29 November 2002 Points to Consider – proposed Qantas-Air New Zealand buy-in.

Opinion Editorial for The Press

Christopher Kissling and Christopher Findlay reflect on the implications of the proposed Qantas-Air New Zealand buy-in.

The proposal for Qantas to buy a 22.5% shareholding in Air New Zealand will present the consent authorities on both sides of the Tasman Sea with some tricky questions to solve. The most obvious is the market dominance in Australia and New Zealand of two carriers that seek to cooperate rather than compete head-to-head. But it's a dilemma based on an artificial distinction.

Qantas has manoeuvred adroitly to place Air New Zealand in a tight corner. What other airline would want to buy into a carrier with a cap on its shareholding while it faces both international and stiff domestic competition from Qantas as allowed within the aviation agreement between Australia and New Zealand? The foreign ownership limit comes from the rules of the international regulatory system that applies to air transport.

Some analysts have suggested that Singapore Airlines would be a better alternative suitor. At least it resides in the same Star Alliance as Air New Zealand.

Putting aside the bad blood generated by the failed Ansett Australia debacle, what would Singapore Airlines gain? The New Zealand market is small. Singapore Airlines has access to any of the international airports in New Zealand if it wishes to exercise those rights under the Singapore/New Zealand liberal bilateral air service agreement. It could also fly across the Pacific under a multi-country agreement which includes the US and NZ. It has little need of domestic feeder traffic from provincial airports in New Zealand.

But it has to have a domestic network within Australia. Air New Zealand stymied Singapore's earlier move to get one by exercising its option to acquire 100% of Ansett Australia. The price was bid too high. Now that airline is history. Air New Zealand almost followed suit. Ansett Australia is not there to provide a domestic network linked with Qantas' foreign competitors. Air New Zealand does not have the resources to enter the Australian domestic market like Qantas has done in New Zealand.

Australia and Singapore could conclude a more open air services agreement that would allow Singapore Airlines to operate freely to NZ or to the US. But it still needs a domestic Australian network to be an effective competitor.

Under Australian foreign investment rules it could set up a wholly owned subsidiary to operate the domestic system and provide its own feed into its international services. It has the brand name and other assets to succeed but it would have to take on both incumbents. That could be messy and expensive. Qantas has its low cost subsidiary Australian Airlines sitting in the wings which is available to be used to thump an entrant if retaliation is required. The threat of doing so, and of starting a real war, might be enough to keep out the pretenders.

What about Virgin Blue? It has been making noises about going international now it has a bigger Australian ownership. But for now it will probably play the regulatory game and see what it can get out of the conditions that the competition authorities might impose on the merger. Also, Virgin Blue philosophies do not gel with those of Singapore Airlines removing much likelihood of synergies in that direction.

So right now there's not much of a real threat of entry into the Trans-Tasman market from another full service carrier like Singapore Airlines, even if that right is granted by the consent authorities as a means of encouraging continued competition on Trans-Tasman and Pacific routes. And because of this problem, the regulator might baulk at approving the deal.

But that too creates a problem. The consolidation of Qantas and Air NZ is the sort of adjustment we might have expected in an open market. It makes the whole business even more attractive to other foreign buyers at the same time.

So the challenge is to maintain competitive conditions. We don't have to accept that we should put up with a monopoly to get more effective competition later. The real problem is that one regulatory problem is being created by another.

We have to challenge the limits on foreign ownership of international carriers which come out of the dinosaur-like rules that apply to international aviation. Let's move to a much more liberal rule on who is allowed to fly. One popular option is called 'the principal place of business rule". Under that rule, a carrier setting up a substantial Australian or New Zealand domestic business would be able to fly internationally as well. It's a contradiction that there is no limit on foreigners in domestic operations in Australia or New Zealand but there is a limit on foreigners participating in carriers that fly internationally from Australia or New Zealand.

Our new carrier could take a regional view on this network design. This rule too would open up the bidding for the aviation assets in the region, including Air New Zealand.

Meantime, use up your Air New Zealand "Airpoints" faster than your Qantas "Frequent Flyer points" – that is if you can expend them when and where you want to fly.

Christopher Kissling is Professor of Transportation Studies, Lincoln University, Canterbury, New Zealand.

Christopher Findlay is Professor of Economics, Asia Pacific School of Economics and Management, at the Australian National University.