Air New Zealand choosing Qantas may have been a big mistake

A report in www.stuff.co.nz says that Air New Zealand may live to regret choosing Qantas ahead of Virgin Blue when it set out to strike a deal with another airline.

The Australian regulator’s rejection of the code-share proposal 10 days ago came after five years of hard and expensive work by the two national air carriers to put such a deal together, with industry estimates that Air NZ will have spent at least $30 million in external professional fees alone in trying to get into bed with Qantas, which for Air NZ, that is equal to at least a year of losses on the contentious trans-Tasman routes.   Qantas is estimated to have spent even more trying to secure, first, an alliance, then a more limited but essentially similar code-share arrangement. It remains empty-handed.

Now the two airlines must decide within a week or two whether to continue to throw good money after bad in a continued search for a tie-up which makes perfect sense in terms of aviation policy, but breaks every rule in the competition law book.

Apparently offstage, but increasingly an ever-present threat to both, sits Virgin Blue, the airline Air NZ sought to buy in 2001 in a desperate attempt to save Ansett Australia, with that attempt failing when then-Virgin Blue owner Sir Richard Branson ostentatiously tore up a cheque from Air NZ for $250 million in front of startled assembled media.

Branson was backing Virgin Blue to take Ansett’s place in the Australasian aviation market, which it is now doing with considerable success, with Australian airline analysts saying Virgin Blue is outsmarting and outperforming Air NZ, Qantas in its domestic operations and Qantas low-cost carrier Jetstar by extracting more revenue from its capacity and increasing its profit where others are falling.

Not so public as Branson’s cheque-ripping antics was Virgin Blue’s behind-the-scenes approach to Air NZ in early 2002, just as the Kiwi carrier was starting talks with Qantas on a possible alliance.  Virgin Blue was then unlisted, a new kid on the block, but with big aspirations in the Pacific including New Zealand.

Chris Corrigan’s Patrick Corp (now owned by Toll Holdings) had built a 62% stake in Virgin Blue and was also keen to start a ground-handling freight business in Australia in competition to Qantas.

Air NZ’s most pressing need was a feed into the Australian domestic market and the Sunday Star-Times understands the board evaluated the possibility of a link-up with Virgin Blue as Qantas talks continued.

A deal with Virgin Blue was recognised as being far easier to get through the regulators, but Air NZ’s fear was that such an alliance would provoke a fierce competitive response from Qantas at a time when the Kiwi airline was in a weakened state.

On the Virgin Blue side, pressure for an Air NZ deal came from the Corrigan and Patrick Holdings camp, which was keen to keep the new airline private, but Branson was keen for a separate public listing for Virgin Blue to dilute the influence of Patrick Holdings in the business.

So the deal-making bounced back to Qantas and the rest is a history that is still unfolding, with among options touted for Air NZ if it decides not to pursue a favourable final ruling for the code-share plan from the Australian Competition and Consumer Commission is an alliance with Virgin Blue instead, although some analysts discount such a possibility for the same reasons it was rejected five years ago with an analyst saying “Air NZ’s interests are too closely aligned with Qantas’ and Regardless of whether they have a code share, they need a cosy relationship with their most significant competitor – doing anything which upsets that relationship would be stupidity.”

Ian Thomas of Sydney-based Centre of Asia Pacific Aviation said though that he would not be surprised if Air NZ decided to revisit its Virgin Blue option, saying that it was difficult to see the ACCC draft decision altering materially from its final call, with it also becoming clear Qantas was preparing to embark on its Plan B for the future, which did not include Air NZ.

Thomas said the last time Air NZ and Virgin Blue talked, the airlines had dissimilar products, but that was changing rapidly as Virgin Blue begins operating a more business-related service which means Air NZ could hook into their networks in Australia with its own higher-yielding traffic.”

Also, five years ago, Virgin Blue, as a new emerging airline, did not have a capacity which Air NZ would have been happy linking into, but he added, “Now Virgin Blue is capable of co-ordinating operations with other airlines which it previously didn’t have”.

With inter-lining arrangements now in place with Malaysia and Hawaiian Airlines, Air NZ could easily become a new partner, “Virgin Blue might be a second best alternative to Qantas, but depending on the outcome of the Qantas plan, it is one I imagine they will look closely at again.”

Report by The Mole, with material from www.stuff.co.nz