Virgin-Air New Zealand alliance to benefit passengers

Virgin Blue has scored a major breakthrough in its plans to overhaul its international network after the competition regulator today dropped its opposition to its tie-up with Air New Zealand.

In another boost today, the Australian Competition and Consumer Commission has also indicated it will approve Virgin Blue’s proposed alliance with Middle Eastern airline Etihad. The two deals are central to Virgin Blue’s strategy of turning the airline into an upmarket competitor to Qantas.

After indicating three months ago that it would block the deal, the competition regulator will now allow Virgin Blue and Air New Zealand to form an alliance on the trans-Tasman route for three years – two years less than the airlines had sought.

New Zealand’s Minister of Transport, Steven Joyce, is also expected to give his blessing to the trans-Tasman alliance within days.

Although the ACCC’s chairman, Graeme Samuel, said the alliance was ‘‘likely to benefit passengers’’ by giving them more frequencies and potentially lower fares, he remained concerned that it may affect competition on a number of trans-Tasman routes such as those to Wellington.

These are truly game-changing alliances.

The regulator has forced the airlines to increase capacity on those routes it fears could be adversely affected. This is to prevent them from lifting fares by slashing flights.

Many analysts had doubted that the airlines could convince the regulator to change its mind, but their prospects improved after New Zealand airports dropped their opposition two months ago.

Morgan Stanley analysts estimated earlier this week that the alliance could boost Virgin Blue’s net profit after tax in 2011/12 by between $15 million and $30 million.

Analysts from Royal Bank of Scotland said today that the regulator’s two decisions were a ‘‘nice early Christmas present’’ for Virgin Blue after two knockbacks in two days in September.

The analysts said interest in Virgin Blue was set to gain momentum ‘‘as the pieces of its corporate and international strategy are put into place over the next six to nine months’’.

Virgin Blue is still awaiting a final decision from US regulators on its proposed alliance with Delta Air Lines between Australia and the US. The US Department of Transportation has indicated it will block the deal but the federal government has since stepped in to lobby for approval on Virgin Blue’s behalf.

The two airlines have also made a commitment to the US regulator not to reduce services on the route for two years if they win approval.

Virgin Blue’s chief executive, John Borghetti, said the regulator’s two decisions marked a key step towards the airline achieving its plans to create an international network.

‘‘These are truly game-changing alliances,’’ he said.