condition, as the rival alliance appears unwilling to add more capacity to the market.

"Qantas and Emirates consider that there is excess capacity in the trans-Tasman market," says the ACCC. "Qantas's submissions to the ACCC suggest that it does not plan to increase its capacity on trans-Tasman routes in the short-medium term."

On balance, the ACCC seems to think that both airlines will gain more from the alliance than they lose through the imposition of capacity conditions, and will be willing to accept the compromise.

Given the strategic importance of the relationship between Virgin and ANZ, it seems likely that this is a pill the two airlines will swallow in order to secure their position against their adversaries in the new duopoly.