Public register version restriction of publication claimed in relation to part. 3 June 2011

Transcription

1 Authorisation A91227 & A91228: Alliance between Virgin Australia and Air New Zealand Submission in support of application for variation under conditions Public register version restriction of publication claimed in relation to part 3 June 2011 Sydney 2 Park Street Sydney NSW 2000 Australia GPO Box 3810 Sydney NSW 2001 T F Melbourne 120 Collins Street Melbourne VIC 3000 Australia GPO Box 90 Melbourne VIC 3001 T F

2 Contents Page 1 Introduction and Executive Summary 1 2 The Christchurch earthquake Overview Conditions in Christchurch 1 3 Effect on demand for Trans-Tasman services Demand for services to and from Christchurch How forecast passenger numbers and revenue levels were calculated Impact on total trans-tasman demand 9 4 Applicants response to excess capacity on Christchurch services Applicants response to drop in demand to date Proposed reductions in capacity 11 5 Application for variation of compliance with conditions Overview Variation of compliance for Northern Summer Variation of compliance for Northern Winter Summary of requested variation of compliance Remainder of term Urgency of request 13 6 Variation of compliance would not change the balance between benefit and detriment 14 Gilbert + Tobin _1.doc

3 1 Introduction and Executive Summary On 16 December 2010, the Australian Competition and Consumer Commission (the ACCC) granted conditional authorisation for an alliance between Virgin Australia (formerly Virgin Blue) and Air New Zealand in relation to air passenger services between Australia and New Zealand. As a condition of authorisation, the Applicants are required each scheduling season to meet certain capacity conditions in relation to each nominated route and in relation to total Trans-Tasman capacity (the Conditions). The Conditions specify that the Applicants may apply to the ACCC for a variation of these obligations in exceptional circumstances, as defined. On 22 February 2011, a severe earthquake struck the Christchurch region of New Zealand, resulting in horrific loss of life and destruction of homes, businesses and infrastructure. The earthquake and subsequent aftershocks have resulted in a significant disruption to tourism, business and daily life in Christchurch. As a consequence of these tragic events, the Applicants have experienced a severe reduction in demand for flights to and from Christchurch, which is forecast to continue for the duration of the Northern Summer 2011 scheduling season and, based on available information, for the duration of the Northern Winter 2011 season. In response to this drop in demand, the Applicants reduced fares across the Tasman routes in order to maintain load factors. On the Christchurch routes, reduced fares have not significantly increased passenger numbers. Accordingly, the Applicants have withdrawn some unnecessary capacity on the routes to and from Christchurch. The Applicants intend to withdraw further unnecessary capacity to match the drop in demand. The Applicants consider that there may not be sufficient demand to redeploy any capacity withdrawn from the Christchurch routes onto other trans-tasman routes. This withdrawal of capacity may mean that the Applicants do not meet the minimum requirements for total trans-tasman capacity in the NS11 and NW11 seasons. The Applicants seek a variation of their obligation to comply with the capacity conditions, pursuant to section 2 of the Conditions of authorisation, as set out in section 5 below. This submission is made in support of that application for variation. 2 The Christchurch earthquake 2.1 Overview The Conditions provide that the Applicants may apply to the ACCC for a variation of compliance with the Conditions in exceptional circumstances (clause 2(a)(i)). Exceptional circumstances are defined to include, but not be limited to, force majeure events including severe natural disasters and pandemics. The tragic events of the Christchurch earthquake are exceptional circumstances for the purposes of a variation of the Conditions. 2.2 Conditions in Christchurch On 22 February 2011 an earthquake of magnitude 6.3 struck the centre of Christchurch, killing 181 people and causing severe destruction to large areas of the city. In the days and weeks immediately following the earthquake Christchurch was at a standstill as rescue efforts and the first steps in a major clean-up were underway. While these immediate conditions have alleviated, the severe impact of the Christchurch earthquake Gilbert + Tobin _1.doc page 1

4 is still being felt, keeping many businesses closed, affecting the daily lives of residents and discouraging visitors. (a) Damage to buildings, services and infrastructure As a result of the earthquake, a substantial number of buildings and streets have been seriously damaged. As at 24 April 2011, 362 buildings in Christchurch were listed by the Canterbury Earthquake Recovery Authority (CERA) for demolition (241), partial demolition (82) or make-safe orders (39). Many of these buildings were of significant heritage value and many housed important businesses and tourist attractions. The list of buildings is provided at Attachment A. 1 As a result of damage to buildings and infrastructure, there continue to be a number of exclusion zones in force around Christchurch. In particular, a large part of the central CBD, known as the red zone is inaccessible to people and vehicles as it remains unsafe. Since May 2011, residents only have had controlled access to parts of the zone under permit; however there is a strict curfew in place and it is for the purposes of gaining access to possessions. Figure 1 below shows the exclusion zones as at 27 May See also: Gilbert + Tobin _1.doc page 2

5 Figure 1: Christchurch CBD exclusion zones 2 Further areas of the city have reduced accessibility as a result of demolition activities. Figure 2 below shows parts of the city that are affected by building drop zones. 2 See: Gilbert + Tobin _1.doc page 3

6 Figure 2: Christchurch building drop zones 3 Transport around Christchurch was severely impaired by the earthquake and is still limited. Around half of all Christchurch s streets and roads suffered some level of damage in the 22 February earthquake. Except for roads that remain closed, Christchurch City Council has completed a high proportion of the temporary works necessary to make most roads safe for people to drive on. However, permanent repairs cannot be carried out on city roads until underground services, such as sewer, water and stormwater pipes, are repaired. This is expected to take some time. 4 A significant proportion of Christchurch s regular bus routes are still not operational while many other services are operating under reduced timetables. 5 Essential services also continue to be affected. While running water is back up and running, the sewer system in Christchurch is still being cleared of sand and silt to make it See: See: See: Gilbert + Tobin _1.doc page 4

7 operational. Sewerage systems are functioning in parts of the city, but in many others repair works are ongoing, with residents relying on port-a-loos and chemical toilets. In parts of the city, the electricity system is still not functional and buildings are unable to connect to power. Throughout the city, there continue to be frequent electricity outages as essential repairs take place. The electricity network provider in Christchurch, Orion New Zealand, describes the electricity supply in Christchurch s CBD and Eastern suburbs as in a fragile state. 6 Further, there have been recurring aftershocks in Christchurch and in the Canterbury region more generally, which have made recovery efforts more uncertain and contributed to the uneasiness of residents, adding to the perception for potential visitors that Christchurch is unsafe. 7 (b) Economic impact As a result of the severe damage to buildings, roads and other infrastructure, many businesses remain shut and some residents are being housed in temporary emergency accommodation. Unlike following the September 2010 earthquake, where most businesses were closed for just a few weeks, many businesses are still closed over 3 months on. It is expected that the rebuilding process will take years to complete and that businesses will take much longer to normalise during this process. The Canterbury region accounts for around 15% of New Zealand s Gross Domestic Product (GDP). New Zealand Prime Minister, John Key has estimated the February earthquake reconstruction could cost over $13 billion, in addition to the estimated reconstruction costs of $6-$7 billion from the September earthquake. With New Zealand GDP approximately $200 billion, this represents a huge financial commitment in the context of the size of the New Zealand economy. These reconstruction costs are expected to result in a short to medium term contraction of economic productivity which may push the New Zealand economy back into recession in the first half of 2011, until the rebuilding stimulus is deployed. As a result, consumer confidence has dropped with the ANZ-Roy Morgan consumer sentiment index falling 7 points in March 2011 (the first reading since February s seismic events) to points and remained at that level in April Consumer confidence is now at the lowest reading since March The largest fall was in the Canterbury region where confidence fell 16 points to Canterbury s drop in sentiment was dominated by a fall in perceived future conditions, an input positively correlated to household discretionary spending, including leisure travel. In this regard, the Reserve Bank Governor of New Zealand Alan Bollard said The earthquake has caused substantial damage to property and buildings, and immense disruption to business activity. While it is difficult to know exactly how large or long-lasting these effects will be, it is clear that economic activity, most certainly in Christchurch but also nationwide, will be negatively impacted. Business and consumer confidence has almost certainly deteriorated See: For more information on aftershocks, see: Anz-Roy Morgan Consumer Confidence - Flatlining, April 2011, Gilbert + Tobin _1.doc page 5

8 (c) Tourism impact The Christchurch earthquake has caused significant damage to tourist infrastructure. This, together with a lack of consumer confidence and a perception that Christchurch is unsafe has resulted in a severe reduction in tourist numbers. In the immediate aftermath of the earthquake, governments around the world issued travel warnings against all non-essential travel to Christchurch. For around a month following the earthquake, Tourism New Zealand, the Australian Government and the US Government were among those who advised against travel to the city. Although reduced in severity, travel warnings are still in place. For example, the Australian Government warns travellers to exercise a high degree of caution in the Christchurch and Lyttleton areas, saying: 9 Australians in Christchurch and Lyttleton should exercise a high degree of caution because of damage to buildings, public infrastructure, and essential services caused by the earthquake that affected the area on 22 February While damage is concentrated in the CBD, eastern and seaside suburbs of Christchurch, isolated pockets of serious damage to buildings are present in other parts of the city. Aftershocks are likely to continue for some time, some of which may be strong. Strict cordon restrictions have been imposed by the authorities in central Christchurch see the NZ Civil Defence for updates on the cordon zones. Any unauthorised person within the cordon area risks being arrested. You should follow the instructions and advice of local authorities. Australians should not enter or approach any damaged buildings and should observe security barriers in place around them, due to the risk of building collapse. You should assume tap water is unsafe to drink until advised otherwise by Christchurch City Council. Australians in the Christchurch area should monitor the NZ Civil Defence and Canterbury Earthquake websites for the latest information on water and essential services. Christchurch Airport is operating normally. Confirmed bookings should be made before travel to the city. Such warnings have the effect of making trans-tasman travel to Christchurch unappealing for some travellers. Many of the buildings destroyed or damaged by the earthquake were key tourist sites. These include the historic Christchurch Cathedral and the Canterbury Museum, both of which were severely damaged and remain closed. 10 The Christchurch Art Gallery has also been closed since the earthquake. 11 Christchurch s casino reopened on 26 May 9 See: (as at 30 May 2011) 10 See: ; 11 See: Gilbert + Tobin _1.doc page 6

9 2011, having been closed since the earthquake. 12 So many tourist attractions are currently shut, that Christchurch s tourism body provides a list of contact details for businesses, restaurants, and attractions that are open and recommends that tourists confirm their current status before visiting. One of the key attractions of Christchurch for tourists was its historic architecture and cityscape, both of which have been irreparably damaged. Rebuilding is likely to take years. In addition, as a result of the earthquake, Rugby World Cup matches will no longer be held in Christchurch in September- October 2011, with a very great impact on forecast visitor numbers to Christchurch. Auckland will instead host these matches, which means that many travellers will instead substitute Auckland as a destination. Much of the tourist accommodation in Christchurch remains closed. As the figure below shows, only 56% of the accommodation beds available before the 22 February 2011 earthquake are currently available. Most notably, only 27% of each of hotels and backpackers are currently open. Some of the city s most prominent hotels are on the buildings to be demolished list, together with restaurants, bars and cafes. 13 This undersupply of hotel rooms means that tourists will be less likely to travel to Christchurch. At the same time, the decision by some operators not to re-open reflects the drop in demand for tourism. Figure 3 Accommodation availability in Christchurch 14 A May 2011 update on the situation in Christchurch, released by the Christchurch tourism body in order to attract visitors, is provided at Attachment B. Air New Zealand and Virgin Australia anticipate that the reduction in tourism demand will continue for the foreseeable future. It will be a significant period of time before See: See Attachment A Update Christchurch, May 2011, See Attachment B. Gilbert + Tobin _1.doc page 7

10 Christchurch s tourist attractions, hotels and infrastructure are up and running and before Christchurch is again a popular destination for trans-tasman travel. Further, as discussed above, following the Christchurch earthquake there has been a significant weakening of consumer confidence in New Zealand. Consumer confidence is a key indicator of demand for discretionary travel. In the Applicants experience, this reduction in confidence has been correlated with a drop in demand for trans-tasman travel generally, with some New Zealanders choosing not to undertake trans-tasman travel. The Applicants consider that the Christchurch earthquake may have also affected the number of people choosing to travel to New Zealand generally, as tourists frequently combine several New Zealand destinations, including Christchurch in the one trans- Tasman trip. For the March to May 2011 travel period, Air New Zealand has observed that there has been [restriction of publication claimed] reduction in the number of passengers who have flown a multi-city trans-tasman itinerary that includes Christchurch. The effect of the earthquake on demand on Christchurch routes and on the total trans- Tasman is discussed in detail below. 3 Effect on demand for Trans-Tasman services 3.1 Demand for services to and from Christchurch For each of Virgin Australia and Air New Zealand, demand has dropped significantly for trans-tasman services to and from Christchurch. Even taking into account fare reductions which have been put through by both airlines, passenger levels have decreased in NS11 and NW11 by approximately 25% compared with the same seasons last year. The following table sets out comparative, capacity, passenger numbers, fares and load factors on trans-tasman routes to and from Christchurch over this period. Figure 4: Passenger numbers and load factors Christchurch routes [restriction of publication claimed] The combined Alliance projected performance shows a significantly depressed outlook for both NS11 and NW11 compared to the same season in 2009 and Total revenue in each season is projected to be down by over [restriction of publication claimed] driven by both a reduction in demand and a significant decrease in average fare which is a result of both the Alliance and competitor carrier pricing initiatives to stimulate demand. 3.2 How forecast passenger numbers and revenue levels were calculated For Virgin Australia, the figures for NS11 were calculated based on the profile of forward bookings. Virgin Australia analysed the load factors and average fares for each month in NS11 as at 9 May 2011 and compared these to bookings for the equivalent month in NS10. The percentage difference in the load factors and average fares between the two years has been applied to determine the end position of each month compared to the same month last year. For NW11, demand projections were based on NS11 projections. That is, given that the conditions in Christchurch are forecast to continue, the same percentage reduction in passengers and fare levels was carried forward to the NW11 season. This was then cross-checked against forward bookings received to date which showed that actual forward bookings for NW11 are even lower than for the previous season. Gilbert + Tobin _1.doc page 8

11 For Air New Zealand, the figures for April are the actual numbers for the month. For May to July 2011 passenger numbers were calculated based on forward bookings as at 23 May. The relativity between bookings received for Christchurch and non-christchurch routes was calculated. This percentage difference was applied to the pre-earthquake forecast passenger numbers for Christchurch routes (See Attachment D) to calculate passenger numbers for May to July For August to the end of NW11, given that conditions in Christchurch are forecast to continue, a fixed percentage difference, based on the trend seen for April to July, was used to create the new passenger position. The same methodology was used for passenger revenue using the forward revenue profile as at 23 May The pre-earthquake forecast passenger numbers (See Attachment D) were calculated by taking the relativity of 2010 s load factor between Christchurch and non-christchurch routes and applying it to 2011 s forecast load factors for non-christchurch routes. For revenue, the year on year yield improvement for non-chc routes was calculated and applied to last year s average fare. 3.3 Impact on total trans-tasman demand Services to and from Christchurch comprise approximately 25% of total trans-tasman capacity. As such, a large reduction in demand for Christchurch services has a significant impact on total trans-tasman passenger numbers. The information provided at Attachment C shows that the number of passengers on non- Christchurch routes is expected to increase in 2011 compared with the same period in The reasons for the increase in forecast passenger numbers include: Air New Zealand has introduced the new Seats to Suit fare and product offer which has stimulated demand by making available more seats at reduced fares (with fewer in-flight services). Since the launch of Seats to Suit Air New Zealand has seen passenger demand grow by 14% on capacity growth of 10% [restriction of publication claimed]. Passenger levels for NW10 and, to a lesser extent, NS10 were reduced compared with previous years. This is as a result of the unusual economic conditions that prevailed during these seasons and the impact of natural disasters. In particular the Queensland floods and the 22 February 2011 Christchurch earthquake both occurred during the NW10 season, reducing demand for trans-tasman travel in each direction. Therefore, any increase in total passenger numbers in 2011 is against a reduced base. Although the Applicants have seen a small increase in bookings on non-christchurch trans-tasman routes compared with the 2010 seasons, this is not as a result of passengers substituting other New Zealand destinations for travel to Christchurch. Figure 5 below shows that there has been no uplift in bookings on non-christchurch routes following the 22 February 2011 earthquake. Rather, any year on year increase in traffic on non-christchurch routes is explained by the factors discussed above. Figure 5: Forward bookings of passengers in 2011, compared with the same period in 2010 Trans-Tasman routes Bookings as at 20 February 2011 Bookings as at 15 May 2011 Christchurch routes +8% -20% Gilbert + Tobin _1.doc page 9

12 Non-Christchurch routes [restriction of publication claimed]. [restriction of publication claimed]. The expected total trans-tasman passenger numbers for NS11 and NW11 is significantly reduced compared with the previous year as a result of the drop in demand on routes to and from Christchurch. Any increase in passengers on other trans-tasman routes has not offset the reduction in demand on the Christchurch routes. Further, over this period earned revenue for the Alliance is expected to decrease by [restriction of publication claimed]. In an environment in which airlines face rising fuel costs, this is not sustainable. Since January 2011, aviation fuel costs have risen by 45% per barrel, as illustrated in Figure 6 below. This rise in fuel costs equates to [restriction of publication claimed] in total operating costs for Air New Zealand and a [restriction of publication claimed] increase in operating costs for Pacific Blue. Figure 6: Price of Singapore Jet Fuel, 1 July May 2011 The Applicants consider that, in the current conditions, it would not be viable to redeploy capacity withdrawn from Christchurch routes onto other trans-tasman routes. The Applicants have not yet determined where aircraft withdrawn from Christchurch routes will be redeployed. In Virgin Australia s case, it anticipates aircraft may be diverted to domestic Australian flying. 4 Applicants response to excess capacity on Christchurch services 4.1 Applicants response to drop in demand to date Immediately following the earthquake, bookings for routes to and from Christchurch dropped significantly. Between 21 February and 1 May 2011, the number of bookings received for travel on Christchurch routes during NS11 dropped by 37% for Air New Zealand and 34% for Virgin Australia, compared to the same period in the previous year. In response to this significant drop in forward bookings the Applicants first attempted to stimulate demand by reducing fares. Gilbert + Tobin _1.doc page 10

13 For example, sale fares on the Christchurch routes shortly after the earthquake for each of Pacific Blue and Air New Zealand were as low as NZD$99 (seat only) compared with usual lead-in fares ranging from $199 to $219. The Applicants attempts to use sale fares to stimulate demand have produced only very limited improvements in passenger numbers. This is best highlighted by Pacific Blue s recent results on Christchurch routes. In May 2011 passenger numbers were down by 25%, far outstripping the 17% reduction in capacity following withdrawal of some services. This resulted in a load factor of [restriction of publication claimed] and a significant [restriction of publication claimed] reduction in revenue. These results occurred in a context in which the earned average fare had been reduced by [restriction of publication claimed]. As reduced fares were not stimulating demand, the Applicants each took the decision to reduce capacity. From April 2011, Virgin Australia and Air New Zealand reduced their combined capacity on the Christchurch routes by 9.3%. This amounted to 127 return trips and 1.9% of total trans-tasman flying for the NS11 season. For NW11 the Applicants have reduced capacity on Christchurch routes by 12.4%. This amounts to 137 return trips and 2.7% of total trans-tasman flying for the NW11 season. 4.2 Proposed reductions in capacity As a result, the Applicants propose to remove further capacity from the routes to and from Christchurch as follows: (a) Northern Summer 2011 For NS11 the ability for the Alliance to reduce capacity to levels in line with the reduction in demand is limited by the months remaining in the season. The NS11 season commenced in April 2011 and runs through to the end of October The months of April and May have already passed. Typically, passengers book trans-tasman travel 2-3 months in advance of the travel date. Therefore, the ability for the Alliance to influence capacity levels in the months of June, July and August are now fairly limited. As a result, the Alliance can only introduce further capacity reductions in September and October of the NS11 season. As a result, the Alliance proposes to reduce its capacity on Christchurch routes by a further 6% for the remainder of the season. While this will not restore load factors to levels previously expected, based on forecast passenger numbers, this reduction in capacity will provide an Alliance load factor of [restriction of publication claimed]% for NS11 for the Alliance, which compares with combined load factor of [restriction of publication claimed]% in NS10, and [restriction of publication claimed]% in NS09. (b) Northern Winter 2011 For NW11 the Alliance has greater ability to adjust capacity levels to better match demand for the whole season. While, ideally, the Alliance would look to reduce capacity in line with demand, the Alliance proposes to reduce its capacity on Christchurch routes by a further 13%, compared with the 17% required to match the reduction in demand. This reduction will allow room for any improvement in demand above that forecast, although the Applicants consider that there is little likelihood that any improvement in demand will occur during NW11. The proposed reduction in capacity would result in load factors around the levels achieved over the previous two years, albeit at a lower average fare. Based on forecast passenger numbers, this reduction in capacity will provide a load factor of [restriction of publication claimed]% for NW11, which compares with a load Gilbert + Tobin _1.doc page 11

14 factor of [restriction of publication claimed]% in NW10 and [restriction of publication claimed]% in NW09. While the proposed reduction in capacity for NW11 is larger than in NS11, this is simply a function of timing: further capacity reductions can be rolled out for the whole of the NW11 season, but only for a few months of the NS11 season. If the same timeframe could have been applied to the NS11 season, the size of the reductions would be very similar. 5 Application for variation of compliance with conditions 5.1 Overview In the light of the above information, the Applicants apply for variation of compliance with the conditions. The Applicants request that the requirement that the Applicants must fly in respect of each Scheduling Season not less than 100% of the Trans-Tasman Base Year Seat Capacity (1)(b) be varied to reflect the drop in demand on the services to and from Christchurch, as described in sections 5.2, 5.3 and 5.4 below. No routes to and from Christchurch are Nominated Routes for the purposes of the Conditions. As discussed above, the Applicants can forecast with accuracy the effect on demand for the duration of Northern Summer The Applicants expect that these demand conditions will persist in the Northern Winter 2011season as the underlying conditions in the city and their effect on tourism demand will continue for the foreseeable future. However, given that it is more difficult to forecast with accuracy over this period, the Applicants apply separately for variation of compliance for each of these seasons. To provide further certainty, if the ACCC grants a variation for the second season, the Applicants will agree to report to the ACCC any change in forecast demand conditions for Northern Winter 2011 as they arise. 5.2 Variation of compliance for Northern Summer 2011 The Applicants apply for the following variation of compliance for NS11 obligations: Figure 7: Northern Summer 2011: Variation of Alliance Seat Capacity Northern Summer 2011: Variation of Alliance Seat Capacity Base Year Alliance Seat Capacity 2,360,250 Alliance Capacity Christchurch routes 481,129 Total proposed reduction 71,608 Total proposed reduction (as % of Christchurch capacity) 14.9% Total % of Base Year Alliance Seat Capacity 3.0% Varied Base Year Alliance Seat Capacity 2,288, Variation of compliance for Northern Winter Figure 8: Northern Winter 2011: Variation of Alliance Seat Capacity Northern Winter 2011: Variation of Alliance Seat Capacity Base Year Alliance Seat Capacity 1,725,205 Alliance Capacity Christchurch routes 377,085 Gilbert + Tobin _1.doc page 12

15 Total proposed reduction 95,815 Total proposed reduction (as % of Christchurch capacity) 25.4% Total % of Base Year Alliance Seat Capacity 5.6% Varied Base Year Alliance Seat Capacity 1,629,690 If demand conditions materially improve between the grant of variation and the commencement of the Northern Winter 2011 schedule, the Applicants will have the incentive to deploy further capacity onto the trans-tasman to match demand. However, if the ACCC considers that it would be desirable, the Applicants will agree to notify the ACCC of any material changes in demand conditions so that the variation may be amended accordingly. 5.4 Summary of requested variation of compliance The Applicants apply for the following variation of compliance with their obligations under the Conditions: Figure 9 Requested variation Base Year Alliance Seat Capacity Variation of Alliance Seat Capacity NS11 NW11 2,360,250 1,725,205 Total proposed reduction 71,608 95,815 Total % of Base Year Alliance Seat Capacity Varied Base Year Alliance Seat Capacity 5.5 Remainder of term 3.0% 5.6% 2,288,642 1,629,690 The Applicants will continue to monitor the effects of the earthquake on demand. In the absence of any further request for variation, the Applicants will comply with the requirement to fly not less than 100% of the Trans-Tasman Base Year Alliance Seat Capacity, as specified in the Conditions of authorisation. 5.6 Urgency of request The Applicants understand that the ACCC may wish to consult interested parties in relation to this request. The Applicants request that the ACCC consider this request as quickly as possible. As discussed above, the Northern Summer 2011 schedule is well underway. While there are few forward bookings for Christchurch routes, in order to minimise disruptions to those passengers who have booked services, the Applicants need to implement capacity reductions as soon as possible. Gilbert + Tobin _1.doc page 13

16 6 Variation of compliance would not change the balance between benefit and detriment The requested variation of compliance would not change the balance between benefit and detriment found by the ACCC in its Determination. The ACCC found no competition concerns in relation to the Christchurch routes or to the trans-tasman generally. Rather, it concluded that there was sufficient competition on these routes to constrain the Alliance and that the Alliance would not have the ability or incentive to withdraw capacity in order to raise fares on these routes. 15 This is reflected in the fact that no Christchurch route is included as a Nominated Route for the purposes of the Conditions. This competitive environment will not be changed by the Variation. The Christchurch earthquake of 22 February 2011 is clearly an exceptional circumstance. The variation process under the Conditions was designed to provide the Alliance with some flexibility to address demand conditions in situations like this. The requested variations are consistent with the purpose of the Conditions and are proportional to the severity of the circumstances in Christchurch which are expected to continue at least throughout Northern Summer 2011 and Northern Winter ACCC, Determination: Applications for authorisation lodged by Virgin Blue Airlines Pty Ltd and Others in respect of an airline alliance between the Applicants, 16 December 2010, pp 74-80, Gilbert + Tobin _1.doc page 14

17 Attachment A Building Treatment Status Report Gilbert + Tobin _1.doc page 15

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24 Attachment B Christchurch update, May 2011 Gilbert + Tobin _1.doc page 22

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26 Attachment C Effect of earthquake on passenger demand [restriction of publication claimed] Gilbert + Tobin _1.doc page 24

27 Attachment D Proposed capacity withdrawal [restriction of publication claimed] Gilbert + Tobin _1.doc page 25