The collapse of domestic airlines in both New Zealand and Australia has sparked a war of acquisition among the major survivors.

Qantas New Zealand has entered receivership, while Australia's Impulse Airlines, under threat of collapse, has agreed to be taken over by Qantas Airways. The reasons for these failures differ, but their consequences intertwine.

Qantas NZ never recovered from a pilots strike two years ago. When its current owners took charge last year, they hoped a new non-equity franchise with Qantas would kickstart traffic. The overseas feed helped, but it never dented the 65-70% domestic market share Air New Zealand (ANZ) enjoys.

Provincial routes proved to be the airline's undoing. Toward the end, only five of Qantas NZ's 18 routes were profitable. When Qantas learned in early April how badly off its namesake was, it toyed with a rescue but decided instead to wait for its franchisee's collapse, which came two weeks later.

That set off a scramble to fill the vacuum. Qantas provided temporary lift and now plans to launch scheduled service of its own this month. Where it will find the necessary aircraft remains an open question. Qantas has also agreed to codeshare with Origin Pacific Airlines, a turboprop operator in Nelson, New Zealand, for feed on regional routes.

ANZ has also moved to fill the void. It added capacity and routes and used subsidiaries Air Nelson, Eagle Air, and Mount Cook Airlines to add 36 more daily flights. ANZ chief executive Gary Toomey expects his airline to keep the extra market share it gained through this effort.

But the New Zealand plot thickens with the possible entry of Virgin Blue, Australia's other discount airline. Brett Godfrey, Virgin Blue's chief executive, flew to Wellington after Qantas NZ's collapse to discuss plans with transport minister Mark Gosche. Godfrey is targeting December for Virgin's entry into New Zealand.

Virgin's spectre has prompted ANZ to launch domestic flights with its own low-cost unit, Freedom Air. Before this, Freedom only flew secondary trans-Tasman routes. It has now wet-leased two jets and started domestic flights the day after Godfrey's visit to Wellington. It plans more.

Virgin's hopes hinge on a bilateral issue. It claims a New Zealand-only operation will not work because the market is too small. Godfrey wants the right to fly trans-Tasman routes linked with New Zealand domestic flights. The bilateral appears to permit the domestic part and would allow Virgin to operate trans-Tasman if it were an Australian airline.

But Wellington hints that Virgin is really British, operating under a special Australian law for foreign airlines. Godfrey argues that Virgin Blue is incorporated in Australia and pays a royalty to use the Virgin name. Hence, it should be considered Australian. Yet, transport minister Gosche says his government may ask the UK to grant New Zealand more traffic rights before it accepts Virgin.

The question of where Qantas can find aircraft for New Zealand is tied to its takeover of Impulse. The smaller carrier, a victim of Australia's recent fare wars, has agreed to avoid receivership by giving up its name and flying its eight Boeing 717s and 13 Raytheon 1900Ds under Qantas livery. The 717s will be redeployed to leisure routes where Qantas now flies 737s, which would be moved to New Zealand. For about A$50 million ($25 million) in convertible notes, Qantas gains an instant fleet.

ANZ, Ansett and Virgin are furious. None of them wants to buy Impulse, but neither do they want to see it go under Qantas control.

Australia's Competition and Consumer Commission (ACCC) had raised concerns, questioning whether the acquisition "would be so damaging to future competition" that it would be better to allow Impulse simply to collapse. However, the ACCC eventually agreed that it would not oppose the deal, subject to undertakings from Qantas designed to ease the way for new competition. Those largely relate to relinquishing slots at busy Sydney airport, but include terminal access concessions and undertakings on pricing. Qantas had said that it was ready to relinquish up to a third of Impulse slots at Sydney - the same amount Ansett yielded before the ACCC approved its takeover of Hazelton.

After the demise of Impulse, some observers suggest Australia might become more protective of Virgin because it will be the only new competitive carrier left.

Source: Airline Business