Wellington is shaping up as the front line in the battle to stop Air New Zealand and Australian rival Virgin Blue teaming up on the Tasman.
A powerful group of Wellington interests estimate that the alliance could cost the region's economy more than $100 million a year and at least 1600 jobs as a result of less competition and higher fares.
Air New Zealand and Virgin Blue have applied to authorities in both countries for permission to merge their trans-Tasman businesses, covering all services across the Tasman and any connecting domestic flights.
The aim is to establish a second Australasian airline network to combat the combined juggernaut of Qantas and its budget arm Jetstar, which Air New Zealand chief executive Rob Fyfe warns will soon dominate the market if left unchecked.
Air New Zealand's John Whittaker says that the alliance would improve profits by attracting more passengers through greater network connections and flight frequencies.
New Zealand tourism would benefit from having a second large airline bloc with access to the Australian domestic network to feed the Tasman route.
The deal follows two previous attempts by Air New Zealand to link arms with arch rival Qantas, which were rejected as too anti-competitive in 2006.
But this time around the airlines claim things will be different.
Mr Whittaker says while the deal with Qantas was about reducing seat numbers in a bid to make the loss-making route profitable, the new bid is all about growth.
The proposal will see the airlines collude on every aspect of their business, including pricing, services on the ground and in the air, and share the revenues.
A combined Air New Zealand and Virgin Blue, which operates as Pacific Blue on the Tasman and domestic New Zealand, will control just over half the total market. That compares to the three-quarter share that Air New Zealand and Qantas would have commanded.
Air New Zealand concedes that while the alliance would remove competition with Pacific Blue, it will be kept honest on price and service by other competitors.
Qantas has told the Australian Competition and Consumer Commission that it is not opposed to the union.
The alliance will "optimise" schedules by spreading competing flights that depart at similar times more evenly through the day, which will reduce duplication of infrastructure and save costs.
While there will be no reduction in overall capacity under the alliance, Air New Zealand has refused to give the Wellington group an assurance that seat numbers on the city's routes will not be affected.
But Mr Whittaker says: "This is a growth strategy for us, it is not a cut-your-way-to-savings. Our market share has fallen too far already."
The two airlines will retain their own brands but standardise services including fares, check-in, lounges, and will have comparable onboard in-flight entertainment.
Top-end fares are expected to become cheaper, reducing the average fare price. But the lowest fares are considered too cheap already, though there might be more of them.
Ad Feedback For both airlines the alliance is about their long-term survival.
Air New Zealand will gain access to Virgin's extensive Australian domestic network to feed its Tasman services.
The lack of access to the Australian domestic network has prevented Air New Zealand from taking advantage in the strong growth being fuelled by Australian travellers who are increasingly keen on crossing the ditch for short get-aways.
The airline's figures show the Tasman market as a whole grew about 50 per cent to 3.4 million in the five years to 2005.
Much of that growth has come from new carriers like Jetstar and that trend is not going to change, Mr Whittaker says.
"The Australian market is going to grow faster. They have got a bigger population and we are an attractive tourism destination."
FOR its part, Virgin Blue will be able to tap into Air New Zealand lucrative business travel market, which Pacific Blue has not been able to attract because of its limited schedule and in-flight services.
Each brand will continue to focus on the markets in which they have an advantage, suggesting Air New Zealand will take the peak business travel times out of the main centres and leave the leisure travellers to Pacific Blue centred on its Brisbane hub and regional New Zealand.
But Wellington business, tourism operators, local authorities and the city's airport are unconvinced and have banded together to fight the proposal.
They say the region could be hard hit if the alliance fails to deliver on its promises.
Analysis from BERL Economics commissioned by the group shows the alliance could cost 1650 jobs and reduce the region's economy by up to $107 million and output by $229m a year by 2015.
In the last 10 years Wellington's trans-Tasman services had grown by 44 per cent. That "stemmed almost exclusively" from the arrival of Pacific Blue as a challenger to the previous Air New Zealand/Qantas duopoly, the group says in a joint submission to the Transport Ministry opposing the deal.
Competition from Pacific Blue has resulted in more capacity and lower average fares. Those benefits are under threat if the alliance is given the green light and market reverts to a duopoly, the group says.
Higher fares risked scaring off price-sensitive Australian tourists, who make up three-quarters of the market.
That could cost Wellington more than 170,000 visitors a year by 2015, according to route development experts ASM.
Each tourist visitor to Wellington contributes about $2300 to the local economy.
Businesses and organisations, including the government, also rely on convenient and affordable international travel to attract new business and grow the region's economy.
Other opponents are also urging authorities to assess the impact of the alliance on a route by route basis, not the whole market approach favoured by the airlines.
Auckland International Airport says the alliance could have "a real anti-competitive effect on a wide range of routes".
It could even lead to Pacific Blue pulling out of the New Zealand domestic market "which would have a strongly adverse effect on competition on those routes and consequently on New Zealand consumers".
Only one route, Auckland to Sydney, has all seven airline brands competing directly.
On many others the alliance will either become part of a duopoly with the Qantas group or a monopoly.
Regional airports from Dunedin to Cairns say the alliance will end hard-fought-for competition to their ports.
Brisbane's Gold Coast Airport is the exception, saying the agreement could increase services to Australian airports.
But Auckland Airport says "recent experience suggests that, when individual routes become dominated in this way, competitive pressure reduces or even disappears, fares rise and passenger volumes fall significantly. In other words, authorising the alliance could do real damage to New Zealand consumers."
Unlike Auckland and Christchurch, which have the benefit of being served by other foreign airlines like Emirates who tack a Tasman crossing onto their long-haul flights to Australia, Wellington has a maximum of only three competitors on its routes: Air New Zealand, Pacific Blue and Qantas.
The alliance would reduce the Sydney route to a duopoly with Qantas, and wipe out competition on the Brisbane service.
FARES on direct flights to Australia from the capital are already substantially higher than those flying from Auckland and Christchurch, "which undoubtedly reflects the greater competition present in those two cities", the Wellington group says.
Much of the group's concern is due to the lack of detail provided by the airlines on how the alliance will operate, including they plan to "optimise" their schedules.
"Without any agreement on the flights and schedules they propose to operate across the Tasman, the public benefits claimed by the [airlines] strike us as wholly speculative."
Mr Whittaker says that a detailed alliance schedule will be prepared once Virgin Blue announces the outcome of its network review, due any time.
Wellington's fears that there will be fewer passengers, less competition and a resulting loss of economic benefits to the region are unfounded, he says.
"That is not going to happen because we are moving to a model that is going to drive growth and we are providing the seats that will meet the demand for the growth.
"Air New Zealand's seat numbers out of Wellington are going to increase over the next year."
Mr Whittaker says that Wellington Airport's claim that the more airlines that operate on a route the greater the growth does not hold up.
Auckland to Sydney had the greatest number of airlines competing, but growth on that service was lower than services to Melbourne and Queensland served by fewer airlines.
What makes a difference is an attractive destination combined with a low-fare airline model flying full planes.
"Those are the things that correlate strongly with growth in market places, not just the number of airlines flying it," Mr Whittaker says.
"We are going to see fares tumble in these markets over the next year because we are putting in that business model."
Air NZ, Virgin Blue seek merger clearance
Air New Zealand and Virgin Blue have applied to authorities in Canberra and Wellington for permission to merge their trans-Tasman businesses, including all services across the Tasman and any connecting domestic flights.
In New Zealand the approval must be sought from Transport Minister Steven Joyce on the advice of the Transport Ministry. However, opponents of the merger argue that the law limits the minister's powers to approving only those parts of the agreement that relate to fares and capacity on international flights, and not a broad alliance between two airlines.
They want Mr Joyce to decline jurisdiction, allowing the airlines to apply to the Commerce Commission to assess the public benefit of the alliance.
In Australia the decision falls to competition watchdog the Australian Competition and Consumer Commission.
A final decision is expected from both authorities by the end of the year.
How They Line Up Objectors: Wellington business, tourism operators, local authorities and airport. Auckland, Hamilton and Dunedin airports. Tiger Airways. Supporters: Qantas Travel Agents Association. Gold Coast Airport.
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