The equity alliance agreed between Qantas Airways and Air New Zealand (ANZ) has passed its first and easiest test in Wellington, with the New Zealand cabinet in principle giving approval to the deal.

This clears the way for the two traditional rivals to seek clearance from competition regulators in both countries. The New Zealand Commerce Commission and Australian Competition and Consumer Commission have agreed to work together in their review. Both have already voiced concerns and are expected to scrutinise the plan closely.

The New Zealand government has gone to lengths to stress that the competition standards for judging this case will be no different than in any other. Its initial approval simply clears the deal from the standpoint of national interest, but still subject to a ruling from the competition agencies.

Qantas proposes to buy 22.5% of ANZ in three tranches for a total of NZ$550 million ($225 million) that would include a new share issue for 10% of its stake. This would add new capital to ANZ's balance sheet and dilute the New Zealand government's share from 82% to 64%. Qantas would appoint two directors to ANZ's 10-member board while ANZ would gain one seat on the Qantas board.

The deal is more an alliance than a straight equity sale. Qantas and ANZ plan to form a co-ordinating group with three representatives each to oversee all ANZ domestic and international flights and all Qantas flights to, from, and within New Zealand. Under this group's strategic oversight, ANZ would run these combined operations.

Qantas and ANZ would also codeshare on all New Zealand domestic and trans-Tasman flights and on all flights between New Zealand and the Americas. ANZ would codeshare on Qantas Australian domestic flights and any other Qantas international flights that connect with ANZ flights.

Qantas is a oneworld alliance member; ANZ belongs to Star Alliance. Neither carrier proposes to withdraw or switch alliances as a result of this deal. Geoff Dixon, Qantas chief executive, says he is "comfortable" with these dual alliance memberships because he believes bilateral partnerships are more important anyway. Star says that its members "recognise the business decision of Air New Zealand".

Both airlines concede that their deal is anti-competitive. It would effectively hold a monopoly in the New Zealand domestic market and the trans-Tasman market between Australia and New Zealand. The combination would also give Qantas and ANZ over 65% of the transpacific market from both countries to North America. Qantas already holds 77-80% of Australia's domestic market.

Nonetheless, competition regulators may approve a deal if other public benefits outweigh its anti-competitive effects. Qantas and ANZ hope to persuade regulators on this basis. They have unveiled an economic study, commissioned by them, that shows claimed benefits in increased tourism, jobs and synergies. This study also claims that ANZ cannot survive long term without a strategic partner such as Qantas. The study estimates that fare increases resulting from the alliance will be modest.

ANZ and Qantas are also offering "enforceable undertakings" to pave the way for future rivals. They say they would make terminal space available, offer maintenance and refrain from capacity dumping or lowering fares designed to thwart competitors.

Most observers predict the regulators will impose many conditions if they approve the deal at all. If the New Zealand government's in-principle approval had been put to a vote, it is unclear whether parliament would have accepted it. Some of the objections sound nationalistic, but lawmakers also raised issues about the deal's merits, from governance of the airline co-ordinating committee and board of directors to revenue sharing. Australia's comments have been more muted and supportive.

If the alliance receives competition clearance, which could take six months, it will go back to the New Zealand government for final approval in its role as majority shareholder.

Share of capacity on non-stop services - December


New Zealand

New Zealand






Air New Zealand




Qantas Airways




United Airlines








NOTE: Shares are for seat capacity flown non-stop based on OAG schedule data for December 2002. USA=mainland US excluding Hawaii. Other=a range of carriers fly onward services between NZ and Australia including Thai Airways, Malaysia Airlines etc.



Source: Airline Business