China Eastern and Qantas offer capacity conditions in fresh effort to win approval for proposed alliance

A China Eastern Airbus A330-300 at Melbourne Airport (Rob Finlayson)

China Eastern and Qantas have offered a “capacity condition” on the Sydney-Shanghai route as part of their attempt to win over the Australian Competition and Consumer Commission (ACCC) on their proposed alliance on Australia-China routes.

The offer of a capacity condition is contained in the two carriers’ latest submission to the ACCC seeking approval for the proposed tie-up. The ACCC said in a draft determination in March it intended to block the alliance because it would give Qantas and China Eastern the ability to raise fares and limit capacity growth on the Sydney-Shanghai route.

In response to the draft determination, the pair said the ACCC failed to appreciate the vigorous and effective competition provided by other carriers offering indirect services between Australia and China the role of other airlines in the Australia-China market.

Moreover, the competition regulator placed insufficient weight on the public benefits Qantas and China Eastern claim will flow from the alliance and disregarded the benefits to Australians that come from an Australian carrier being able to maintain an operating presence in China.

Also, Qantas and China Eastern said their proposed partnership would enable and expedite capacity growth on routes between the two countries, rejecting the ACCC’s assertion that it would limit growth.

“The Commission’s stated concerns ignore commercial realities,” China Eastern and Qantas said in their joint submission.

In its draft determination, the ACCC’s argued the partnership would result in “significant public detriment”, given Qantas and China Eastern currently held about 83 per cent of all seats between Sydney and Shanghai, which gave 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 in March it did not believe the Star Alliance member would 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.

In response to the ACCC’s initial ruling, and despite their rebuttal of certain points made in the draft determination, Qantas and China Eastern have offered a “capacity condition which specifically addresses the Commission’s concerns and which ensures the Applicants will maintain and grow capacity”.

“This Draft Capacity Condition, coupled with the commercial terms of the Joint Coordination Agreement and the realities of global aviation, mean that the Applicants will neither have the ability or incentive to reduce capacity or limit growth,” the submission said.

The details of the capacity condition were redacted in the public version of the China Eastern/Qantas submission for commercial in confidence reasons.

Qantas and China Eastern also asked economists at HoustonKemp and aviation consulting house CAPA – Centre for Aviation to analyse the effects of their proposed alliance.

The CAPA report noted capacity between Australia and China via mid-point hubs such as Hong Kong, Singapore and Kuala Lumpur to the top 15 Chinese airports more than doubled between March 2010 and March 2015.

Meanwhile, the HoustonKemp report said indirect operators imposed a strong constraint on the price offered for direct services on the Sydney/Shanghai route as well as a range of Australia-China city-pairs.

“To deny authorisation to the entire Proposed Conduct on the basis of one single route overlap is inappropriate, particularly given that the Commission is otherwise satisfied that the Proposed Conduct will not have a significant impact on any other area of competition,” the China Eastern and Qantas submission said.

“The overlap with China Eastern in respect of the Sydney-Shanghai route that the Commission perceives as the fundamental problem is in fact what underpins the entire arrangement and therefore the mutual commercial interest of the parties to deliver the public benefits of connectivity, schedule choice and terminal co-location.”

The complete China Eastern/Qantas submission can be read on the ACCC’s website.


Australian Aviation

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