Competition regulators face one of their toughest tests in deciding whether to approve the equity alliance between Air New Zealand (ANZ) and Qantas Airways. The airlines warn that without the alliance ANZ could be left as a largely domestic operation.

The airlines acknowledge the tie-up would restrict competition - a concession underscored by United Airways' recent decision to drop USA-New Zealand services by April - but claim the alliance's public benefits outweigh that.

Regulators will certainly scrutinise those predicted benefits, but they may devote more attention to the alleged downside of not approving the deal. ANZ and Qantas have set out in painful detail what they think would happen in that event.

The alternative, they say, is for Qantas to boost capacity between Australia and New Zealand, and to add flights within New Zealand, as it is permitted to do under the Australia-New Zealand air services accord. Subject to caps, Qantas would also add Auckland-Los Angeles flights. The combined effect, the airlines say, would gradually undercut ANZ's viability. Without more capital from Wellington, ANZ could eventually lose this "war of attrition".

"There is a real risk," says New Zealand finance minister Michael Cullen, "that ANZ would shrink back to being largely a domestic operation with very little long-haul coverage at all." Peter Harbison, general manager of the Centre for Asia-Pacific Aviation, encapsulates how the airlines see the alliance: "Qantas wants it and Air New Zealand needs it."

Two ironies emerge from the submission. Firstly, it implies that the liberal Australia-New Zealand air services regime is failing in its aim of promoting competition. The unrestricted cabotage and third/fourth freedoms plus liberal fifth freedoms that it allows would effectively be used by Qantas to undercut ANZ. Regulators are now being asked to approve a more anti-competitive result than the traditional bilateral which trades rights on a reciprocal basis.

Secondly, their application asks the authorities to approve the deal because one of the applicants would anyway try to reach the same anti-competitive result without it. According to Harbison: "The proposal offers a way to achieve by regulatory means what will otherwise occur in the marketplace."

Source: Airline Business