WELLINGTON (Dow Jones)--Air New Zealand Ltd. (AIR.NZ) and Virgin Blue Holdings Ltd. (VBA.AU) said Monday that they will seek regulatory permission to co-operate on flights between Australia and New Zealand, potentially lowering costs for both carriers that dominate traffic between the countries.
The airlines said the planned alliance will allow for collaboration on future route and product planning, including code sharing on each other's services across the Tasman Sea and on connecting domestic services, reciprocity on loyalty schemes and sharing of airport lounges. In a joint statement the carriers said they will file applications later Monday with the Australian Competition and Consumer Commission and the New Zealand Ministry of Transport after working on the alliance proposal for some months.
The move comes as Virgin Blue, which operates on international routes to New Zealand through its wholly owned Pacific Blue subsidiary, also refined its full year earnings guidance Monday, saying that weaker than expected passenger demand last month looked set to continue through June 30.
In its monthly operating statistics for March, the Australian airline group said it now expects its profit before tax and exceptional items to be at the lower end of the A$80 million to A$110 million range that it forecast in February.
"Whilst industry capacity growth has remained in line with that expectation, the demand environment experienced during April and seen in the forward bookings through to the year-end has weakened, and volatility has increased," Virgin Blue said in a statement.
While an attempt in 2006 by Air New Zealand and Virgin Blue's larger rival Qantas Airways Ltd. (QAN.AU) to forge a similar deal was disallowed as they shared over 75% of traffic on the route, analysts believe the current proposal is less likely to be blocked.
The route between Sydney and Auckland is the busiest international route out of Australia and eight airlines fly passengers on numerous routes between the countries including Air New Zealand, Virgin Blue subsidiary Pacific Blue, Qantas, its discount subsidiary Jetstar, and Emirates Airline (EA.YY). In the year to January, the combined market share of Pacific Blue and Air New Zealand was around 54%, with the Qantas group controlling around 31% of capacity and Emirates with around a 13% market share according to Australia's Bureau of Infrastructure, Transport and Regional Economics.
On Monday the ACCC said it would review the proposal but offered no further detail.
"On receiving an application for authorisation, the ACCC will review the proposal. That process normally takes about six months," a spokesman for the ACCC said. A spokeswoman for the New Zealand Ministry of Transport on Monday said the ministry hasn't yet received the application and therefore couldn't comment.
After the alliance talks were disclosed last week, some analysts said a tie-up would help both carriers reduce costs on the route, which has been loss-making or at best of marginal value for some time.
Credit Suisse said the main benefit to the deal would be the elimination of duplicated flight schedules, estimating the airlines fly the equivalent of 12.5 empty planes across the Tasman Sea each day.
"We estimate the benefit to Virgin Blue A$5 million-A$10 million per year, assuming some benefit is passed to customers," Credit Suisse said in a note to clients Thursday.
However Goldman Sachs JBWere analyst Marcus Curley said obtaining regulatory approval might not be so simple.
"At this stage, I would be thinking that approval is going to be difficult to get. Collectively they represent 56% of the trans-Tasman, which is a dominant position and hence raises questions around the potential lessening of competition," he said.
Previous attempts between Air New Zealand and Qantas Airways Ltd. (QAN.AU) to reach similar deals have failed to obtain regulatory approval as a potential tie-up would have meant the two airlines dominated traffic between the two countries.
The airlines claimed Monday the alliance would create a "new wave of competition," attract more passengers and could lead to new routes.
"This additional market stimulation is likely to allow Air New Zealand and Virgin Blue to harness the alliance benefits to start new routes or fly additional frequencies," said Brett Godfrey, chief executive of Virgin Blue.
Air New Zealand Chief Executive Rob Fyfe also said combining the two customer bases means "additional flights and new routes will make sense much more quickly."
Fyfe said if the alliance is approved it will be one of several measures to improve the airline's competitive position on the trans-Tasman in the face of the Qantas' two-airline move for regional dominance. While Jetstar has been flying to New Zealand since 2005, Qantas' discount offshoot took over domestic New Zealand routes from its parent just last June.
Air New Zealand and Virgin Blue said while the proposed alliance is a "significant development for both carriers" it doesn't affect or place restrictions on any existing partnerships. It is also "not a signal of intention by Air New Zealand or Virgin Blue to take a shareholding in the other," the statement said.
The code share agreement will involve each airline selling tickets for each other's flights under its own airline code. The alliance also includes a revenue allocation agreement under which revenue generated across all Tasman sectors currently operated by either airline, or which may be developed under the agreement, will be allocated between the two carriers. A joint team representing both airlines will oversee the trans-Tasman operations.
Curley said if approved, the tie-up was positive for both companies. "This industry is riddled with too much capacity and poor returns. From a company perspective, consolidation on routes or markets is a good thing," he said.
Shares in Virgin Blue fell in afternoon trade after the release of March traffic numbers, closing down 4.5 cents, or 7.6%, at 55 cents.
-By Rebecca Howard, Dow Jones Newswires; 64-4-471-5990; [email protected]
(Rebecca Thurlow in Sydney contributed to this article)
VBA Price at posting:
55.0¢ Sentiment: LT Buy Disclosure: Held
