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Debate AirNZ Report On Propose Qantas/Air NZ Deal


calls on the Government to SLOW DOWN the Kiwi Share approval of Qantas investment into Air New Zealand

The case for more deliberation, consultation and public say in the decision on whether Qantas should be allowed to acquire a shareholding in Air New Zealand

Prepared by Debate Air New Zealand, PO Box 1702, Wellington • http://www.debateairnz.org.nz

11 DECEMBER 2002

Dominion Post


- Introduction: "PULL UP!"
- Ten good reasons for not rushing into the Qantas proposal
- What others are saying
- The December 18 Kiwi Share decision
- Government’s exercise of its Kiwi Share rights
- Is there an alternative?
- The Commerce Commission and Commerce Act
- Question and Answer: Air New Zealand’s views and our reply
- Will the airlines lower fares to encourage demand?


Introduction: PULL UP!

In May 2001 Qantas proposed that it acquire a shareholding in Air New Zealand. PM Helen Clark indicated that there were "serious obstacles" due to international landing rights, competition law and New Zealand’s position as a high-class international tourist destination.

At that time the Government was slowly deliberating the merits of Singapore Airlines increasing its stake in Air New Zealand.

Previously the Government had just as deliberately undertaken the review of Virgin Blue’s application to fly the Tasman.

Qantas is now asking for Government approval, under the Kiwi Share powers, to be allowed to acquire a shareholding in Air New Zealand and Government has accepted a deadline of 17 business days.

Why are the "serious obstacles" no longer so serious? There is a sorry tradition in New Zealand of governments rushing major decisions that benefit some and cause long-term harm to the country. We can all think of examples.

Right now Government seems headed towards another hasty, arrogant decision by allowing Qantas to buy into Air New Zealand.

This paper questions the wisdom of hurrying the decision and whether Qantas will really be that good for Air New Zealand.

In particular, we call on the Government to . . .


Why does the Government (including the Kiwi Shareholding Minister) need to make any decisions at this time? Urgency is being driven by those who want to make the deal a fait accompli. Making a decision now excludes the public.


Ministers should decide whether the Qantas option is in the national interest AFTER the analysis has been done, not before.

They should delay making any commitment on the Kiwi Share until after the Commerce Commission has investigated the transactions costs and benefits.


Why has the issue been managed to minimize public involvement? Details of the proposed deal were kept quiet until very recently and now there is a barrage of public relations pushing the Qantas option. The transaction affects all New Zealanders and has significant commercial and community consequences. Ministers need to listen to these people before making a decision.




The claims that Air New Zealand is not viable without the deal are not true.

They are scaremongering public relations. Air New Zealand has recovered from the Ansett purchase. It is profitable. It has the capacity to raise any capital it needs from the New Zealand capital markets. The New Zealand Government is its 82% shareholder. It is part of the world’s largest airline alliance.


There are better ways for Air New Zealand to raise capital than tying the company to Qantas. The Qantas deal is being promoted as the only viable option, but there are other options. The best option may be Air New Zealand raising needed capital from New Zealand investors (without any loss of sovereignty). Air New Zealand does not need an airline shareholder.


Air New Zealand claims that the transaction would result in higher profits, lower fares, increased services, and more engineering work. This is good PR but not credible in the real world. The likely losers would be New Zealanders and New Zealand companies, facing rising charges and rationalized services.


This deal is much more to Australia’s advantage than New Zealand’s. The promises of a ‘partnership of equals’ would count for nothing as Qantas inevitably made business decisions in its own best interests (e.g. why should it direct tourists to New Zealand?). Qantas is in various ways the worst conceivable airline partner because its commercial interests clash directly with Air New Zealand’s. The strong diplomatic pressure from Australia for New Zealand to accept the deal is a warning that it is primarily to Australia’s advantage. Over time Air New Zealand would wither as Qantas built itself up at Air New Zealand’s expense.


Air New Zealand does not need Qantas to survive in the international airline market. Domestically, the future is in being ‘low cost’ and Qantas is not low cost. Internationally, the future is being efficient and interlinked with an alliance of airlines. Nothing Qantas can offer will enhance Air New Zealand's current position in the Star Alliance.


All the evidence suggests that a clear majority of New Zealanders are opposed to the Qantas proposal. There is widespread disquiet. Spokespeople representing tourism, export and consumer interests oppose the plans. The Government and Kiwi Share Minister do not have a mandate from the public to commit New Zealand to the deal.


It appears, on the current hasty schedule, that the Kiwi Share Minister’s judgment of the public interest will be cursory and incomplete. Many important issues, such as airfare and freight price rises and reduction of services, will barely be considered.


There is no legal, commercial or governmental reason why any decision needs to be made at this time. Haste forestalls democratic input from New Zealanders. The Government should take time to listen to the wide range of New Zealanders with concerns before considering any action.


Government apparently received the application on 25 November 2002. No substantive statement of costs and benefits was put forward at that time. On 9 December Air New Zealand made available a cost benefit analysis on the transaction. A number of differences are apparent between the benefits as originally announced and those set out in the cost/benefit report.

Airlines have a track record of presenting ‘facts’ that suit their immediate objectives.

The Government needs to be very sceptical and careful in considering the airlines’ proposal. The original timetable allowed 17 working days from Air New Zealand’s announcement to the time the Kiwi Share decision is to be made. Now Government has 7 business days to digest a 213 page report which includes new facts such as $183 million per annum of cost savings in New Zealand.


There is no need for the Government or Kiwi Share Minister to make a decision before the New Zealand Commerce Commission has considered the competition issues.

A Ministerial declaration now on ‘National Interest’, based on scant information and no proper scrutiny of the airlines’ case, can only undermine the Commerce Commission’s independence.

A Kiwi Share decision now is in direct contradiction of Hon Michael Cullen’s promise that this transaction would be managed to avoid Government’s inherent conflicts of interest as Air New Zealand’s main shareholder, as the protector of National Interest and as overseer of competition law. It is blatantly apparent that the Minister of Finance’s interests are being given priority and "serious obstacles" are not impeding his agenda.



NZ Herald, 1 August 2002

In one of the more extraordinary comments of the election campaign Finance Minister Michael Cullen observed: "I cannot understand this assumption that somehow or other Qantas being involved is somehow worse than any other airline." Can it really be true that the future of the airline is in the hands of someone who:

1. Hasn’t noticed that any link between Air New Zealand and Qantas would create an effective monopoly in the domestic aviation market.

2. Isn’t aware that the same two airlines also dominate the trans-Tasman market and many international routes.

3. Doesn’t care that the two airlines belong to different international alliances.

4. Doesn’t recall that Qantas has had a stake in Air New Zealand before with disastrous results.

5. Is oblivious to the fact that it was largely due to the machinations of Qantas that Air New Zealand got into the mess in the first place.

- Jim Eagles

# # # #

Underarm Bowling In The Boardroom, New Zealand Herald, 8 August 2002.

Jim Scott was boss when [Air New Zealand was privatised in 1988]. Scott’s joy at being ‘liberated’ from the shackles of government control quickly turned sour.

Qantas’ 19.9 per cent stake gave it two board seats.

The two directors had to leave the room during discussions on sensitive competitive matters, but Scott believes they picked up enough between meetings to piece together Air New Zealand’s long-range strategy.

‘Qantas sat at the table and dorked us – of course they were asked to leave, but they knew what was going on, they understood the strategy of Air New Zealand to strengthen its position.

# # # #

Dominion Post, 2 September 2002

Increasing numbers of businesses in the Wellington region want Qantas Airlines to keep its hands off Air New Zealand. The August BRC-Sherwin Chan Walshe poll of more than 300 businesses, prepared for the Dominion Post, shows 67 per cent of those questioned were opposed to Qantas snapping up a stake in New Zealand’s national carrier – up from 56% opposition in June.

The survey result comes as several leading investment houses and business people put pressure on the Government, as Air New Zealand’s controlling shareholder, to draw on New Zealand investors to recapitalise the airline – rather than undermining market competition by allowing Qantas on to the share register.

- Ho-Sang Mathew Loh

# # # #

New Zealand Herald 3 December 2002

Ralph Norris is the figurehead of a huge public relations exercise to convince the public that a near-monopoly and reduced competition in the airline industry is good for the country. The business community sees this as an extremely dangerous campaign, because Norris must get Commerce Commission and the public to buy into this story. They will only do this on the basis that the airline industry, which will be dominated by a near monopoly, should be more heavily regulated.

- Brian Gaynor

# # # #

New Zealand Herald 26 November 2002

If the Air New Zealand-Qantas deal seems to good to be true, that’s because it is….

First there is the claim that it will be worth $450 million a year to the two airlines with no staff cuts, no fare rises and no reduction in services….

Certainly, co-ordinated marketing and a wider spread of flight times (instead of two airlines operating almost identical timetables) could well generate extra traffic.

But the suggestion that the two airlines can pick up an extra $450 million without reducing services or putting up fares is a bit hard to swallow.

Second, there is the constant reference to this as a partnership of equals and not a Qantas takeover. The sad truth is that the collapse of Ansett Australia gave Qantas a big revenue boost and left a wounded Air NZ convinced it needed a big brother in order to survive.

A 22.5% shareholding and two board seats would usually be considered enough to call the shots (especially as most of the other shares are held by a passive investor).

But in this case Qantas is further strengthened by the fact that the advisory board running the joint operation will have equal numbers from the two airlines and any disagreements will go to the two chief executives.

If it comes to the crunch, who will have the most weight? Which airline thinks it needs the other most? Whose interests will come first?

- Jim Eagles



1. Government is set to make a Kiwi Share decision about the deal on 18 December.

This decision will be handed down after less than a month’s consideration of the merits of the transaction. All the signs are that key Ministers had made up their minds without even going through the National Interest process.

2. There is no reason for the Crown to not take a more consultative and deliberative approach. Releasing a report on its assessment of National Interest in December and allowing interested parties to make submissions in, say, April would not delay the final outcome by even one day (assuming that the Government’s decision is the same under both approaches).

3. The Kiwi Share criteria that Government has set itself are absurd. They do not even include the fundamental issue of whether the transaction will be likely to result in higher or lower fares and better or worse air services within NZ and between NZ and the world.

4. The transaction put forward by AirNZ rests on a single precept. AirNZ will lower fares to encourage demand. AirNZ will gain great additional profitability (and NZ many more international tourists) because more people will fly due to low fares.

Every single piece of evidence to hand points to airlines setting price based on competition. Airlines do not lower fares to encourage demand. If they do not have enough passengers to fill their aircraft, they reduce flights.

5. Over 2 million tourists visit NZ each year. About half of these people fly on the Star Alliance. If AirNZ leaves the Alliance it is very unlikely that those people will follow AirNZ. Whatever passengers Qantas can offer AirNZ it pales against the lost of feed from Star.

6. AirNZ and Qantas do not have a ‘common vision’ despite the views of AirNZ’s current CEO and Chairman. AirNZ was bailed out by the NZ Government because it recognized that New Zealand would suffer great economic harm through the loss of its national carrier. Qantas is the quintessential Australian company. It is run for Australia. Its CEO is an ex-Australian diplomat and the interlinkages between Qantas and its Government are deep. NZ and Australia are competitors in many areas, not least for the world’s tourist dollar. The subjugation of AirNZ will see NZ take a back seat to Australian interests.

7. The two aspects of the deal (coordination of services and Qantas’ investment into AirNZ) need not be linked. The Crown does not need to allow Qantas to buy one share in AirNZ.



8. If the Government goes ahead, AirNZ will issue a convertible note to Qantas for $110m as soon as the Minister of Transport gives approval (under his Kiwi Share rights). This is effectively 44.5 cents per AirNZ share.

The Convertible Notes would give Qantas 4.99% of AirNZ. Presumably if the deal ultimately does not progress the Notes would be repaid by AirNZ. If the deal progresses they convert into shares.

9. Once regulatory and shareholder approval are given, Qantas will acquire a further 10% for $245m (also 44.5 cents per AirNZ share).

Within 3 years of the second investment occurring Qantas may acquire a further 7.5% for $183m (it is vague as to whether Qantas could avoid ever making this investment).

10. Also announced is an intention to undertake a rights issue to raise $200m, but quite how fits with the Qantas arrangement is uncertain.

11. AirNZ seems likely to raise between $355m and $750m, with final shareholdings of somewhere between Crown 64%, Qantas 22.5%, Others 13.5%; and Crown 70.5%, Qantas 15%, Others 14.5%.

Outcomes depend on whether Qantas buys 15% or 22.5% and whether the rights issue progresses.


12. All New Zealand routes (and to and from New Zealand) will be controlled by AirNZ. However, overseeing this control will be an Advisory Group which will include Qantas staff.

13. AirNZ will appoint one director to Qantas. Qantas will appoint two directors to AirNZ. At least one Qantas directors will be required to sign all AirNZ board resolutions.


14. Initially the claimed benefits of the transaction were from an extra 50,000 international tourists (an increase of 2.5% on the 2 million who visit now) and 200 jobs that would be created in NZ.

15. With the release of the larger cost benefit report the shape and scale of benefits has changed. Now the main feature of the benefits is that the combined cost of the New Zealand operations of Qantas and AirNZ will decline by $183 million per annum.


16. AirNZ’s announcement said that they had "considered two strategies, that of joining with another airline and then competing against Qantas, or working with Qantas and competing as a strong alliance. The Qantas alliance offered the best outcomes, both from the company's, and the national interest, perspective." No other details are available. AirNZ seems not to have even considered going it alone.


17. As set out at present the approval process for the transaction starts on 18 December when Government decides in principle whether it should exercise its Kiwi Share rights.

This will be followed by 6 months of regulatory process, which will then be followed by the shareholder process. Government’s two political moments of choice are when the Kiwi Share rights are exercised and then when it votes its shares.

18. In reality only the Kiwi Share decision is important, because Michael Cullen has made it very clear that he will vote the shares to support the transaction once it has regulatory approval.


19. Before addressing the criteria/process Government has set itself under the Kiwi Share, it is worth noting what the public’s interest in the outcome is, so the Kiwi Share criteria may be benchmarked:

(i) Consumer interests:

— Lower airfares and airfreight rates

— More destinations

— More frequent flights

— More convenient booking options

(ii) Airline interests:

— Lower costs

— Higher revenue per service (via either higher loadings or prices)

— New services which are profitable

(iii) Related industry interest:

— Purchase of NZ sourced goods and services by AirNZ

— More tourists (via lower fares, better services, more advertising)

(iv) Investor interests:

— Greater profitability.

— Less risk.

Not one of these points is included in any obvious way in the Kiwi Share criteria.


20. In AirNZ’s constitution it states (clause 3.3): No person that owns or operates an airline business, nor any other person where the first-mentioned person and that other person are Associated Persons, may hold or have an Interest in an Equity Security unless the prior written consent of the Kiwi Shareholder has been given to such holding or Interest, and any such consent may be given on such terms and conditions as the Kiwi Shareholder thinks fit.

21. The considerable leeway given to the Minister should be noted. His decision depends on what he ‘thinks fit’. The scope of the Minister of Transport to act arbitrarily can be inferred from the last Minister’s (Hon Mark Gosche) refusal to allow Virgin Blue to fly the Tasman (24 November 2000). He provided no explanation of his actions other than to note that Virgin was not an Australian airline.



22. Cabinet minutes and the Treasurer’s description of the criteria that Government will address in reaching a decision on the 4.99% are set out below. Salient points to note are:

. It does not include any consideration of competition or the efficiency of New Zealand’s domestic or international air services.

. It does not include any consideration of the commercial logic of the transaction.

. Michael Cullen, as the shareholding Minister, has said that he will make his decision on whether the deal makes sense to the Crown as a major AirNZ shareholder only once the deal has regulatory approval.

. There is no facility for public input or consultation.

. In theory Government has indicated that it will reach its Kiwi Share decision within a month.

. There is no reason for the Kiwi Share decision to be made now or with any particular urgency. As the final transaction is not expected until the second half of 2003 there is plenty of time.

. There is no express linkage of the Kiwi Share criteria to the reasons put forward when Government bailed out AirNZ.

23. Minutes of the Cabinet Policy Committee 20 November 2002

1. noted that Qantas and Air New Zealand have revealed to the market that the two airlines are in discussions about a strategic partnership that includes Qantas taking an equity stake in Air New Zealand;

2. noted that should a proposal by the airlines be received within the next week the Government will make an in-principle decision on the ownership case, and a conditional Kiwi Shareholder decision, in December 2002 [CAB Min (02) 31/23];

3. noted that the Kiwi share is a device for maintaining government control of aspects of the operation of a publicly listed company, sufficient to ensure that wider public interests are able to be protected;

4. noted that a favourable Government decision in December 2002 will mean Qantas will be advised that Kiwi Shareholder approval has been given for the entire shareholding sought by Qantas, subject to:

4.1 there being no material changes to the commercial proposal, or significant new information being revealed, during the subsequent competition and other regulatory processes;

4.2 approval of the transaction by Air New Zealand Shareholders, with respect to any portion of shares requiring Shareholder approval;

5. noted that all competition issues will be addressed by the Commerce Commission and Australian Competition and Consumer Commission;

6. agreed that the following considerations should be used to assist the Government’s national interest evaluation:

6.1 maintenance of effective control of Air New Zealand by New Zealand nationals;

6.2 continuation of Air New Zealand’s ability to exercise New Zealand’s existing and future air rights;

6.3 preservation of the unique New Zealand identity of Air New Zealand;

6.4 provision of effective channels for international tourism and travel;

6.5 provision of a durable domestic air services network; and

6.6 preservation of New Zealand based employment;

7. noted that the commercial proposal may raise other issues of relevance to the national interest evaluation which are not covered in paragraph 6 above;

8. noted that in light of the considerations in paragraph 6 above, the information to be sought from the airlines, without prejudice to further information that may be needed, is:

8.1 any proposed amendments to the Air New Zealand Constitution;

8.2 information on any proposed governance and ownership changes;

8.3 expectations of branding, marketing and promotion of Air New Zealand;

8.4 expectations of destination marketing of New Zealand;

8.5 any changes to the nature, distribution and quantum of Air New Zealand’s activities globally;

8.6 international routes, frequencies, and schedules;

8.7 alliance implications, and expected costs and benefits, including changes to expected passenger volumes, and seat capacities;

8.8 Air New Zealand’s role and influence in alliance and code sharing arrangements;

8.9 international competition processes including US antitrust timelines;

8.10 frequent flyer programmes’ status and data;

8.11 structuring of holiday packages;

8.12 domestic routes, frequencies, and scheduling;

8.13 domestic partnership and international inter-line arrangements;

8.14 any changes to the location and skill mix of direct and indirect employment in New Zealand;

9. noted that to ensure clarity and consistency of communications and information flows to and from the airlines, a single contact point (Treasury) within the public sector on the national interest evaluation will be established;

10. directed the Treasury to inform Qantas and Air New Zealand of these considerations and request information from the two airlines, as appropriate, to assist the Government to make an informed decision; and

11. noted that both the quality and timeliness of the information provided by the airlines will have a significant influence on whether the Government will be in a position make an informed decision in December 2002

24. On 25 November 2002 Hon Dr Michael Cullen described how Government was the manage its consideration of the AirNZ proposal:

The Government today received a proposal for Air New Zealand to enter a strategic alliance with Qantas under which Qantas would take a minority stake in Air New Zealand.

The Ministers leading the Government’s response are: Finance Minister Michael Cullen as holder of the Crown’s 82 percent shareholding in Air New Zealand; Transport Minister Paul Swain as holder of the Kiwi Share; and Associate Finance Minister Trevor Mallard, who has been delegated authority for regulatory issues by Dr Cullen.

"The Government intends to maintain majority ownership and control of Air New Zealand for the foreseeable future. The proposal is consistent with that intention.

However there are a number of other factors which need to be considered," the Ministers said.

The Government will assess the proposal both from a principal shareholder and from a Kiwi Shareholder perspective.

As principal shareholder it will have to be satisfied that the proposal is in the best commercial interests of the company going forward. As Kiwi Shareholder, it will have to assess whether the proposal meets the national interest considerations agreed by the Cabinet.

These include:

. maintenance of effective control of Air NZ by New Zealand nationals

. continuation of Air New Zealand’s ability to exercise New Zealand’s existing and future air rights

. preservation of the unique New Zealand identity of Air New Zealand

. provision of effective channels for international tourism and travel

. provision of a durable domestic air services network, and

. preservation of New Zealand based employment.

The two companies will be expected to provide any information required to assist this evaluation. The Government has undertaken to come back to Air New Zealand on 18 December with conditional decisions.

The airlines will apply to the Commerce Commission in New Zealand and to the Australian Competition and Consumer Commission across the Tasman.

Consideration by these bodies is expected to take some months.

"We have made it clear that the proposal will have to satisfy all the normal regulatory and competition criteria. There is no way that we will intervene legislatively to remove or even to lower any of those hurdles. Only after this process has been completed will the Government be in a position to make a final decision.

We ask the media meanwhile to be aware that until then, our legal advice is that we should avoid publicly commenting on the detail of the proposal or what we think of it. Because the Crown has an ownership interest in Air New Zealand, we are covered by the insider trading laws and must avoid any public statements which might be construed as advising or encouraging the purchase or sale of Air New Zealand shares," the Ministers said.

from Dr Michael Cullen’s website



25. The previous National-lead Government policy was: "The Government believes that while it is in the country’s best interests to have a well-performed international airline headquartered in New Zealand, the interests of New Zealand airlines should not be permitted to override the country’s broader interests." International Air Transport Policy of New Zealand, issued by the Hon.

Maurice Williamson, Minister of Transport, February 1998.

This may not be the best policy, but it is at least recognising that what matters is "country’s broader interests" rather than merely those of AirNZ as perceived by a few Treasury officials.



26. To quote the Commission: The overriding purpose of the Commerce Commission (‘the Commission’) is to promote market efficiency by fostering: . healthy competition amongst businesses; . informed choice by consumers; and . sound economic regulation.

This purpose definition represents the Commission’s view of its various statutory responsibilities. The purpose of the principal Act, the Commerce Act, is to promote competition in markets for the long term benefit of consumers within New Zealand.

27. The Commerce Act is a set of generic competition laws that prohibit anti-competitive market behaviour and structure. The Act prohibits: . contracts or arrangements by businesses that could lead to a substantial lessening of competition; . the taking advantage of substantial market power to deter or eliminate competition; and . mergers or acquisitions that would substantially lessen competition 28. Seemingly an arrangement between AirNZ and Qantas that is mainly intended to work by reducing competition would run foul of the Commission and the Act. In practice the Commission’s criteria are not black and white. Against the cost to consumers will be the various benefits of the arrangement (e.g. lower costs). This form of cost/benefit analysis is somewhat arcane and it is not difficult to imagine small algebraic adjustments giving unexpected outcomes.

29. AirNZ has indicated that one of the merits of the transaction is that it will enable the airline to attract more passengers, as well as some additional engineering work.

They have indicated:

. AirNZ has estimated its synergy benefits from the deal will amount to $200m p.a. after three years.

. Qantas have estimated total synergies of between NZ$330m and NZ$450m p.a. after three years. The benefits will be adjusted between the two airlines in accordance with an agreed mechanism with reference to capacity and route profitability.

. Almost all synergy benefits are revenue driven (i.e. not from cost reductions) To be sceptical, AirNZ did not achieve anything like this benefit from its takeover of Ansett. Previously when AirNZ and Qantas stopped code sharing, when Qantas sold its shareholding to Singapore, there was negligible revenue impact.


Question and Answer: AIR NEW ZEALAND’S VIEWS

30. AirNZ has set out the following Q&A. We have added alternative comments below each Air New Zealand answer.

How will you ensure consumers continue to be offered competitively priced airfares?

AIR NEW ZEALAND’S ANSWER: Our fare structures are based on the need to stimulate the market through affordable fares, higher loads and better aircraft utilisation. Our commitment to this approach is shown through initiatives such as Express Class and the enhanced trans-Tasman services for Freedom Air. Express Class and Freedom Air will continue and the current airfare structure is here to stay.

DEBATE AIR NEW ZEALAND’S RESPONSE: Airline pricing is determined by the ability to set fares rather than altruism.

Between March 1990 and June 2002 the cost of domestic air travel rose 95%. The cost of international air travel rose 2% (Dept of Statistics). The international market has been competitive. The domestic market was not. Ansett NZ was a lame duck and prices were set by AirNZ. Competition is the only factor which stimulates lower fares.

Can you assure consumers that fares will not go up?

AIR NEW ZEALAND’S ANSWER: Air New Zealand can confirm that its Express Class and Freedom Air fare structure will remain competitive.

Fares will continue to be market competitive. Express Class and Freedom Air’s expansion are prime examples.

DEBATE AIR NEW ZEALAND’S RESPONSE: “The New Zealand domestic passenger market is fully deregulated, and barriers to entry are low.

Successful competitive entry is available at current fare levels, and thus imposes a real constraint on pricing by incumbent airlines.” [para 6 Air New Zealand submission to the Commerce Commission on its application to buy Ansett Australia 27 February 1996] Between December 1995 and June 2002 the cost of domestic air travel in New Zealand rose 44.8%. The cost of international air travel fell 3.6%.

Fares will rise unless there is competition.

Why has Air New Zealand chosen to go with Qantas, particularly given the fact that many New Zealanders have expressed their lack of support for the move?

AIR NEW ZEALAND’S ANSWER: This alliance is a bold move that is good for the country as well as Air New Zealand. It will create wealth and employment. Now that we have at last been able to tell New Zealanders the terms of the agreement they will be able to appreciate that this was too good an opportunity to miss. It will:

– Allow continuation of affordable, convenient travel for New Zealanders using their own national airline carrier

– Provide economic benefits for New Zealand of close to NZ $1 billion over five years

– Ensure Air New Zealand has a successful future as a global, New Zealand owned and managed company

Leave us in charge of our own destiny

DEBATE AIR NEW ZEALAND’S RESPONSE: “Qantas… has done everything in its power to prevent a transaction that is in Air NZ’s best interest and clearly in New Zealand national interest”

“This sort of hostile action by Qantas against Air NZ’s interests and the national interests of New Zealand is nothing new”

[Air New Zealand counsel describing Qantas’ position on Air New Zealand’s expansion into Australia to the Commerce Commission in Air New Zealand’s application to buy Ansett Australia 27 February 1996]

How much control will Qantas have over Air New Zealand?

AIR NEW ZEALAND’S ANSWER: The basis of the strategic alliance is the absolute commitment of both parties to Air New Zealand being New Zealand controlled, and managed autonomously under the oversight and direction of its own Board.

Air New Zealand will control its own destiny and retain its identity as New Zealand’s airline. Some 70% of shareholding will remain in New Zealand hands and the Kiwi Share structure will remain. The commercial management of the combined operations of Air New Zealand and Qantas in New Zealand and across the Tasman will be Air New Zealand’s responsibility.

DEBATE AIR NEW ZEALAND’S RESPONSE: AirNZ may control both airlines’ NZ domestic and international operations, but this control is to be overseen by an “Advisory Group” which will include Qantas staff.

Qantas’ shareholding will be only 2.5% below the level necessary to vote down any special resolution. It will have an effective veto over any major transaction AirNZ may subsequently wish to undertake.

Will Qantas have boardroom control?

AIR NEW ZEALAND’S ANSWER: Qantas will have only two out of nine board positions, 22% is well short of control.

At one time British Airways had as much as a 25% shareholding in Qantas. That did not constitute control of Qantas.

DEBATE AIR NEW ZEALAND’S RESPONSE: Qantas will appoint two directors to AirNZ and at least one director will be required to sign all AirNZ board resolutions.

What does the alliance mean for the travelling public?

AIR NEW ZEALAND’S ANSWER: An even stronger, growing Air New Zealand. This translates into:

– The retention of affordable fares for Express Class and Freedom Air

– The extension of Airpoints, in time, to Qantas services.

– Greater options and flexibility in the number of flights through code sharing with one of the world’s leading airlines.

Choice will be increased threefold.

– Code share access to routes from New Zealand, Sydney to Singapore, London and Europe

DEBATE AIR NEW ZEALAND’S RESPONSE: The economic rationale for the transaction is to increase aircraft utilisation.

There are two ways for this to happen.

Fares can be lowered to encourage patronage or capacity can be reduced.

There is no protection against the latter option. It is the much more likely consequence of the deal.

What exactly has happened between Air New Zealand and Qantas?

AIR NEW ZEALAND’S ANSWER: We have formed a new regional airline grouping in this part of the world. Our focus will be on co-operating so that we do what is best for New Zealand and Australia, our respective customers and for Air New Zealand and Qantas.

We are co-operating so we have the size and strength to take on the rest of the world’s airlines.

DEBATE AIR NEW ZEALAND’S RESPONSE: Size does not equate with strength in the airline industry. Large badly run airlines are going bust. Small well-run airlines are prospering.

“Pure economies of firm size are not important in the airline industry, since airlines with a few aircraft can operate efficiently.”

[Air New Zealand expert witness Dr P Forsyth submission to the Commerce Commission on Air New Zealand’s application to buy Ansett Australia 27 February 1996]

How will the alliance operate?

AIR NEW ZEALAND’S ANSWER: Two of the more important operational aspects are Air New Zealand and Qantas continuing to operate their own services in New Zealand and trans-Tasman, but commercial management of scheduling, pricing, routes and marketing will be the responsibility of Air New Zealand We will co-operate to develop new routes internationally and improve scheduling and frequency

DEBATE AIR NEW ZEALAND’S RESPONSE: (As above) AirNZ may control both airlines’ NZ domestic and international operations, but this control is to be overseen by an “Advisory Group” which will include Qantas staff.

Qantas will appoint two directors to AirNZ and at least one director will be required to sign all AirNZ board resolutions.

Why didn’t Air New Zealand get New Zealanders to invest in the company rather than selling out to Qantas?

AIR NEW ZEALAND’S ANSWER: Continuing as a stand alone airline was an attractive notion. The stark reality of the international aviation market is however that it would be a high risk path for Air New Zealand.

This alliance is not about the short or medium term. Our vision is on the long term and we are determined to be a New Zealand owned, globally operating and sustainable airline of which every New Zealander will be proud. This is a strategic vision which capital alone could not fulfil

DEBATE AIR NEW ZEALAND’S RESPONSE: There is no reason why the two aspects of the transaction (the operational agreement and the shareholding) need be linked. AirNZ and Qantas could have seen if a regulator would approve the operational links, while AirNZ could have raised its capital requirements from the NZ capital market.

This alliance is dependent on Commerce Commission and Government approval. What happens to Air New Zealand if they do not give that approval?

AIR NEW ZEALAND’S ANSWER: We believe that when the regulatory authorities examine the alliance in detail and the benefits that will accrue to the respective countries and airlines, we will get agreement to proceed. We have no doubt shareholders and the majority of New Zealanders will see the very real wealth creation benefits that will come from the alliance

DEBATE AIR NEW ZEALAND’S RESPONSE: The transaction is blatantly against the intention of the Commerce Act. It may of course get through, but it would be nice to know why AirNZ adopted an approach which means its whole resource is focused only such a problematic deal. If it fails what will Michael Cullen think of John Palmer? What should the electorate think of Michael Cullen?

What is Air New Zealand giving Qantas in return?

AIR NEW ZEALAND’S ANSWER: We share a common vision of what is best for this region and the common realisation that we need to work together to compete against existing and future competition that comes from other carriers. Qantas also clearly value our outstanding reputation for service, safety and technical excellence.

DEBATE AIR NEW ZEALAND’S RESPONSE: As noted “This sort of hostile action by Qantas against Air NZ’s interests and the national interests of New Zealand is nothing new”. Qantas and AirNZ have never had a common vision until now. Why has it taken John Palmer (kiwifruit grower) and Ralph Norris (ex Australian bank employee) to find “common vision”?

What happens to Airpoints and existing alliances?

AIR NEW ZEALAND’S ANSWER: The benefits of Air New Zealand Airpoints members are fully protected.

In time it is planned to extend Airpoints to Qantas services. Air New Zealand is a member of the Star Alliance. No decision will be made in the near future and it should not be assumed that Air New Zealand will leave the Star Alliance.

DEBATE AIR NEW ZEALAND’S RESPONSE: AirNZ cannot remain a member of Star Alliance if this transaction occurs, unless Qantas leaves the One World Alliance.

Will Qantas still operate domestically in New Zealand??

AIR NEW ZEALAND’S ANSWER: Qantas will operate on domestic New Zealand routes and Qantas will be responsible for flight operations matters such as air crew, provision and maintenance of aircraft, and passenger services.

DEBATE AIR NEW ZEALAND’S RESPONSE: At present Qantas operates NZ domestic services using Polynesian Airways aircraft. If the transaction occurs Qantas will use AirNZ aircraft.



31. At its essence the merits of the transaction hinge on how the two airlines will increase aircraft utilization. Will they reduce capacity or will they lower fares? There is almost no example of an airline lowering fares except when fares were previously so high as to be completely stifling demand.

. Both airlines have indicated that they believe that the NZ market is too small to sustain two airlines. The NZ market is defined by the number of people willing to fly at current fare levels. If fares were lowered more people would fly, and the market would be larger.

The Commerce Commission has used a demand factor of 1.3, i.e. every 1% change in price leads to a 1.3% change in domestic passenger demand.

The market is as big as low fares encourage it to be. In Europe the advent of low-fare carriers (Ryanair, Easyjet, Buzz, etc) have had hugely stimulatory consequences on the routes where they have functioned.

. At present AirNZ is trumpeting how its low fares are encouraging huge demand growth (in excess of 20%).

— Wellington Airport’s domestic passenger numbers in October 2002 were 2.5% higher than a year ago. What has happened to the growth? — In fact no one knows if AirNZ is really offering cheaper fares because they have over 10 fare categories. Reducing fares in one or two categories could even mask an average increase in fares.

— One reason for the growth of AirNZ Metro is that AirNZ-Freedom has been withdrawn. The 6,000 or so people a week who flew Freedom between Auckland-Wellington-Christchurch may now just be moving to AirNZ-Metro.

— Qantas seems not to be bothering with advertising itself at present. It is quite likely that most of AirNZ’s growth is really just people who previously flew Qantas.

32. There is every likelihood that the airlines operating together will not act to grow the market. They will not lower fares to fill aircraft. They will take aircraft off runs and offer fewer seats.

33. What are the consequences of selling a national icon?

. It is very difficult to economically or legally argue the case for special consideration to be given to ‘icons’. Government has been quite comfortable for Young Nicks Head to be sold to Americans and for offshore investors to acquire over 70% of the New Zealand wine industry. Does AirNZ warrant any special consideration in this area?

. If it does it is because AirNZ is the main window of the outside world into NZ, as the main offshore marketer of NZ. And it is supportive of many NZ icon events. It is putting itself up as a NZ icon through its support of the NPC, the NZ golf open, the wine awards and other events that contribute to how NZers define themselves.

. Will AirNZ continue to undertake the same branding of NZ to the world, will it continue to fund a large number of NZ ‘icon’ events? Perhaps, but it is telling that of the Australian-owned New Zealand major banks (all but one) have been moving away from supporting major national sports teams which compete with Australian teams. The reality is that a NZ branch of an Australian bank or airline is unlikely to provide support for a New Zealander to compete in any high profile manner with an Australian.

34. What will happen on the international routes?

AirNZ has indicated that it loses money on some international routes and that this transaction will solve this problem. This beneficial outcome may come about in one of three ways:

(i) Qantas is able to route more people onto AirNZ’s planes.

This may happen, but expect the benefit to be small. Qantas’ focus is on bringing people to Australia.

(ii) Qantas reduces competition and AirNZ takes advantage of the reduced competition to increase fares.

(iii) AirNZ reduces capacity.

A fourth option is that AirNZ makes more out of its domestic services and hence is in better shape to subsidise its international services.

35. If AirNZ ceases to gain Star Alliance passengers it is very difficult to see how its international business will prosper under the Qantas arrangement.


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