By Paloma Migone of NZPA
Wellington, Sept 10 NZPA - Air New Zealand and Virgin Blue alliance plans have taken a blow after Australia's competition regulator issued a draft decision denying them permission to merge.
The Australian Competition and Consumer Commission (ACCC) said there were a number of routes between New Zealand and Australia where the alliance raised competition concerns.
"These routes account for around one quarter of passenger traffic in the trans-Tasman market. This means that more than one million passengers per year may be adversely affected by the removal of competition between Virgin Blue and Air New Zealand," ACCC chairman Graeme Samuel said.
Air New Zealand and Virgin Blue proposed an alliance that involves collaboration on future route and product planning, code sharing and frequent flyer programme benefits. The airlines said it would deliver cheaper airfares, increase frequency, better connections, and expand lounge access.
Though the ACCC accepts that an alliance would have public benefits, such as reduced prices, it said it has doubts about the magnitude of those benefits.
The regulator said it was also concerned that the alliance was likely to increase the likelihood of co-ordinated conduct on routes between New Zealand and Australia.
Both airlines argued their alliance would also enable them to compete more effectively against the Qantas-Jetsar group.
But the commission wasn't convinced that it would be more competitive than a scenario where Virgin Blue and Air New Zealand continued to operate independently.
Centre for Asia Pacific Aviation executive chairman Peter Harbison told NZPA he was surprised with the ACCC draft decision, considering the partnership was not as far reaching as the Air New Zealand-Qantas proposed merger, and did not believe it would stand.
"It doesn't seem to me to stack up all that well, frankly," he said.
He believed the eventual outcome would be approval, with conditions, particularly for routes such as Dunedin, where the two airlines accounted for all of the trans-Tasman seats available.
ACCC's argument that Virgin Blue acted as a "maverick" with its pricing in the market was baseless: "We haven't found any particular evidence of that in the Tasman.
"In fact, Virgin Blue seems to be pretty much trapped between the other players; it hasn't actually been price leading."
The ACCC also failed to take into account the threat of entry of Tiger Airlines, Mr Harbison said.
The ACCC invited Air New Zealand and Virgin Blue to provide further information to support the application -- both airlines said it will do so. Air New Zealand said it was currently reviewing the decision and expects to respond in the coming weeks.
Meanwhile, airports in New Zealand agreed with ACCC. In a submission, Auckland International Airport said the merger could have a real anti-competitive effect on some routes.
Three routes between New Zealand and Australia would be fully monopolised, and another six would become shared in a "cosy duopoly" with the Qantas-Jetstar Group.
Wellington International Airport said it was afraid that the alliance would significantly reduce the number of passengers travelling across the Tasman and increase the prices that the remaining customers must pay.
The two airlines filed applications with the ACCC and the New Zealand Ministry of Transport.
Air New Zealand shares were unchanged at 126.
Compare Credit Cards - Independent interest rate and fees comparisons for New Zealand banks.