ACCC will oppose Qantas merger with Alliance citing competition concerns

ACCC will oppose Qantas merger with Alliance citing competition concerns

Source: Qantas

A proposed merger of airlines Qantas (ASX: QAN) and Alliance Aviation (ASX: AQZ) valuing the latter at $919.2 million will be opposed by the consumer watchdog after concluding the transaction would ‘substantially lessen competition’ in the fly-in fly-out (FIFO) transport space.

The Australian Competition and Consumer Commission (ACCC) says that its investigation has concluded the transaction ‘is likely to substantially lessen competition in markets for the supply of air transport services to resource industry customers in Western Australia and Queensland’.

The determination puts the merger up in the air, considering ACCC approval is required for the deal to go through.

In response to the decision, Qantas says it will ‘seek more information’ from the watchdog, and has requested a meeting with the ACCC to understand its decision which the airline claims is “at odds with the increasingly competitive nature of the segment and views expressed by a competitor that the acquisition would not lessen competition”.

The competitor cited by Qantas is Rex, which gave its support to the merger back in September on the condition that any purchase must come with assurances that the pair’s simulators would be available for rival airlines to use.

ACCC chair Gina Cass-Gottlieb said the removal of Alliance was likely to substantially lessen competition and would lead to increased airfares and reduced service quality for customers.

“Qantas and Alliance currently strongly compete with each other in markets where there are few effective alternatives,” Cass-Gottlieb said.

“The proposed acquisition would combine two of the largest suppliers of charter services in Western Australia and Queensland.

“Flying workers in the resource industry to and from their worksites is an essential service for this important part of the Australian economy, so it is critical that competition in this market is protected.”

Cass-Gottlieb added that the ACCC received ‘considerable’ feedback that Alliance was strongly valued by customers as a ‘particularly vigorous and effective competitor’.

“For many customers, Alliance is the preferred supplier due to its large fleet capacity, customer-centric approach and high-quality service offerings, including having the highest on-time-performance in the industry and demonstrated flexibility and willingness to meet customer needs,” Cass-Gottlieb said.

“Alliance doesn’t sell seats on major passenger routes, so many Australians may not have heard of them, but it is one of Australia’s most significant airlines, with 70 aircraft currently and more on order.

“Combining such an important player with Australia’s largest airline, Qantas, would be likely to substantially lessen competition and is something we oppose.”

Further, the chair said the ACCC found it was unlikely a new or existing airline could expand quickly to a scale that would address the loss of competition resulting from the proposed acquisition.

“Qantas will face limited competition if allowed to acquire Alliance because most other airlines lack the right aircraft, fleet size, or capabilities needed to compete effectively,” Cass-Gottlieb said.

“Airlines wanting to enter or expand at scale, face a combination of barriers, including incumbency advantages, the need to establish a reputation for providing a reliable service, access to and training of air crew and engineers, access to suitable aircraft and infrastructure, and the significant regulatory requirements to fly.

“This combination of factors makes it very difficult for smaller airlines to win significant customer contracts and grow their business.”

In replying to the ACCC’s statement, Qantas said the proposed acquisition would enable it to service the FIFO sector better due to unlocked efficiencies from a combined fleet of similar aircraft.

“Qantas first flagged its long-term interest in ultimately acquiring 100 per cent of Alliance when it bought just under 20 per cent of the charter operator in February 2019. The ACCC investigated that minority holding for three years and made no findings that it lessened competition,” Qantas said.

“Qantas is also Alliance’s biggest customer, wet leasing 18 Embraer aircraft that are operated on the national carrier’s behalf on a number of routes.

“Qantas in February announced options for up to 12 additional E190 aircraft to be wet leased from Alliance to provide increased capacity and network connectivity in the domestic market.”

Alliance managing director Scott McMillan has also responded to the ACCC’s decision, noting the airline would closely consider the watchdog’s decision and its options before deciding on next steps.

“We are disappointed with the ACCC’s decision today to oppose the Qantas acquisition,” McMillan said.

“While we respect the ACCC and its process, we remain of the view that there is a strong industrial logic for Alliance to be part of the Qantas Group and that the proposal does not substantially lessen competition.

“We also think there is a compelling case that the proposed transaction will lead to superior outcomes both for Alliance shareholders and for our customers.”

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