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Proposed amendments to section 77A of the TPA International news Our publications Five things you need to know…exclusion clauses In brief

Key points The Australian Competition Tribunal reached a different decision than the ACCC by granting the authorisations sought by Qantas and Air New Zealand for their proposed alliance. The ACCC had rejected the proposed alliance. The Tribunal reviewed the ACCC's decision on the merits and came to a different view based on a change in the relevant market dynamics, rather than through any deficiency in the ACCC's reasoning. The introduction of new services and increased commitment to the trans-Tasman route by other carriers such as Virgin Blue and Emirates necessitated a re-examination of the proposed alliance's effect on competition. The Tribunal noted that the proposed alliance could cause detriment for time-sensitive passengers through a reduction in the frequency of flights. It determined that this detriment was relatively small and was outweighed by the substantial public benefits associated with the alliance. The proposed alliance is still unable to get off the ground because the New Zealand Commerce Commission rejected the proposed alliance in 2003 and a subsequent appeal to the High Court of New Zealand by Qantas and Air New Zealand was unsuccessful. The Tribunal's decision is of interest because it reinforces the view that competition assessments are based on market dynamics and that high market shares are not necessarily determinative. The Tribunal's decision is also of significance as an indicator of how a matter may be considered before the Tribunal if the proposed 2005 Dawson Bill changes are introduced to permit appeals to the Tribunal from any formal merger applications considered by the ACCC.

Introduction

On 16 May 2005, the Australian Competition Tribunal (Tribunal) delivered its reasons for the determination regarding Qantas and Air New Zealand's proposed alliance. Qantas and Air New Zealand had applied for review of the determination of the Australian Competition and Consumer Commission (ACCC), which had refused authorisation in relation to the proposed acquisition by Qantas of ordinary shares in Air New Zealand, and some cooperative arrangements between Qantas, Air New Zealand and Air Pacific.

Background

In December 2002, Qantas and Air New Zealand applied to the ACCC for authorisation of Qantas' proposed acquisition of a 22.5% voting interest in Air New Zealand, and for Qantas and Air New Zealand to enter into agreements to coordinate their activities with respect to all passenger and freight services on Air New Zealand flights, and all Qantas flights to, within and from New Zealand. Qantas and Air New Zealand also sought authorisation for an agreement to cooperate with Air Pacific Limited with respect to passenger and freight services. The conduct for which Qantas and Air New Zealand sought authorisation was known as the "Alliance".

In September 2003, the ACCC refused each request for authorisation. Qantas and Air New Zealand applied to the Tribunal for a review of the ACCC's determination. The Tribunal reviews matters on the basis of the evidence and submissions placed before it rather than being solely confined to the facts placed before the ACCC. This proved very important in this matter because the competitive environment in which the Alliance would have operated was found by the Tribunal to have changed significantly since the ACCC's decision to refuse authorisation.

A determination was published by the Tribunal in October 2004 granting the authorisations sought, however the reasons for judgment were not published until May 2005.

The Tribunal found that public benefits accruing as a result of the Alliance would outweigh any detriment resulting from certain anti-competitive aspects.

Changes to the competitive environment

The Tribunal emphasised that the state of competition in the relevant markets had changed significantly since the ACCC refused Qantas and Air New Zealand's requests for authorisation. The market in which the most significant changes had occurred was the trans-Tasman air passenger services market, which was also the market in which there were the most anti-competitive concerns.

The Tribunal considered that the two major competitive developments in this market since the ACCC's determination were the entry of Pacific Blue (Virgin Blue's trans-Tasman carrier) to a number of trans-Tasman routes and the expansion of Emirates' trans-Tasman business. The increased presence of these two carriers was a principal factor in the Tribunal's decision that competition would not suffer significant long term damage within the trans-Tasman passenger market.

The Tribunal found that while Qantas and Air New Zealand would be likely to comprise a significant share of the market immediately following the commencement of the Alliance, the presence of Pacific Blue and Emirates would constrain Qantas and Air New Zealand's ability to raise prices or reduce capacity in the longer term.

The Tribunal also noted that the very high market share held by Qantas and Air New Zealand, estimated at approximately 80%, was not necessarily indicative of the ability of rival carriers to compete in the future, particularly as this market share was calculated before Virgin Blue and Emirates launched serious initiatives in the market. Additionally, the rapid growth of these two rival carriers since their entry suggested that they faced no strategic disadvantage on the level of brand recognition or credibility.

The Tribunal also discussed the potential benefits that the Alliance could have upon Qantas' international strategy. Qantas argued that the Alliance and the resulting access Qantas would gain to the Auckland-Singapore route would allow Qantas to achieve its goal of establishing a "mini-hub" in Singapore. The Tribunal accepted that Qantas would benefit from "additional feed" and that this would in turn create income for both the airline and Australia. Australian passengers would benefit from a "comprehensive international network".

Time-sensitive travellers

Although the Tribunal found that the public benefits offered by the Alliance would overshadow any negative impact on competition, it did determine that time-sensitive travellers could suffer disadvantage.

These customers were characterised as travellers who required convenient time schedules and greater flexibility in booking and changing tickets, such as business customers whose air travel is arranged pursuant to a contract between their employer and the carrier.

Time-sensitive travellers tend to be dependent upon the convenient schedules and flexibility offered by full-service airlines such as Qantas and Air New Zealand, rather than being attracted to the lower fares offered by low-cost carriers such as Pacific Blue. The Tribunal recognised that these customers could be limited in their choice of airline following authorisation of the Alliance, but that any disadvantage was outweighed by the public benefits of the Alliance.

Consideration of the matter in New Zealand

At the same time as Qantas and Air New Zealand applied to the ACCC for authorisation of the Alliance, they also made similar applications to the New Zealand Commerce Commission (NZCC) for authorisation under the Commerce Act 1986 (NZ) (Commerce Act). In October 2003, the NZCC refused authorisation under the Commerce Act. An appeal to the High Court of New Zealand was dismissed.

Conclusion

This case demonstrates the Tribunal's sensitivity to the importance placed on market dynamics and the impact that changed circumstances can possibly have on a competition assessment in an appeal to the Tribunal. It also shows the practical difficulties in coordinating trans-Tasman regulatory authorisations.

Jacqueline Cremer
Solicitor
T +61 2 9296 2789
jacqueline.cremer@mallesons.com

© Mallesons Stephen Jaques