Australia's competition regulator is intending to reject the proposed tie-up between Air New Zealand and Virgin Blue on trans-Tasman services.
The two carrier disclosed their plan for codesharing and other combined activities in May and put it forward for consideration by the Australian Competition and Consumer Commission.
But the proposal has generated strong opposition and the Commission says today that it has drafted a verdict which will "deny authorisation" to the carriers.
Chairman Graeme Samuel says the Commission considers the alliance between Air New Zealand and Virgin Blue is "likely to reduce competition in the market for trans-Tasman air passenger services".
It bases its finding on its belief that Virgin Blue acts as a "significant competitor" to Air New Zealand and that the tie-up would raise competition concerns on several routes - accounting for a quarter of passenger traffic - between the carrier's home countries.
The situation has been exacerbated, the Commission says, by the "removal of the constraint" of Virgin Blue's Pacific Blue operation during the carrier's network restructuring.
While it accepts that there are certain benefits to the tie-up with Air New Zealand, the Commission has "doubts about the magnitude" of these and remains unconvinced that trans-Tasman services would be more competitive than if the two airlines remained separate.
But it also states that it is prepared to hear further evidence from the two airlines that their proposal will promote, rather than reduce, trans-Tasman competition.