Comment: Non alliance a missed opportunity

The Australian Competition and Consumer Commission (ACCC) draft decision to deny authorisation of the planned code share between Qantas and Air New Zealand late last month is baffling and appears to ignore the global evidence that alliances benefit consumers.

Qantas and Air New Zealand had proposed to co-operate to eliminate wasteful competition but also introduce new services and give passengers more choices.

Competition across the Tasman between Australia and New Zealand is intense with nine airlines competing including Virgin and Emirates.

The ACCC draft decision appears to pass over what is termed in the industry as the ‘Southwest effect’ , a term first coined by the US Department of Transport.

The ACCC also appears to have disregarded the years of fare reduction across the Tasman when Qantas owned 19 per cent of Air New Zealand, and the reduction in airfares since the demise of Ansett, when Qantas has controlled 70 per cent of air traffic often in a monopoly situation.

ACCC Chairman Graeme Samuel said authorisation of the agreement would fundamentally change the competitive process on the trans-Tasman.

The ACCC considers that the agreement would only result in limited public benefits in the form of cost savings to the airlines as well as marginal improvements in schedule spread, connectivity and frequent flyer options for consumers,” Mr Samuel said.

“[While the ACCC] appreciates that Qantas and Air New Zealand would continue to be constrained on the trans-Tasman to some extent, by Virgin Blue and Emirates…because these rivals face impediments to further expansion on the trans-Tasman, they will not replace the competitive dynamic that will disappear under the agreement.”

Yet the evidence simply does not support that argument.

According to the Reserve Bank of New Zealand and the NZ Bureau of Statistics, between 1990 and 2003, airfares between Auckland and Sydney have declined 47 per cent (based on lowest fares available from Air NZ),  CPI has increased 30 per cent, and wages have lifted by 33.7 per cent.

From 1990 to 1997, Qantas had a 19 per cent stake in Air New Zealand and during that time fares went down by 26 per cent.

Air New Zealand and Qantas argue – and rightly so – that by combining operations they could rationalise operations, cut out wasteful duplication of flights, operate larger more efficient aircraft and offer passengers new point-to-point services.

These types of services would eliminate the costly and time-consuming stops in hubs such as Sydney and Auckland.

New non-stop services between cities, such as Wellington and Canberra, would result. And that has been the experience in Australia since the demise of Ansett.

Before 2001 there were virtually no Perth-Brisbane non-stops and a trip to Canberra was via Melbourne or Sydney. Since the collapse of Ansett, Qantas has been able to justify double daily Perth-Brisbane non-stops and launched Perth-Canberra non-stops.

Despite having a monopoly on the Perth-Canberra route, Qantas reduced its fare by 25 per cent on that route because it was able to eliminate costly stops and airport taxes.

Qantas and Air New Zealand applied for approval of a far more complex equity alliance in 2002 and the ACCC concedes that: “the scope of the proposed alliance was broader than the agreement as it involved all Qantas and Air New Zealand flights into, within and departing from New Zealand”.

The ACCC and the NZ Commerce Commission rejected that tie-up but an appeal was successful to the Australian Competition Tribunal, where new evidence could be tendered, but was rejected by the New Zealand High Court, where fresh arguments were disallowed.

The most perplexing aspect of the draft rejection is that the ACCC has failed to give weight, or Qantas and Air New Zealand failed to submit data, related to the ‘Southwest effect’.

The US Department of Transportation (DOT) determined in a 1993 study that when Texas-based Southwest Airlines launched a new service to a city, a phenomenon occurred where the average fare fell and the number of passengers dramatically increased.

We have seen a similar effect in Australia and New Zealand. In the mid-1990s, New Zealand airline Kiwi International with just two aircraft was able to keep both Qantas and Air New Zealand in the red across the Tasman for more than a year because of its cut-price fares.

A more recent study completed by the Office of Aviation and International Affairs found that the ‘Southwest effect’ still holds true today. That study, which focused on Southwest’s arrival in Philadelphia, proved that not only did fares fall in the majority of short haul, medium haul and long haul markets, but also that the passenger traffic significantly increased in markets served by Southwest. Passenger traffic on flights between Philadelphia and Los Angeles increased by 69 per cent and the fares were decreased by 36 per cent.

Virgin Blue, with 50 Boeing 737s in service, is Australia’s ‘Southwest’. Rather than just another start-up that may not survive the year, Virgin Blue has the backing of Toll Holdings and Sir Richard Branson.

The ACCC also appears not to have given sufficient weight to the vast amount of international data that shows that code-sharing, alliance membership and anti-trust immunity reduces fares.

According to Jan Brueckner, professor in the Department of Economics and the Institute of Government and Public Affairs at the University of Illinois, whose 199 9 analysis of over 54,687 different itineraries was derived from three million records representing 17,518 distinct international city pair markets, fares had fallen by 27 per cent due to co-operation between airlines on interline fares or through fares.