(Updates comment from Alliance Aviation) SYDNEY, Dec 19...

(Updates comment from Alliance Aviation)

SYDNEY, Dec 19 (Reuters) - A proposed alliance between Virgin Australia Holdings Ltd (VAH) and Alliance Aviation Services Ltd (AQZ) should be rejected as it could raise the price of flights for resources companies, Australia's competition regulator said on Monday.

The Australian Competition and Consumer Commission (ACCC) issued a draft decision proposing to deny the airlines' plans to cut costs through joint bidding in Australia's "fly-in/fly-out" air services market, valued by research firm IBISWorld at A$1 billion ($728.30 million) a year.

Companies like BHP Billiton (BHP), Rio Tinto (RIO) and Chevron Corp issue tenders for airlines including Virgin Australia, Alliance Aviation, Qantas Airways (QAN) and Cobham PLC to fly their workers to and from remote sites both on chartered aircraft and regularly scheduled regional flights.

The ACCC said it recognised that Qantas and Cobham would remain competitors if the alliance were approved, but the enhanced market position of Virgin Australia and Alliance Aviation combined with the elimination of the risk of the pair losing contracts to one another would likely provide them with a degree of freedom to raise prices.

The price of charter contracts has fallen in recent years as a result of a decline in commodity prices and the end of a construction boom, Virgin Australia and Alliance said in their application to the ACCC in August.

The ACCC said it was seeking feedback on its draft determination by Jan. 27, particularly from charter customers.

Australia's Department of Infrastructure and Regional Development was in favour of the alliance, according to a September submission to the competition regulator.

A spokeswoman for Virgin Australia said the airline would review the ACCC's concerns and work with the regulator to provide additional information as needed.

"We believe the proposed alliance will support competition and create substantial public benefits," she said.

Alliance Aviation said in a statement that it would work with Virgin Australia and review the ACCC's concerns.

($1 = 1.3731 Australian dollars)