The Australian Competition and Consumer Commission has announced it will oppose Qantas Airways Limited (ASX: QAN)'s proposed takeover of Alliance Aviation Services Ltd (ASX: AQZ).
Although a blow to investors of both airlines, Qantas shares actually rose 0.76% in early Thursday morning trade after the revelation.
The Alliance share price understandably plunged 7.7%.
Alliance is a regional airline as well as a "wet lease" provider to the larger carriers.
The competition watchdog noted that both companies are key providers of air services for mining businesses that need to get "fly-in fly-out" workers to and from remote locations.
The dilution of competition on those routes is not worth the merger, it concluded.
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Customers prefer Alliance
ACCC chair Gina Cass-Gottlieb pointed out the acquisition would "combine two of the largest suppliers of charter services in Western Australia and Queensland".
"Qantas and Alliance currently strongly compete with each other in markets where there are few effective alternatives," she said.
"Flying workers in the resource industry to and from their worksites is an essential service for this important part of the Australian economy, so it is critical that competition in this market is protected."
The ACCC investigation also found substantial feedback from customers that they value Alliance as a "vigorous and effective" alternative to Qantas.
"For many customers, Alliance is the preferred supplier due to its large fleet capacity, customer-centric approach and high-quality service offerings, including having the highest on-time-performance in the industry and demonstrated flexibility and willingness to meet customer needs," said Cass-Gottlieb.
"Alliance doesn't sell seats on major passenger routes, so many Australians may not have heard of them, but it is one of Australia's most significant airlines, with 70 aircraft currently and more on order."
Qantas fuming; wants answers from ACCC
In a statement to the ASX, Qantas announced it would "seek more information" from the ACCC on its decision.
"Qantas remains confident the acquisition would not substantially lessen competition in any market," read the announcement.
"Australia has one of the most competitive aviation industries in the world. That competitive dynamic is intensifying with new entrants and expansion of existing carriers and significant growth in the resources sector."
Qantas noted that the ACCC approved Regional Express Holdings Ltd (ASX: REX)'s buyout of charter provider National Jet Express within 11 days, but opposed the Alliance transaction after months of investigations.
The watchdog reported that the other players in the aviation industry, such as Regional Express and Virgin Australia, could not expand fast enough to make up for the loss of competition from Alliance.
"Airlines wanting to enter, or expand at scale, face a combination of barriers, including incumbency advantages, the need to establish a reputation for providing a reliable service, access to and training of air crew and engineers, access to suitable aircraft and infrastructure, and the significant regulatory requirements to fly," said Cass-Gottlieb.
"This combination of factors makes it very difficult for smaller airlines to win significant customer contracts and grow their business."
