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Allowing the proposed alliance between Qantas and China Eastern would give the two carriers the ability to limit capacity and lift fares on the Sydney-Shanghai route, the Australian Competition and Consumer Commission (ACCC) says.
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In a draft ruling, the competition regulator has knocked their application to work together in the Australia-China market, arguing the partnership would result in “significant public detriment”.
The ACCC said Qantas and China Eastern currently had about 83 per cent of all seats between Sydney and Shanghai and the proposed alliance would give them an “increased ability and incentive to limit capacity and/or increase airfares” on the route.
Qantas currently flies daily from Sydney to Shanghai, its only destination in mainland China, with Airbus A330s. China Eastern operates Sydney-Shanghai, Melbourne-Shanghai and Sydney-Nanjing-Beijing services.
While Air China also flies between Sydney and Shanghai with a three times a week service, the ACCC said it did not believe the Chinese flag carrier would not be an effective competitor against a combined China Eastern-Qantas entity and noted it had reduced its presence on the route over the past five years.
“The ACCC does not consider that Air China will sufficiently constrain Qantas and China Eastern in the event they decide to reduce or limit growth in capacity to increase airfares if the Proposed Conduct is authorised,” the ACCC said in its draft determination published on Tuesday.
“The ACCC considers that the lessening of competition on this route that will arise as a result of the Proposed Conduct is likely to outweigh any of the public benefits likely to arise.”
“The competitive constraint they impose on each other is likely to be lost if the Proposed Conduct proceeds.”
While the ACCC acknowledged there would be “some limited public benefits” as part of the proposed alliance, it was not convinced the benefits outweighed with “significant public detriment likely to result from Qantas and China Eastern coordinating their services on the Sydney-Shanghai route”.
It said Qantas and China Eastern did not provide sufficient evidence to conclude new frequencies, direct services and destinations were likely outcome of the proposed alliance.
Moreover, the ACCC said there was also insufficient evidence to conclude that a public benefit, in the form of triggering a competitive response from rivals, was likely to arise should Qantas and China Eastern be allowed to partner up.
The proposed alliance was unveiled in November 2014, following the end of negotiations between Australia and China over a Free Trade Agreement
China Eastern general manager for Oceania Kathy Zhang said the airline was “obviously disappointed at the initial response from the ACCC, given the strong competition that already exists between these two markets”.
“Air travel is key to facilitating the increased traffic flows that will result from the Free Trade Agreement, and our proposed partnership with Qantas is about coordinating in order to provide a better level of service,” Zhang said in an emailed statement.
Qantas said in a statement it was reviewing the ACCC decision and would speak to the regulator in the coming weeks to highlight the consumer benefits of the proposed partnership.
“There are more than 20 airlines already providing services between Australia and mainland China, and the sharp pricing on these routes demonstrates that the market is highly competitive,” Qantas International chief executive Gareth Evans said.
“New traffic rights recently granted to Chinese carriers means the competition in this market will only increase, which underlines the importance of Qantas forming a strategic partnership with China Eastern so that we can strengthen our network and scheduling offer to customers.”
The ACCC draft determination said indirect services provided by other airlines, such as trips through Kuala Lumpur, Singapore or Hong Kong, accounted for about 12 to 15 per cent of passenger traffic between Sydney and Shanghai.
“This is despite the fact that airlines offering a one stop flight between Sydney and Shanghai are priced comparably to, and on occasion significantly cheaper than, direct flights offered by the Applicants.
“While the widespread availability of indirect flights is likely to limit to some degree the extent to which Qantas and China Eastern could reduce or limit capacity growth to raise their airfares, indirect flight are likely to be a significantly weaker competitive constraint than Qantas and China Eastern are to each other on flights between Sydney and Shanghai.”
Submissions from interested parties in response to the ACCC’s draft decision were due by April 8.
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