23 Marcus Clarke Street Canberra ACT 2601

GPO Box 3131 Canberra ACT 2601

Our ref: IM-70118 tel: (02) 6243 1368 Contact officer: John Rouw / Andrew Mahony [email protected] Contact phone: 03 9290 1402 / 03 9290 1983 www.accc.gov.au

12 February 2019

Dear Madam / Sir

ACCC investigation of ’ acquisition of stake in Alliance Airlines

The Australian Competition and Consumer Commission (ACCC) is seeking your views on the acquisition of a 19.9 per cent interest in Alliance Aviation Services Ltd (Alliance Airlines) by Qantas Airways Ltd (the acquisition).

Alliance Airlines principally operates air charter services, particularly fly-in fly-out (FIFO) to remote mining sites. The Qantas Group also operates FIFO services. Further details regarding the acquisition can be found at Attachment A.

The ACCC’s investigation is focused on the impact on competition. In particular, we are seeking your views on:

 whether Qantas and Alliance Airlines compete closely, and how the acquisition affects the incentive to compete

 the impact of the acquisition on prices or service quality

 impacts relating to the Virgin -Alliance Airlines Charter Alliance Agreement.

Further issues you may wish to address are set out in Attachment B.

This matter is public and you can forward this letter to anybody who may be interested.

The legal test which the ACCC applies in considering the acquisition is in section 50 of the Competition and Consumer Act 2010. Section 50 prohibits acquisitions that are likely to have the effect of substantially lessening competition in a market. While the acquisition is of a minority shareholding in Alliance Airlines, there is no threshold shareholding for the purposes of s. 50 and all acquisitions are therefore subject to the Act.

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When considering minority shareholdings, the factors considered by the ACCC include:

 the extent to which the shareholding would reduce the incentive of the acquirer to compete vigorously with the target, since to do so would reduce the returns the acquirer receives from its investment in the target

 whether the partial acquisition creates a ‘blocking stake’ that would prevent a more competitive alternate acquisition of the target

 the level of control that the shareholding will provide over the target company, and the consequent ability of the acquirer to influence the behaviour of the target to:

o reduce the extent of competition between the acquirer and the target, or

o prevent or hinder the target from acting as a supplier/acquirer of services to/from third parties, or from engaging in pro-competitive joint action with third parties, so as to limit the competition between those third parties and the acquirer

 the extent of confidential information about the target that the shareholding will provide the acquirer

 whether the partial acquisition will otherwise affect the target’s ability to compete.

Please provide your response by no later than 5pm on 4 March 2019. Responses may be emailed to [email protected] with the title: Submission re: Qantas Alliance - attention John Rouw / Andrew Mahony. If you would like to arrange a time to discuss the matter with ACCC officers, or have any questions about this letter, please contact John Rouw on 03 9290 1402 or Andrew Mahony on 03 9290 1983.

Updates regarding the ACCC’s investigation will be available on the ACCC’s Public Mergers Register at (ACCC mergers register).

Confidentiality of submissions

The ACCC will not publish submissions regarding the acquisition. We will not disclose submissions to third parties (except our advisors/consultants) unless compelled by law (for example, under freedom of information legislation or during court proceedings) or in accordance with s155AAA of the Competition and Consumer Act 2010. Where the ACCC is required to disclose confidential information, the ACCC will notify you in advance where possible so that you may have an opportunity to be heard. Therefore, if the information provided to the ACCC is of a confidential nature, please indicate as such. Our Informal Merger Review Process Guidelines contain more information on confidentiality.

Yours sincerely

Tom Leuner General Manager Merger Investigations

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Attachment A

Alliance Airlines

Alliance Airlines provides aircraft charters for the resource industry and inbound and domestic group travel across Australia, New Zealand, the Pacific Islands and South East Asia. Alliance is headquartered in and has charter bases in Adelaide, Auckland, Brisbane, Cairns, Melbourne, Perth and Townsville.

Below is a route map from Alliance Airlines’ website.1

Alliance Airlines is also part of a Charter Alliance Agreement with the Group. Pursuant to this agreement, Virgin Australia Group and Alliance Airlines have agreed to bid together for contracts with corporate customers. The ACCC granted authorisation for the Charter Alliance Agreement on 18 May 2017.2

Separate to the Charter Alliance Agreement, Alliance Airlines also supplies wet-leased aircraft to Virgin Australia Group.3 Alliance Airlines operates scheduled services from Brisbane to destinations including Bundaberg, Gladstone and Port Macquarie for the Virgin Australia Group.

1 http://www.allianceairlines.com.au/where-we-fly

2 The ACCC’s decision is available at https://www.accc.gov.au/system/files/public-registers/documents/D17%2B63643.pdf

3 A wet lease is a leasing arrangement whereby one airline (the lessor) provides an aircraft, crew, maintenance, and insurance to another airline (the lessee), which pays by hours operated.

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Alliance Airlines also operates some regional air services on behalf of the Qantas Group’s QantasLink business.

Alliance Aviation Services Ltd, which owns Alliance Airlines, is listed on the Australian Securities Exchange.

Qantas

The Qantas Group’s aviation services include regional services for regular passenger transport and charter flights.

Qantas Airways Ltd is listed on the Australian Securities Exchange.

The acquisition

On 1 February 2019 Qantas announced it had acquired a 19.9 per cent holding in Alliance Aviation Services Ltd, for about $60 million.

Qantas stated in a media release that it expects to ultimately seek regulatory approval from the ACCC to build on its current shareholding, with a longer-term view of taking a majority position in Alliance Aviation. Qantas has stated that, in the meantime, it is supportive of the ‘business as usual’ approach of Alliance Airlines management and will not seek board representation.4

4 https://www.qantasnewsroom.com.au/media-releases/qantas-acquires-19-9-per-cent-stake- in-alliance-airlines/

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Attachment B

1. Please provide a brief description of your business or organisation.

2. Please outline the reasons for your interest in the acquisition, including any commercial relationship/s with either of Qantas or Alliance Airlines.

Competition

3. What services do you consider that Qantas provides in competition with:

a. Alliance Airlines, or

b. Alliance Airlines and Virgin Australia Group pursuant to their Charter Alliance Agreement?

On what routes / which regions, or for which types of customers, do they particularly compete?

4. How closely do Qantas and Alliance Airlines compete to provide these services? Please consider how they compete on, and whether they are each other's closest competitors on, any or all of the following dimensions:

a. price, including specials and promotions,

b. route network,

c. frequency of flights on each route,

d. aircraft quality, service quality, on-time running, inclusions and extras, and

e. reputation.

5. Are there particular routes or types of customers for whom this competition is particularly intense? Please provide illustrative examples wherever possible.

6. What other service providers compete with Qantas and Alliance Airlines to provide similar services? How competitive are these alternative options, having regard to the factors identified above at question 4? Do these service providers compete with Qantas and Alliance Airlines on all routes, and for all types of customers? Or is their competition more limited?

Impact of the acquisition

7. Do you consider that Qantas’ acquisition of a 19.9 per cent interest in Alliance Airlines impacts on the competitiveness of services provided by:

a. Alliance Airlines, or

b. Alliance Airlines and Virgin Australia Group pursuant to their Charter Alliance Agreement?

8. What is the likely response of other existing competitors to the acquisition, including any changes to capacity, fares, service levels, fleet size or any other relevant aspects of their operations?

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Barriers to entry and expansion

9. Are there any other providers of air passenger transport that you consider will commence operations in competition with Qantas and Alliance Airlines in the foreseeable future? What are the reasons for your view?

10. Please explain the barriers an operator would face in trying to provide air passenger transport on a scale similar to that of Alliance Airlines.

Other information or competition issues

11. Please provide any additional information or comments, or identify other competition issues, that you consider relevant to the ACCC’s consideration of the acquisition under section 50 of the Act.

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