Air New Zealand and Virgin Blue seek regulatory permission for trans-Tasman alliance

Air New Zealand intends to throw the reverse engines on transtasman domination by the Qantas-Jetstar duo with its proposed tie-up with Virgin Blue.

The airline ended speculation it was working on a deal with Virgin Blue Airlines yesterday when it said it would seek regulatory approval to create an alliance with the low cost carrier on the competitive trans-Tasman route.

Air New Zealand chief executive Rob Fyfe said the proposal would provide both airlines with a combined 56% market share.

The proposal would strengthen their competitive offering on the route and see them collaborate on future route and product planning, code sharing and frequent flyer programme benefits.

The alliance requires approval of the Australian Competition and Consumer Commission and New Zealand Ministry of Transport– expected to take up to six months.

Application for authorisation from the New Zealand Commerce Commission under the Commerce Act is voluntary. The commission said it will make it’s own assessment of the competition issues.

Despite reducing capacity, Air New Zealand has been losing market share and money on transtasman flights. Figures released last week revealed Air New passenger numbers carried on the transtasman and Pacific Island routes fell 1.6% in March – 3.2% lower than the same time last year.

Mr Fyfe said the Tasman was undoubtedly the most competitive route for Air New Zealand and was only delivering a 4% profit margin, or $4 in every $100 ticket.

He said the airline had three choices to improve profits: reduce cost and operate cheaper services; reduce capacity, which the airline had already done by 10%; or get more passengers — the aim of the alliance.

The proposed alliance will connect regional centres in Australia and New Zealand as part of a transtasman journey and would not include domestic-only travel in either country.

Air New Zealand anticipates annual cost savings from the alliance of $25-$30 million, expected to be realized in the year from July 2011 to June 2012, with most of that being achieved by carrying more passengers.

Money earned by either airline across transtasman flights under the alliance would be shared between the two.

The airlines said in a statement there was no intention by either carrier to take a shareholding in the other.

Mr Fyfe did not expect to face hurdles to regulatory approval, despite having previous attempts to merge with Qantas on the route knocked back by regulators because of competition concerns.

“We weren’t prepared to advance this unless we had a high degree of confidence of approval.”

Mr Fyfe said the Air NZ-Qantas combination would have posed a much larger dominance in the market than the expected 56% share for Air NZ-Virgin Blue.

Dunedin Airport was the only airport the two airlines were competing exclusively with each other for transtasman seats, with a near-majority at Cairns.

The alliance will reduce competitors on the Tasman route to six.

“But six is a lot on world scale. Less than 5% of routes have more than five operators on them,” said Mr Fyfe.

The Centre for Air Pacific Aviation said it was clear Air New Zealand needed to do something on transtasman route in the short-term, as it had been caught in limbo between the very aggressive pricing of low cost Jetstar and the much higher prices Qantas was able to levy as part of its wider network.

As well as fending off Qantas/Jestar competition, the alliance with Virgin Blue would also increase Air New Zealand’s reach into the Australian domestic market,

In return, it would enable Virgin Blue to compete more successfully with Qantas for the higher-yielding corporate traveler.

Executive director Peter Harbison said the biggest concern for Qantas, which had two-thirds of the Australian market, would be in next steps: Will the alliance be used as a vehicle for further expansion into Australia?

A wider relationship between Air New Zealand and Virgin Blue would be a real “game changer”, he said.

The proposed Air New Zealand, Virgin Blue Alliance wouldn’t affect global alliances. Virgin Blue is linked to the global Sky Team Alliance while Air New Zealand is with Star Alliance.

Polynesian Blue is not included in the alliance.