Qantas Airways Limited [2004] ACompT 9 (with Summary dated 16 May 2005)

AUSTRALIAN COMPETITION TRIBUNAL

Qantas Airways Limited [2004] ACompT 9 SUMMARY File No 5 of 2003 RE: APPLICATION FOR REVIEW OF THE DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 9 SEPTEMBER 2003 DENYING AUTHORISATION IN RELATION TO APPLICATIONS A30220, A30221, A30222, A90862 AND A90863 (PROPOSED ACQUISITION BY QANTAS OF ORDINARY SHARES IN AIR NEW ZEALAND AND COOPERATIVE ARRANGEMENTS BETWEEN QANTAS, AIR NEW ZEALAND AND AIR PACIFIC)

BY: QANTASAIRWAYSLIMITED(ABN16009661901) and AIR NEW ZEALAND LIMITED (ABN 70 000 312 685)

Applicants

GOLDBERG J (President), MR G F LATTA and PROFESSOR D K ROUND 16 MAY 2005 MELBOURNE (Heard in Sydney and Melbourne)

SUMMARY 1. In accordance with the practice of the Australian Competition Tribunal ("the Tribunal") the following summary has been prepared to accompany the Reasons for Determination made today. The summary is intended to assist in understanding the outcome of these proceedings and is necessarily not a complete statement of the reasoning or the conclusions of the Tribunal. The only authoritative statement of the Tribunal's reasons is that contained in the published Reasons for Determination which is being published today and will be available on the internet at www.fedcourt.gov.au, together with this summary. 2. The matter before the Tribunal was a review sought by Qantas and Air New Zealand of the Australian Competition and Consumer Commission's ("the Commission") refusal to grant them authorisation in respect of agreements relating to their activities across the Tasman and elsewhere. In essence, Qantas and Air New Zealand entered into a series of agreements, subject to authorisation, rationalising a number of their airline activities. 3. On 12 October 2004 the Tribunal handed down its determination in which it granted the authorisation sought. The Tribunal has found that although there is a detriment arising out of certain anti‑competitive aspects of the proposed agreements, there are public benefits accruing as a result of the proposal which outweigh that detriment. 4. In December 2002 Qantas and Air New Zealand applied to the Commission for authorisation for Qantas to acquire ordinary shares in Air New Zealand comprising up to a 22.5% voting equity interest, and for Qantas and Air New Zealand to enter into agreements for the coordination of their activities such as scheduling and pricing for all passenger and freight services on all Air New Zealand flights and all Qantas flights into, within and leaving New Zealand. There was also an application for authorisation of an agreement relating to co‑operation with respect to aspects of passenger and freight services with Air Pacific Limited. We refer to this acquisition and these agreements as "the Alliance". The Alliance between Qantas and Air New Zealand involved, in substance, the combining of flights and the removal of competition between them in relation to matters such as pricing and scheduling. 5. On 9 September 2003 the Commission denied authorisation in respect of all the agreements on the grounds that they would involve a substantial lessening of competition and that the anti‑competitive effects of the proposed agreements would substantially outweigh the public benefits flowing from the agreements. 6. Qantas and Air New Zealand applied to the Tribunal to review the Commission's decision. Qantas and Air New Zealand's proposals were examined in relation to their effects in various markets. The markets were: · the trans‑Tasman air passenger services market; · the trans‑Tasman airfreight market; · the Australian domestic air passenger services market; · the Australia‑North America air passenger services market; · the Australia‑North America airfreight market; and · the market for travel distribution services. The greater part of the hearing was taken up by a consideration of the trans‑Tasman air passenger services market, there being little controversy that there were any anti‑competitive effects in the other markets save for the Australia‑North America air passenger services market. 7. The Tribunal, using the "future with and without test", considered the public benefits and anti‑competitive detriments which would flow or be likely to flow if authorisation were granted ("the factual") and then compared them with the public benefits and anti‑competitive detriments which would occur, or be likely to occur, if authorisation were not granted ("the counterfactual"). 8. The Tribunal, consistently with its previous determinations, adopted a test of assessing the benefits to the public said to be generated from the Alliance by considering the benefits which flowed not only to ultimate consumers but also to the parties and their shareholders (described as the "total welfare" or "total surplus" approach), with a caveat that the weight that should be accorded to benefits achieved by producers might depend on whether and to what extent any cost savings or other benefits were passed through to consumers. 9. The benefits that were claimed by Qantas and Air New Zealand in relation to the trans‑Tasman air passenger services market were: · the enhancement of the national interest; · the benefits to Qantas' network as a result of network extension with Air New Zealand; · international benefits of such network extension; · synergy benefits of such network integration; · scheduling benefits of such network integration; · pricing benefits of such network integration · tourism benefits. 10. In relation to the trans‑Tasman air passenger services market we found that, notwithstanding the substantial combined market share of Qantas and Air New Zealand of approximately 80% that would exist at the time the Alliance came into operation if it were authorised, there would be little anti‑competitive detriment arising from the fact that Qantas and Air New Zealand would not be competing against each other in the market, although we do recognise that some time‑sensitive passengers might on occasion experience some inconvenience, at least in the short‑run. We considered, with the exception of the time‑sensitive passenger, that any attempt by Qantas and Air New Zealand to act jointly in an anti‑competitive way, such as by limiting capacity or increasing prices, would be constrained by the presence and likely responses of two airlines in particular, Pacific Blue and Emirates. We were satisfied that Emirates and Pacific Blue, currently holding only a relatively small market share (but one that had significantly increased during 2003/2004), would act as a constraining influence upon Qantas and Air New Zealand, as they had available capacity and cost advantages which would enable them to attract travellers with competitive pricing and scheduling if Qantas and Air New Zealand raised their prices or restricted their capacity. We were satisfied that Emirates has made a commitment to the trans‑Tasman market at least for the five year period for which authorisation was sought, and that Pacific Blue is committed to the trans‑Tasman market, and that both airlines would attract passengers from Qantas and Air New Zealand if the Alliance sought to raise its prices or restrict its capacity. 11. The only significant detriment was in relation to the time‑sensitive passenger, usually a person travelling on business who wished to travel to and from Australia at short notice and had little flexibility as to the time at which he or she could travel, should flight frequencies be reduced. 12. In determining the constraining effects of Pacific Blue and Emirates we paid particular attention to their current and likely future strategic behaviour in the market, in addition to analysing past trends in market share for each of the participants in the market. 13. Ultimately, we reached the conclusion that any anti‑competitive detriment brought about by the proposals of Qantas and Air New Zealand in relation to the time‑sensitive passenger was relatively small and that it did not require a substantial public benefit to outweigh that detriment. 14. Although we reach a different conclusion to that reached by the Commission, it should be pointed out that at the time the Commission made its determination Pacific Blue had just started its trans‑Tasman flights and Emirates had not sought to promote its brand and build up its schedules across the Tasman in the manner it did between the time of the determination and the time at which the hearing commenced. As this was a de novo hearing held eight months after the Commission's determination, we were considering a quite different market from that analysed by the Commission.