Statement made by Ralph Norris, Managing Director & CEO Air New Zealand Limited.
Air New Zealand and Qantas have submitted further information to the New Zealand Commerce Commission. The submission clearly shows that the proposed Strategic Alliance is the only way to secure substantial and long term benefits for New Zealand, including tourism and job creation, with little negative effect.
The evidence clearly shows that New Zealand and Australia are not isolated from the changes which have dramatically affected the global aviation industry and we must learn to adapt and accept change to continue to grow and prosper as both a nation and an airline. The Alliance is a bold initiative by Air New Zealand and Qantas, but it does need the support of the Commerce Commission if the substantial and long term benefits are to be realised.
The highly respected economic advisor to Air New Zealand and Qantas, Henry Ergas of NECG has confirmed his assessment of the benefit to New Zealand and this has been reviewed by other world-leading economists including Professor Robert Willig. All agree with the economic evidence submitted in support of the Application and will say so directly to the Commerce Commission.
These economic opinions fundamentally disagree with the economic modelling carried out by, and on behalf of, the Commerce Commission upon which it based a significant part of its draft determination.
If New Zealand wants to avoid the economic consequences of another near failure of Air New Zealand, future State intervention in shaping New Zealand's airline industry is likely to be inevitable if competition regulators in New Zealand and Australia decline the application by Air New Zealand and Qantas.
Air New Zealand views such State intervention as inappropriate and unnecessary in the local deregulated airline market, but notes its competitors internationally include heavily subsidised and highly protected airlines, some of which already operate to New Zealand.
The Minister of Finance has also stated on numerous occasions that the State is not prepared to be a fairy godmother and provide unlimited future funding of the airline.
That is why the Alliance should be allowed to proceed as it provides a pragmatic, commercial framework within which Air New Zealand can operate successfully as an independent New Zealand-owned and controlled airline in the rapidly changing global aviation environment.
Domestic New Zealand routes are not extensive enough to sustain Air New Zealand, Qantas and a budget carrier such as Virgin Blue going head to head. One airline will ultimately have to give ground. The most vulnerable in such a situation is Air New Zealand.
Our response to the New Zealand Commerce Commission's draft determination is consistent with the case we have presented from the outset.
Some critics have described our position as a doomsday scenario. It is a realistic assessment of the trends that are sweeping through the airline industry internationally.
New Zealand and the trans Tasman routes can not escape what is happening in the rest of the world.
A budget airline will be operating on routes to New Zealand. Last week Virgin Blue announced its intention to do that, and while it clothed that announcement in terms of it being conditional on the outcome of the Alliance decision, we know that to be posturing in a transparent attempt to gain cheap control of the entire budget carrier segment through a forced sale of Freedom Air.
The present head to head competition between Air New Zealand and Qantas will not be sustainable. Add in a budget airline, and the end consequences range between:
- Withdrawal or failure of one airline;
- Air New Zealand being made vulnerable to a full takeover;
- Further ongoing State support, which is most unlikely to occur.
Within our response to the Commerce Commission there are four key positions we defend.
- We stand behind our viewpoint that the Alliance will bring between $189 and $256 million in annual net economic benefits to New Zealand by year three. This figure is the work of economists NECG. Within our response we have pointed out to the Commission where we believe its experts have misinterpreted information, made invalid assumptions or reached wrong conclusions.
These include the assumption that Tasman and domestic New Zealand airfares under an Alliance will be higher by 48% and that in such a scenario Air New Zealand and Qantas would lose no market share to an aggressive competitor. We know the travelling public is more commercially astute than to allow this to occur.
If the Commerce Commission maintains its present position it will be locking
Air New Zealand into the past. That is not a sustainable position for
Air New Zealand in an increasingly volatile global aviation market.
- We reject the proposition that the Alliance will inevitably lead to passenger, freight and fare increases, and a decline in competition. To underline our belief, we have offered conditions that will cap some fares, maintain flight schedules, introduce new routes and see the start up of additional freight services.
There are already 9 carriers operating across the Tasman, with Emirates and Royal Brunei soon increasing that to 11, while Virgin Blue's entry will bring the total number of trans-Tasman airlines to 12. It is only a matter of time before Virgin Blue and possibly other carriers compete on domestic New Zealand routes. Even without the evidence that airfares are tumbling to record lows both internationally and within New Zealand, it would make no commercial sense for Air New Zealand to give these competitors an opening by pricing itself out of the market.
- Freedom Air is an integral part of our existing and future customer offering. We have offered conditions in relation to the future operations of Freedom Air to facilitate the entry by a budget airline to New Zealand that gives any new entrant a head start to operating on the Tasman and domestically.
We have stated from the outset that the Alliance is not a panacea for the future success of Air New Zealand. Our future rests on the Alliance in combination with Freedom Air, Air New Zealand Express Class and further continuous improvement of our international services.
Take one element away and damaging constraints are placed on our ability to operate successfully in the future.
- We disagree with the Commerce Commission's position that the Alliance will not result in an additional 50,000 tourists a year visiting New Zealand. It is the point that most clearly underlines the gulf that can develop between theoretical modelling and commercial reality.
The Commission's modelling forecasts a decline in visitor numbers.
What this ignores is that it is to Air New Zealand's and Qantas' mutual commercial advantage to attract those visitors to New Zealand within an Alliance, as both will share in the economic benefits generated. We will make it happen - whether that requires additional marketing, or pricing or packaging incentives - because we are in the business of bringing tourists to New Zealand on our aircraft.
Air New Zealand currently invests in excess of $70 million every year to promote New Zealand as an international tourist destination. This investment contributes significantly towards New Zealand's $6.2 billion international tourism industry with Air New Zealand carrying 44% of all inbound international tourists, notwithstanding the fact that Air New Zealand spends 90% of all airline expenditure promoting New Zealand which is double our proportionate share. No other airline could, or would, maintain this level of commitment to New Zealand.
Our total response to the Commission's draft determination runs to hundreds of pages of documentation and evidence.
In compliance with convention, the full text of that response will not be made public until the Commission releases it, probably some time this week.
In light of the impact of recent developments such as the Iraq War and the SARS virus on international air travel, we remain convinced that an Alliance with Qantas is not only smart and innovative, it is commercially necessary.
On that basis we have not moved away from the thrust of our original application.
In May, we gave the Australian Competition and Consumer Commission (ACCC) a number of undertakings that addressed its main concerns about the Alliance. Those undertakings have been incorporated within the answers we have given the New Zealand Commerce Commission in relation to its concerns.
We believe that the weight of our response, the realities of the rapidly changing global aviation market, the corroborated economic analysis from independent economists and the undertakings we have given will be sufficient for the Commission to reverse its preliminary draft determination, and we look forward to the opportunity of discussing our response with the Commission in detail and responding the Commissioners' questions at the five-day conference in August.
NOTE: The content of all Air New Zealand media releases are accurate at the time of issue, as stated at the top of each release. For updates on any changes, please contact Air New Zealand.
Air New Zealand is proud to be a member of Star Alliance. The Star Alliance network was established in 1997 as the first truly global airline alliance to offer worldwide reach, recognition and seamless service to the international traveller. Its acceptance by the market has been recognised by numerous awards, including the Air Transport World Market Leadership Award, Best Airline Alliance by both Business Traveller Magazine and Skytrax. The member airlines are: Adria Airways, Air Canada, Air China, Air New Zealand, ANA, Asiana Airlines, Austrian, Blue1, bmi, Continental Airlines, Croatia Airlines, EGYPTAIR, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Shanghai Airlines, Singapore Airlines, South African Airways, Spanair, SWISS, TAP Portugal, Turkish Airlines, THAI, United and US Airways. Aegean Airlines, Air India, Brussels Airlines and TAM have been announced as future members. Overall, the Star Alliance network offers 19,500 daily flights to 1,071 airports in 171 countries.
For more information about Air New Zealand visit www.airnewzealand.com and for more information about Star Alliance visit www.staralliance.com.