Virgin, Air NZ alliance rejected

The ACCC has rejected Virgin Blue and Air New Zealand's proposed alliance on trans-Tasman flights.

VIRGIN Blue Holdings Ltd's international ambitions have been dealt another blow after its proposed alliance with Air New Zealand Ltd on trans-Tasman was blocked by the competition regulator.

The knockback comes just one day after the US government rejected the airline group's partnership with Delta Air Lines on Australia-US services.

Virgin Blue now has just 14 days to convince authorities on both sides of the Pacific that the tie-ups with Delta and Air New Zealand - a big part of its international strategy - would benefit consumers and should proceed.

Shares in Virgin Blue tumbled for the second straight day - down three cents, or 6.98 per cent, at 40 cents, while Air New Zealand dropped 3.5 cents, or 3.43 per cent, to 98.5 cents.

The Australian Competition and Consumer Commission's (ACCC) ruling, issued on Friday, said Virgin Blue and Air New Zealand's proposed alliance was "likely to reduce competition in the market for trans-Tasman air passenger services".

Interested parties have until September 24 to respond to the draft ruling, during which time Virgin Blue said it would try to explain the public benefits to the ACCC.

"The parties note that the ACCC has invited the applicants to provide information to substantiate the public benefits claimed," Virgin Blue said in a statement.

"The parties welcome the invitation and will do so."

Similarly, Air New Zealand said it was reviewing the draft decision and expected to "respond to the ACCC's concerns once they are identified".

"This will occur over the coming weeks," it said in a separate statement.

ACCC chairman Graham Samuel said there were a number of trans-Tasman routes where the alliance raised competition concerns.

"These routes account for around one quarter of passenger traffic in the trans-Tasman market," Mr Samuel said in a statement.

"This means that more than one million passengers per year may be adversely affected by the removal of competition between Virgin Blue and Air New Zealand."

The ACCC said the alliance was likely to result in some public benefits, such as cost savings and efficiencies, but it had "doubts about the magnitude of these benefits".

The ACCC also acknowledged the trans-Tasman partnership would give both airlines a broader and more integrated network, and enable them to compete more effectively against Qantas and Jetstar.

But it was "not convinced" that it would increase competition in that market.

The Centre for Asia Pacific Aviation said the airlines would have to work hard to change the ACCC's mind.

"In the space of two days, two key planks of the carrier's cooperation strategy, with Delta and Air New Zealand, appear to be under serious threat," the centre said in a research note.

"A few days ago they looked relatively safe and were on the way to making the Virgin Blue Group a serious competitive force against its much larger competitor, Qantas."

In December last year, the ACCC approved Virgin Blue's joint-venture partnership with Delta, but the ACCC noted that alliance was different to what was being proposed across the Tasman.

"Unlike that case, this matter involves an alliance between the first and third major competitors in the trans-Tasman market and substantially less significant connectivity benefits for consumers," the ACCC said.

On Thursday, the US Department of Transportation found Delta and Virgin Blue hadn't demonstrated the alliance would produce sufficient benefits to consumers to warrant immunity from US anti-trust laws.

Virgin Blue also has a new partnership with Abu Dhabi-based Etihad Airways, announced last month, that requires ACCC approval.