Regulator shoots down Qantas alliance with Air NZ

ACCC chairman Allan Fels said the pact would create a one-airline market on the trans-Tasman route, denying passengers choice and making increased air fares inevitable.

Professor Fels disputed almost every point put forward by the airlines, including potential cost savings, benefits to consumers and the tourism industry, and the assumption that Air New Zealand, if left to fend for itself, would ultimately fail through a war of attrition with Qantas.

``The proposed alliance is highly anti-competitive and its benefits are small," Professor Fels said. The possibility of the airlines offering sufficient undertakings or concessions to change the ACCC's thinking was ``extremely limited".

He noted that even if Virgin Blue were to start flying trans-Tasman services, the alliance which involves Qantas taking a 22.5 per cent stake in Air New Zealand would still dominate.

Qantas and Air New Zealand both pledged to pursue an alliance but many observers now believe that the carriers won't be able to sway the ACCC from yesterday's draft findings. They'll have the opportunity to put their case again in coming weeks.

``Most of the market believes Qantas will be able to get around the objections by making concessions. But I'm a pessimist on this," said Alliance Capital Management's Andrew McAuley.

``I think they may have to give away too much to make the alliance worthwhile. It mightn't get through in any form."

Qantas chief executive Geoff Dixon said the draft determinations highlighted a ``growing gulf" between commercial reality and the ideals of competition regulators. Germany's Lufthansa is the latest airline to warn of large losses in an industry that lost more than $30 billion in 2002.

``It is remarkable that both authorities appear to have completely ignored the ongoing crisis in the global aviation industry," Mr Dixon said.

Air New Zealand chief executive Ralph Norris said the ACCC's findings were ``more negative than we had anticipated". He also defended the airline's argument that the alliance would generate economic benefits for New Zealand of $NZ1 billion ($903,670) through more tourism and the creation of new jobs.

The New Zealand Commerce Commission, which has also ruled against the proposal, estimated the alliance would cost the New Zealand public as much as $NZ432 million through higher airfares and freight costs and deliver, at most, a benefit of $NZ46.3 million.

Mr Norris said that although Air New Zealand was performing well in its home market, ``our major concern is over our ability to compete internationally". He's previously warned that the airline could not win a capacity war with Qantas and could be reduced to purely a domestic carrier within five years.

Analysts suggested Qantas would face even greater anti-trust issues if it were to pursue what is said to be Mr Dixon's dream deal: a tie-up with Singapore Airlines. They expect Qantas, if indeed the ACCC won't budge on its ruling, to become more aggressive on Air New Zealand's key routes not only to Asia and the US but also in its home market.

``Will anyone want to have Air New Zealand's blood on their hands?" asked one analyst.

Shares in Qantas were up 2c to $3.09 while Air New Zealand fell 1.5c to 41.5c.