Air New Zealand and Virgin Blue group air alliance questions and answers

What is the Air New Zealand–Virgin Blue group alliance application about?

Air New Zealand and Virgin Blue group applied under Part 9 of the Civil Aviation Act 1990 for authorisation to form an Australasian Airline Alliance for the integrated operation of their trans-Tasman international air services.

The Civil Aviation Act 1990 states that the Minister of Transport may authorise certain provisions of a contract, agreement or understanding between two or more persons in respect of international air carriage.

The Ministry of Transport considered the arrangements both in terms of the criteria in Part 9 of the Civil Aviation Act 1990 and the public interest. The Ministry provided advice to the Minister of Transport to inform his decision.

What is the New Zealand Minister of Transport’s decision on the Air New Zealand–Virgin Blue alliance application?

The New Zealand Minister of Transport has authorised the Alliance following agreement between the applicants on a formula that determines the minimum seat capacities that they will operate across the Tasman.

The authorisation is limited to a three-year period, after which the Alliance application will need to be resubmitted for further authorisation.

How will this affect day-to-day operations on Tasman routes for both airlines?

Under the Alliance the two airlines will work together on the services and fares they offer.

While the airline applicants themselves are better placed to advise how day-to-day services will change, customers can expect to see a number of benefits such as a wider range of travel options and an improved range of departure times.

The applicants also indicated that they will be increasing the number of seats that are available on certain routes across the Tasman.

How will this affect the number of flights offered by both airlines?

Enabling more sustainable competition between two major airline groups, the Qantas group and the new Air New Zealand-Virgin Blue Alliance, within and between both Australia and New Zealand will be a major benefit of the Alliance.

The applicants have made commitments that will at least maintain the numbers of seats offered across the Tasman and increase capacity on some routes, particularly from Wellington.

In the decision to authorise the Alliance, particular weight was placed on the fact that the two airlines will be able to offer their own flights on the domestic legs of trans-Tasman journeys in both countries. Air New Zealand has not been able to do this since the collapse of Ansett Australia in 2001.

What will this mean for passenger fares?

There will be more sustainable competition and cost savings as a result of the Alliance as well as a commitment that the two airline applicants will maintain the number of seats that are operated across the Tasman. This should allow the low fares that passengers have recently enjoyed to be maintained.

In addition, other airlines competing across the Tasman will continue to provide strong competition for the Air New Zealand-Virgin Blue Alliance on most routes.

How will anti-competitive behaviour be monitored and avoided?

Authorisation of the Alliance for a three-year period places a strong incentive on the two airlines to operate in a competitive manner.

How the applicants implement the Alliance, as well as the state of the market, will be taken into account in deciding whether any further authorisation should be given.

The applicants will also report to the Ministry of Transport on their compliance with the seat capacity provisions twice a year. There are specific commitments with respect to both overall seat numbers and on air routes to Australia from Wellington as well as on the Dunedin-Brisbane and Queenstown-Sydney routes.

The Minister of Transport also has the ability to revoke authorisation should the airlines fail to comply with terms of the Alliance agreement.

When will this new agreement take effect?

The applicants have indicated that it will take several months after the latter of the New Zealand or Australian authorisation has been given before new services go on sale.

What conditions have been placed on operators by New Zealand?

The specific provisions agreed to between the applicants prior to the New Zealand authorisation include that it is for a three-year period.

This is the first time that such a time limit has been utilised under Part 9 of the Civil Aviation Act 1990.

There are also detailed provisions relating to maintaining the overall number of seats across the Tasman and on specific routes out of Wellington, Dunedin and Queenstown.

Will this have a positive economic impact for New Zealand compared with what would happen if the Alliance were not authorised?

Although as part of the process the Ministry of Transport had some preliminary analysis done, it is difficult to quantify exactly the overall economic impact.

During the authorisation process the applicants committed to ensuring that, barring developments beyond their control, seat capacity would at least be maintained.

In addition, consideration was given to what was likely to happen if the Alliance did not proceed. This would be unlikely to be the status quo. As recent examples of the Virgin Blue group withdrawing from unprofitable markets has shown, it cannot be expected that airlines will continue operating unprofitable services. For example, when a previous application by Air New Zealand to enter into a similar alliance with Qantas was rejected, Air New Zealand cut back its services from Wellington.

How long is this authorisation in place for?

The Minister of Transport has given authorisation for a three-year period from the commencement of the Alliance.

Previous such authorisations under the Civil Aviation Act have not been time limited.

Will this authorisation affect competition on air services between Auckland and the South Pacific?

No, the Alliance only covers services within and between Australia and New Zealand, excluding Norfolk Island.

Air New Zealand, Polynesian Blue and Pacific Blue will continue to compete on air services to the Cook Islands, Samoa and Tonga.

Why was the New Zealand application made to the Minister of Transport and the Australian application to the Australian Competition and Consumer Commission (ACCC)?

Different jurisdictions have different arrangements in place for consideration of airline alliance proposals.

In New Zealand the Civil Aviation Act provides for the authorisation of international airline alliances. There is a separate competition regime under Part 9 of the Civil Aviation Act for international air transport arrangements. Applications are considered by the Ministry of Transport, which then provides advice to the Minister of Transport to inform his or her decision.

Globally, having a separate regime for international air transport is not uncommon. For example, in the United States such decisions are made by the Department of Transportation.

What process was followed in considering the application?

The process the Ministry of Transport followed in preparing advice to the Minister of Transport was as follows:

• The Air New Zealand-Virgin Blue group application for authorisation of an alliance was posted on the Ministry of Transport website.
• Interested parties had until close of business on Friday 2 July 2010 to make their views known to the Ministry.
• All views were posted on the Ministry of Transport website. Air New Zealand and the Virgin Blue group were given an opportunity to comment on any views expressed before the Ministry prepared its advice to the Minister.
• Air New Zealand and Virgin Blue group were also given further opportunity to comment, particularly on any issues that may be adverse to them as applicants, before the report was finalised.
• The Ministry prepared a final report to the Minister of Transport making a recommendation to authorise the Alliance.

Note - before the report was finalised the applicants agreed provisions on the time period and on the minimum seat numbers that they would provide across the Tasman and provided these to the Ministry of Transport.

How has the analysis of the application been undertaken?

There have been three parts to the analysis.

First, the specific statutory requirements were considered, including detailed consideration of whether or not the Alliance arrangements fully fell under the jurisdiction of the Civil Aviation Act. With the exception of one specific provision in the arrangements, which the applicants decided not to seek approval for, these requirements were assessed to have been met.

Second, the benefits put forward by the applicants were considered. These were assessed to be valid.

Third, a general public interest test was applied. This included making an assessment of the market in terms of individual trans-Tasman routes. An assessment was also made of the competition that the Qantas group would continue to provide in the Australasian market, specifically competition between the Qantas group and the Alliance.

There was also consideration of what the likely outcome would be if the Alliance was not authorised in both New Zealand and Australia.

Has the Ministry of Transport worked with the ACCC while considering the applications?

The two applications have been considered independently under different laws. Ministry staff attended the ACCC pre-determination conference (the minutes are available on the ACCC’s web site) and have taken account of the views expressed there by New Zealand stakeholders.

Following the draft determination by the ACCC that it was inclined to turn down the application, the applicants presented both the ACCC and the New Zealand Ministry of Transport with proposed conditions drafted to meet the ACCC’s concerns. The Ministry studied these conditions in detail and they were influential in the final advice provided to the Minister.

Why was this authorised when the last two applications in previous years by Air New Zealand and Qantas were rejected?

There are several differences between the current application and the earlier applications made by Air New Zealand and Qantas. For example, the first application involved domestic markets as well. Also the two earlier applications were between two airlines that were in rival global airline alliances and had the highest market shares on the Tasman. This latest application involves the first and third largest. There have also been other new developments, including the growth of Emirates in the trans-Tasman market.

What has been the recent international trend in decisions on air services alliances by regulatory agencies?

Similar alliances have been approved by regulators in Europe, North America and Japan for air services across the North Atlantic and North Pacific, which see the three major global airline alliances, Star, oneworld and SkyTeam, competing to offer global networks to their customers.

Qantas already has approval from the ACCC for similar alliances with British Airways and South African Airways.

Why has the alliance been authorised for three years when officials recommended five years?

On 16 December 2010, the ACCC announced its final determination to authorise the Alliance for a period of three years.  Officials had recommended to the Minister of Transport that he authorise the Alliance in New Zealand for five years.  However, the Minister decided that it would be practical to authorise the Alliance for three years, to be consistent with the ACCC.  This would enable the applicants to apply for reauthorisation in New Zealand and Australia at the same time.

Will all information and reports informing the Minister’s decision be released?

The Ministry of Transport report and the alliance agreements are available on the Ministry’s website www.transport.govt.nz. Consideration will be given to the release of other material pending the removal of commercially sensitive information.