The powerful Australian Competition and Consumer Commission (ACCC) has raised concerns that the 19.9% stake Qantas acquired in Alliance Airlines earlier in 2019 could reduce competition.
The ACCC released a Statement of Issues on the matter yesterday, August 1, 2019. Qantas and Alliance compete on both FIFO routes and regular passenger transport routes. Frequently, they are the only two airlines providing service on a route. The ACCC is concerned that Qantas’ USD$40 million, 19.9% stake in Alliance is likely to “substantially lessen competition”.
The ACCC has the power to initiate Federal Court action against an entity if it is found to be in breach of Section 50 of Australia’s Consumer and Competition Act. Section 50 explicitly forbids entities from acquiring financial interests in other entities that would have, or is likely to have, the effect of substantially lessening competition.
What the ACCC had to say
In a media statement released yesterday, ACCC Chairman Rod Sims said;
“Alliance Airlines is a close, important and growing competitor to Qantas, including through its partnership with Virgin. It provides consumers and companies with a crucial alternative to Qantas in markets that are already highly concentrated,”
“We consider this shareholding has the potential to impact Alliance’s future growth and its ability to be a strong competitor. It may impact Alliance’s ability to grow through raising funds from investors, or to consider rival takeover approaches. It may also impact whether Alliance’s customers perceive it to be an independent rival to Qantas.”
The release yesterday of the Statement of Issues is a step in a formal investigative process. The ACCC is now calling for submissions from interested parties prior to determining whether it thinks Qantas has breached Section 50 of the Consumer and Competition Act.
The ACCC is a powerful quasi-government body. Large entities like Qantas can have a mixed run dealing with the ACCC. Whilst it approved the Qantas tie-up with American Airlines recently, it also disallowed the proposed Qantas tie-up with Cathay Pacific on Australia-Hong Kong routes. An automatic tick of approval cannot be assumed.
Alliance Airlines is Australia’s dominant FIFO charter operator. Its main base is in Brisbane and it also has secondary hubs at airports around the country. Alliance has a fleet of 46 aircraft, comprising 25 Fokker F100s, 16 Fokker F70s, and five Fokker F50s.
The core of the Alliance business is flying workers in and out of remote worksites, frequently to mines and energy plants. Alliance also has a substantial business providing regular passenger services for both Virgin Australia and Qantas. Virgin was allegedly blindsided by the Qantas buy-in back in February. There is some concern about what the Qantas stake will mean for Alliance’s ongoing relationship with Virgin Australia.
Alliance Airlines is expecting to declare a USD$22.5 million profit for the 2018/19 financial year.
The Qantas response
Qantas insists its interest in Alliance is purely passive. In a statement, Qantas said it bought into Alliance because it is a well-run business with good exposure to the resources sector and makes money.
Qantas has not sought a board seat nor attempted to interfere in Alliance’s management.
In its response to the ACCC statement, Qantas said;
“We do not believe there is any evidence of a lessening of competition as a result of our minority stake, nor any reasonable prospect that there will be. To the contrary, Alliance Aviation has extended the services it offers to the market in recent months.”
Qantas also indicated that it does not plan to sell its stake in Alliance Airlines.
Prima facie, Qantas’ interest in Alliance Airlines raises some flags. Of particular relevance is the continuation of Alliance’s deep working relationship with Virgin Australia and the continuing provision of choice and competition on routes solely served by Alliance and Qantas.
High airfares and the lack of competition in regional and rural Australia is already a red hot political issue. This could further exacerbate that problem.
But Qantas is insisting its interest in Alliance isn’t to lessen competition. It points out that since buying its stake in February, Alliance has added new routes.
Time will tell whether the ACCC agrees.