Australia’s competition regulator says a Qantas-Emirates partnership should be allowed to proceed, although it has also signaled its intention to impose capacity conditions in the Australia-New Zealand market.

The Australian Competition and Consumer Commission (ACCC) has issued a draft approval of the application by Qantas and Emirates to cooperate closely, particularly on routes from Australia to Europe via Dubai. The agency says that in this market, public benefits outweigh the competitive harm caused by two major players combining.

However, the ACCC is more concerned about the Australia-New Zealand market, and it is examining ways to ensure capacity is not reduced. The remedy favored by the ACCC goes further than the capacity commitment the two carriers had already offered.

The ACCC is accepting comments on its draft ruling, and is expected to release a final decision in March. It is also proposing that the approval be for five years, not the 10 sought by the applicants.

The two airlines want to coordinate and code share across their networks where possible, and revenue share on trunk routes. They define these trunk routes as flights between Australia and Dubai, as well as points beyond Dubai such as European cities, and points beyond Australia such as New Zealand.

Qantas plans to make Dubai its main stopover on Australia-Europe flights. It will end its current partnership with British Airways, under which both used Singapore as a stopover and London as a hub for Western Europe connections.

The ACCC says the new partnership will result in “material, although not substantial” consumer benefits. There will be some detrimental effects to competition, because the carriers’ networks overlap. This is particularly true in the key Australia-U.K. market, where their combined share was almost 50% for the year through June. However, there is enough competition in this market to help offset their dominance, the ACCC says.

On Australia-New Zealand routes, the market would be essentially split between Qantas-Emirates and the Air New Zealand-Virgin Australia partnership, with few other effective competitors. In this case, “the ACCC is concerned that the alliance may have an increased ability and incentive to reduce or limit growth in its capacity in order to raise airfares.”

The ACCC says the overlap applies to four main routes: Sydney-Auckland, Melbourne-Auckland, Brisbane-Auckland, and Sydney-Christchurch. Looking at the Australia-New Zealand market overall, a Qantas-Emirates combination would only account for 40% of passengers versus 57% for Air New Zealand-Virgin Australia. However, examining specific key routes gives a different picture: Qantas-Emirates would have the largest share on Sydney-Auckland, Melbourne-Auckland and Sydney-Christchurch.

Anticipating these concerns, Emirates and Qantas have already offered a commitment to keep overall capacity between New Zealand and Australia at current levels.

This is one of the three options being considered by the ACCC as a condition of approval. However, the regulator says its preferred option is a capacity commitment covering only the four main major routes where the airlines’ networks overlap. A third option is individual capacity commitments for each of the four markets.

The ACCC says it also wants to require capacity growth in the Australia-New Zealand market. But it acknowledges that there is currently a capacity surplus, so it will not apply this requirement initially. The agency is inviting submissions on both the capacity commitment and the growth requirement.

Qantas and Emirates welcomed the ACCC draft approval, and say they are focusing on responding to the concerns over Australia-New Zealand flights. The carriers plan to begin their partnership in April, and have already begun preparations that do not require regulatory approval, such as connecting IT systems and creating a Qantas operational base in Dubai.