Airline alliance attractive - broker

A transtasman alliance between Air New Zealand and Virgin Blue represents an alluring proposal for Air NZ shareholders, Craigs Investment Partners broker Chris Timms says.

The proposal incorporated code sharing, revenue sharing on the transtasman sectors, lounge co-operation and reciprocal frequent flyer benefits.

The alliance would be supported by a joint Tasman network planning and revenue management team.

Air NZ noted numerous benefits for customers, including better connectivity, improved frequency and stronger sales capability in Australia through Virgin Blue's distribution network.

Mr Timms said Air NZ and Virgin combined had about 53% of the transtasman capacity (37% and 16% respectively) and market share.

Residual capacity was split between Qantas-Jetstar (30%), Emirates (14%) and the balance held by Aerolineas, Chile and Brunei, with 1% to 2% each.

The proposal was before regulation and competition authorities.

The Australian Competition and Consumer Commission (ACCC) might authorise anti-competitive arrangements if the public benefit outweighed the public detriment, Mr Timms said.

"This is a six-month process involving public consultation not dissimilar to the Commerce Commission," he said.

The proposal would not result in an Air NZ-Virgin monopoly on any major routes, unlike the Air NZ-Qantas proposal that was rejected in 2008. However, approval was not a foregone conclusion.

"Given the uncertainty, we have left forecasts unchanged and have not banked the indicative benefits that may accrue to Air NZ if the proposal is authorised. These benefits would boost earnings per share from the second half of 2011 by around 10%."

The financial benefits were largely attributed to revenue synergies, albeit optimising routes and frequency to better align with branding. Cost structures suggested reduced operating costs.

That would likely mean Virgin Blue would fly more of the combined Gold Coast leisure routes near its Brisbane hub, while Air NZ would fly more of the combined Sydney-Melbourne routes.

 

 

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