By Matthew Perlman

Law360 (June 1, 2020, 6:14 PM EDT) -- Australian competition enforcers said Monday they are continuing to investigate an AU$60 million ($41.1 million) minority investment by Qantas in rival Alliance Airlines, despite upheaval in the airline industry being caused by the COVID-19 pandemic.

The Australian Competition and Consumer Commission has been investigating the February 2019 deal, which gave Qantas a 19.9% stake in Alliance and made it the company's largest shareholder. The commission raised concerns in August about reduced competition between the airlines, specifically for charter flights in certain regions and on routes to important hubs.

In a statement Monday, the agency said it's more important than ever to make sure smaller airlines remain competitive as the aviation industry continues to confront "uncertain times."

"The Australian aviation industry remains highly concentrated and it is crucial that competition provided by smaller airlines is maintained long term," ACCC Chair Rod Sims said in the statement. "Acquiring a strategic stake in a close competitor in such a concentrated market raises clear competition concerns."

The airline industry has been particularly hard hit by the coronavirus pandemic because of travel restrictions and a fall-off in demand that has resulted in massive flight cancellations. In March, the ACCC authorized Qantas, Virgin Australia and Regional Express to coordinate flight schedules to help deal with the pandemic, calling the request urgent and saying enforcers hoped it would help them compete against one another afterward.

Qantas completed the deal for its stake in Alliance in February 2019, saying in a statement at the time that it had not sought any management control or board representation at Alliance and intended to be a passive investor for the time being. Qantas also said its long-term plan was to acquire a majority stake in Alliance and acknowledged that it would need approval from the ACCC if it does.

But the commission said Aug. 1 that although Qantas had not sought clearance for the minority investment, that transaction raised concerns because Alliance is "a close, important and growing competitor to Qantas."

Qantas and Alliance both provide charter services to corporate customers in Queensland, Northern Territory and Western Australia, all areas where mining and resources companies employ so-called fly-in fly-out workforces. They are also the only airlines providing regular flights from Brisbane to Bundaberg and Gladstone, the commission said.

In a statement of issues, the ACCC said Qantas' position as Alliance's largest shareholder could hinder competition between the airlines and make Alliance less competitive more generally. The investment could also give Qantas the ability to limit Alliance's fundraising or to block a takeover by a new investor interested in making Alliance more competitive, according to the commission.

Qantas responded to the concerns saying that although it has been upfront about ultimately wanting to take a majority stake in Alliance and understands the "regulatory challenges" such a change would pose, there's no evidence its current investment has affected competition. The airline also said it remains a passive investor in Alliance and it still has not sought management control or a board seat.

The commission said in Monday's statement that Qantas deciding to complete the deal in February without seeking clearance ahead of time makes the current probe an enforcement investigation rather than a standard merger review. The commission said its focus is on the competitive dynamics between the airlines and whether Qantas is attempting to exert influence on Alliance's operations yet.

"We will consider enforcement action if there is evidence that the Qantas shareholding is compromising Alliance's ability to be a strong competitor to Qantas, now and in the future," Sims said, adding that any further increase in Qantas' stake in Alliance is "very likely to raise significant competition concerns."

Qantas responded to the commission's announcement Monday saying that it continues to fully cooperate, but again contended that its holding in Alliance has no impact on competition

"Qantas acknowledges the importance of strong competition, which has benefited travelers and made airlines better," the company said in a statement. "Australia has one of the most pro-competitive aviation sectors in the world, with fewer barriers to entry than most other countries."

A representative for Alliance declined to comment Monday.

--Editing by Stephen Berg.

Update: This story has been updated with a comment from Qantas.

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