Paper prepared for Debate Air New Zealand.

Keywords:Business & Finance;

Major factors in the background to the proposed merger between Air New Zealand and QANTAS are the Australian reneging on its open skies agreement with New Zealand, so that Air New Zealand does not have simple access to the Australian domestic air travel market, and the subsequent hurried – and with hindsight, foolish – purchase of Ansette Australia by Air New Zealand to obtain that access. I draw two immediate and relevant conclusions:

First, the Australian government was very willing to bully New Zealand when it thought it was in the Australian interest.

Second, hurried decisions are not necessarily good ones. That applies to the earlier merger as much as it does to this proposed one. As I understand it, Debate Air New Zealand is anxious that the merger be evaluated carefully, and not hurriedly and casually – certainly not as casually as the Air New Zealand-Ansette merger was. I agree.

The merger process goes something like this:

Next week the government of New Zealand gives its approval for the merger process to proceed. As the majority shareholder of Air New Zealand, its permission is required. However the approval should only be in terms of the narrow criteria of the New Zealand government as a shareholder. The government would be wise not to make any reference to the merger being in the public benefit.

There are two reasons for this. First it has not yet the comprehensive information to make the decision, and even if it had, a decision next week would be too hurried.

The second reason is that the merger decision then goes to the Commerce Commission for approval. The Commission will almost certainly conclude the merger will result in market increased dominance by the merged airline as far as the New Zealand domestic air travel market is concerned. Normally that would mean it would refuse permission for the merger.

However Section 36(8) of the Commerce Act 1986 states (after removal of some of some of the weighty – but for these purposes unimportant – caveats in order to get the main idea across) that

“The [Commerce] Commission shall grant an authorisation [to merge] it is satisfied that the merger …. if implemented would result in … a benefit to the public which would outweigh any detriment to the public which would result … any … strengthening a dominant position in a market.”

Were next week the government to approve the merger proceeding on any wider criteria than its shareholding interest, it would be saying something about the public benefit. As pointed out above, it is not in a position yet to make that judgement about the public benefit, but even were it, any public statement could be interpreted as an improper influence on the judicial procedure which the Commerce Commission is undertaking. Thus, next week the government needs to give the absolute minimum approval to go on the next step.

We cannot tell whether the Commerce Commission will conclude the public benefit outweighs the detriment from the increased market dominance. But I think we can say a couple of things.

The first is that the Commerce Commission is not well placed to make such an important decision. It is designed for dealing with much smaller mergers. That was the conclusion that the government came to in regard to the dairy industry merger which led to Fonterra. It took the merger decision out of the hands of the Commission, and made it a parliamentary one by special legislation. We can argue whether the ANZ-QANTAS merger is larger or smaller than the diary industry one. However they are the same order of magnitude, and the conclusion, that the Fonterra decision was too big and complex for the Commerce Commission, broadly applies to the ANZ-QANTAS merger.

The second problem that the Commerce Commission faces is that it is both the judge of the applicability of Section 36(8), and also has the function of testing the quality of the evidence. The merger partners will put forward a case that the merger is in a public interest. But there is no mechanism by which the case can be evaluated independently before the Commission.

What is needed is that there should be an independent counsel charged with testing before the Commission the evidence of the merger being in the public interest. The counsel should, of course, have sufficient resources to call on expert evidence in order that he or she can carry out their task.

Behind this concern is a worrying weakness of the merger decision process. Those involved in a merger will provide evidence that the merger is in the public benefit. This evidence tends to be based upon optimistic assumptions which are rarely fulfilled after the event. There is no penalty if the assumptions are not met. It is very difficult for the Commerce Commission to judge the degree of optimism that is involved in the submissions. That is whey there is a need for a properly resourced independent counsel, whose function is to assist the Commission by putting the public benefit claims of the merger applicants under the most rigorous scrutiny.

In effect the public needs the public interest to be independently represented during the hearings. This in no way derogates from the commissioners themselves. They should value such independent scrutiny, as it will simplify their task of weighing the public benefit against the detriment from the increased market dominance. The merger applicants should welcome such an independent counsel too, if they are convinced that their case for the merger being in the public benefit is a valid one.

In the event of the determination by the Commerce Commission being that the merger should proceed, there remains one further key step in the merger approval. process.

By its holding of the Kiwi Share – which is different from its ownership interest in Air New Zealand – the Government has a duty to determine the public interest After the Commerce Commission decision, the government should then decide whether the merger should proceed, using the Kiwi Share as the legal mechanism by which it makes that decision.

While the determinations of the Commission and the evidence placed before it will be relevant, the Government may come to a decision which differs from the Commission. In my view it has the authority and judgement to come to a decision which differs from the Commission. In any case its assessment of what constitutes the public benefit – to what extent the merger would be in the national interest – may be different from the precise legal notions in the Commerce Act.

The practical import of this paper can be summarised as follows:

1. The government announcement next week, should be based on the narrowest basis of approval as a majority shareholder for the next stage of the merger to proceed.

2. The hearings of the Commerce Commission should include a properly resourced, independent counsel whose function is to test the public benefit argument before the Commission.

3. In the event of the Commerce Commission approving the merger, the Government should (using the evidence placed before and the determination of the Commission as well as other matters it considers relevant) make its own assessment of the magnitude of the public benefits and use the authority inherent in its Kiwi Share to agree or disagree to the merger.

Like the Government, Brian Easton is not in a position to assess at this stage whether the proposed merger has or has not substantial public benefits.