A partnership between Qantas and China Eastern is stuck on the runway due to concerns it will lift prices and reduce seats to China.
The Australian Competition and Consumer Commission (ACCC) intends to reject plans by Qantas and China Eastern to co-ordinate services between Australia and China, saying that could give the airlines the ability and incentive to limit capacity or increase fares.
But Qantas and China Eastern are planning to counter with a charm offensive, arguing competition will increase under a share arrangement and deliver better flight schedules, reduced transit times and a wider range of connections.
A draft decision by the ACCC finds Qantas and China Eastern already account for more than 80 per cent of capacity on direct services between Sydney and Shanghai.
"They are the two major airlines on the route and the only airlines offering daily flights, and so the major competitive constraint on each other," ACCC chairman Rod Sims said.
"Competition between them will be greatly reduced under the proposed agreement."
The ACCC believes the range of travel options available to passengers for journeys beyond Shanghai would not automatically be increased.
Qantas and China Eastern already have a code sharing agreement and had planned to create a five-year joint venture that would combine their operations at Shanghai International Airport from mid-2015.
The airlines will make submissions to the ACCC over the coming weeks to highlight the benefits to customers of the proposed partnership.
Qantas International chief executive Gareth Evans said more than 20 airlines already provided services between Australia and mainland China in a highly competitive market.
"New traffic rights recently granted to Chinese carriers means the competition in this market will only increase, which underlines the importance of Qantas forming a strategic partnership with China Eastern so that we can strengthen our network and scheduling offer to customers," Mr Evans said in a statement on Tuesday.
Qantas and China Eastern also argue the tie-up will facilitate commerce between the two countries.
"Air travel is key to facilitating the increased traffic flows that will result from the Free Trade Agreement," China Eastern Oceania General Manager Kathy Zhang said.
IG Market analyst Evan Lucas said the ACCC's draft decision was a blow to Qantas in its push into mainland China, but the airline would likely engineer a deal to make sure it maintains the route.
"The concern from the ACCC was certainly real but it's not the end of the road for Qantas," Mr Lucas said.
The ACCC is seeking submissions from other interested parties before April 8.
Qantas shares dropped five cents, or 1.6 per cent, to $2.99.
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