The competition regulator will allow Virgin Australia to extend its alliance with Air New Zealand on the trans-Tasman route for another five years, two years longer than it had originally proposed.
In its final decision, the Australian Competition and Consumer Commission ruled the alliance was likely to result in "material public benefits", including more frequent flights and access to loyalty programs and airport lounges.
"This is likely to promote competition on trans-Tasman routes, particularly for business travellers," the ACCC said.
However, it has imposed conditions requiring Virgin and Air New Zealand to maintain a base level of capacity on six routes between Australia and New Zealand, including between Melbourne and Christchurch and Brisbane and Wellington.
Virgin and its biggest shareholder Air New Zealand had wanted the conditions on capacity on the trans-Tasman removed. However, New Zealand airports and councils had claimed that removing conditions on the amount of capacity would lead to the airlines reducing the number of flights to try and increase fares.
The ACCC will require the airlines to provide key data at the end of each scheduling season to help it determine if the alliance has adversely affected competition.
However, in a fillip for the airlines, the regulator has approved the alliance for five years after taking into account their requests for a longer period to give them investment certainty.
In June, the ACCC proposed giving approval for three years, spurring the airlines into mounting a strong case for a longer period.
The latest decision brings the Virgin-Air New Zealand alliance in line with the tie-up between Qantas and Emirates on the trans-Tasman, which was approved for five years.
The ACCC said Virgin's operations between Australia and New Zealand would be "more limited than its key competitors" without the alliance. It also said Air New Zealand would be at "some competitive disadvantage" to Qantas and Emirates because of its weaker sales presence in Australia.
Virgin and Air New Zealand still need approval from New Zealand's Ministry of Transport to extend their tie-up. The pair has a combined market share of 58 per cent on the trans-Tasman route compared with about 39 per cent for Qantas, Jetstar and Emirates.