The Virgin-Air New Zealand alliance (VANZ alliance) is the latest airline tie-up to receive authorisation from the Australian Competition and Consumer Commission (ACCC)—albeit draft and conditional authorisation. 1 It allows Virgin andAir New Zealand to coordinate on pretty much all aspects of their trans-Tasman services. To resolve concerns about the impact on competition resulting from the alliance, the ACCC imposed conditions requiring the maintenance of capacity on some routes, and granted authorisation only for three years.

Airlines face uncertain times. Just a quick look at the Qantas and Virgin stock prices will tell you as much. Apparently, fluctuating oil prices bear a lot of the blame. On top of that, with the wider economy also in flux, there is a question mark over future trends for business and leisure travellers.

Increasingly, airlines rely on alliances to maintain their capacity and competitive offering. The costs savings and network enhancements resulting from alliances go some way towards countering the challenges that the airlines face. Airline alliances require ACCC authorisation in order to avoid contravention of the Competition and Consumer Act 2010 (Cth). In deciding whether to authorise an alliance, the ACCC must consider whether the public benefits arising from the alliance will outweigh any public detriment — that is, any negative impact on competition.

In the last five years, around eight major airline alliances have sought ACCC authorisation. With the exception of the Air New Zealand-Air Canada venture in 2009, all of them have ultimately obtained authorisation. That said, it would be dangerous to assume that authorisation is just a rubber stamping process. The ACCC has thrown up several indications that it is cautious about the competitive downside of these alliances.

For starters, the VANZ alliance is subject to capacity maintenance conditions on some routes. Ditto the Qantas- Emirates alliance2 (QE alliance) trans-Tasman flights. Other non-trans-Tasman alliances involved routes in which the airlines did not directly compete3 or, where they did, the airlines were new players challenging incumbents on the routes.4 The only exception is the Qantas-BA alliance on the kangaroo routes between Australia and the United Kingdom. But, in that case, the ACCC warned the airlines that it might not continue to authorise the alliance in the future.

For any new alliance, especially one involving direct competitors, you would have to be mildly concerned about your chances of getting the regulator’s clearance. Looking at the VANZ alliance and others, the authors have identified a few pointers that might help maximise the prospect of success.

Tip 1: Promise to maintain capacity

The ACCC’s biggest concern with an airline alliance involving direct competitors is the reduction of competition between them. A reduction in competition could ordinarily manifest itself in two ways: either a reduction in capacity or an increase in price (or both). The biggest hurdle in obtaining authorisation is convincing the regulator that neither of these will happen.

For the VANZ alliance, the airlines directly competed on nine routes between Australia and New Zealand. The ACCC was concerned about whether other airlines operating on the same routes could provide sufficient competitive constraint to stop the VANZ alliance reducing capacity or increasing prices.5 To resolve that matter, the ACCC imposed conditions by which Virgin and Air New Zealand maintain capacity on the routes of concern. The same thing happened to Qantas and Emirates on some of their trans-Tasman routes. The ACCC imposed conditions that the airlines maintain capacity on the routes in which they considered the alliance would have the greatest negative impact on competition.6

The upshot is that for any new alliance involving direct competitors, particularly airlines that are established on the routes, you will likely need to agree to maintain capacity on key routes. Otherwise, you might have trouble convincing the ACCC that the public benefits outweigh the detriments resulting from the alliance.

Tip 2: If times are tough, admit it

The ACCC will consider the future with or without the proposed alliance as part of its assessment of an authorisation application. Owning up to the fact that airlines might otherwise struggle to stay afloat can be a good argument in favour of authorisation. If an airline stops operating on a route or altogether, that means there are fewer competitors, which the ACCC generally views as a bad thing. Similarly, the fact that an airline is struggling and would likely reduce capacity absent the alliance can also support authorisation.

This has worked in a number of cases going back as far as 2002. The fact that Air New Zealand might have gone under absent authorisation of an alliance with Qantas and Air Pacific was an element of its ultimately successful authorisation application.7

More recently, for the VANZ alliance, the ACCC accepted that without the alliance, Virgin would potentially reduce its capacity on some trans-Tasman routes. With a more limited offering, it would not be as effective a competitor with the rival offerings of the QE alliance and Air New Zealand.8

Qantas went one step further, saying that it was in “terminal decline” in its application for authorisation of the QE alliance. This was a nice turn of phrase, but perhaps overstated its position. Some commentators are actually forecasting strong growth in Qantas shares over the next 12 months.9 The ACCC did not accept that Qantas was in terminal decline, or that it would be unable to compete absent the alliance. If you are making this kind of submission, it is safest to limit it to particular routes for which you can point to statistics indicating a reduction in viability. You can provide that kind of information to the ACCC on a confidential basis.

Tip 3: Get creative with your public benefits

When you are seeking authorisation, a bit of creativity can help turn that anticompetitive frown upside down. Rebadging a competitive downside as a public benefit is the latest trend in airline authorisation applications.

Both the VANZ alliance and the QE alliance applications claimed a public benefit in the form of “reduced wingtip flying” — that is, a reduction in the number of flights operated by each of the alliance airlines at the same time on the same route. The claimed benefit is a better scheduling spread, which offers customers more choice.

You would ordinarily assume that, absent an alliance, airlines are going to schedule flights at the times when there is greatest demand. That is why wingtip flying occurs in the first place. Flights at the same time and on the same route are perfectly substitutable. They are absolutely competitive with one another. So, to the casual observer, a reduction in wingtip flying is really just another name for a reduction in competition, no? Clever strategy from the airlines (or their lawyers). It did not quite sneak past the ACCC, though. The ACCC was prepared to accept that a better scheduling spread is a public benefit. But it also picked up on the fact that a reduction in wingtip flying can amount to a reduction in competition. It balanced these two outcomes, and the public benefit won on balance.10

Tip 4: Point to Qantas

One of the strongest points you can make in support of an airline alliance between competitors is to point to bigger, stronger competitors on the relevant routes. For most alliances flying on Australian routes, the Qantas group is one of the strongest incumbents. The ability to compete with Qantas has proven to be a good argument in favour of authorising an alliance between competitors — unless, of course, you are Qantas. Then you need to point elsewhere. Or assert that you are in terminal decline.

The relative strength of the QE alliance was a big factor in the ACCC’s authorisation of the VANZ alliance. It was also a key factor in the ACCC’s decision to authorise an alliance between Virgin Blue and Delta on trans-Pacific routes in 2009. In that case, neither Virgin Blue nor Delta was established on the trans-Pacific routes. The alliance allowed them to compete with incumbents such as Qantas and United Airlines. The ACCC loves seeing new players, especially in concentrated markets. So, if your alliance allows airlines to compete in new markets, you are in good shape for authorisation.

Conclusion

Airline alliances are rife. For the moment, there are pretty good prospects of obtaining authorisation, particularly if the alliance is between non-competitors. The only problem is that there has to be a saturation point for these alliances, and we have to be close to reaching it. Currently, Virgin has authorised alliances with Delta, Air New Zealand, Etihad and Singapore Airlines. Qantas has alliances with British Airways, American Airlines and Emirates. It is funny, really. Without the alliances, the two major competitors on international flights in and out of Australia are Virgin and Qantas. With the alliances, the picture is just the same.