Australia's competition watchdog has conditionally approved a tie-up between Air New Zealand and Virgin Blue on flights between Australia and New Zealand.
The airlines want to collaborate on trans-Tasman routes and sell seats on each other's planes to compete more effectively against Qantas and its low-cost subsidiary Jetstar.
The approval by the Australian Competition and Consumer Commission (ACCC) reverses an earlier draft ruling which rejected the alliance as anti-competitive.
The regulator says it received a substantial amount of information since its initial decision about the possible public benefits of such a move.
The ACCC has approved the deal, subject to the airlines maintaining a certain level of competition on routes from Wellington and Dunedin to Sydney, Melbourne and Brisbane.
As well as co-ordinating routes, prices and schedules as part of a code share agreement, the airlines will also have reciprocal frequent flyer and lounge access agreements.
Air New Zealand and Virgin Blue have given undertakings to maintain competition the flights if their proposed alliance goes ahead.
ACCC chairman Graeme Samuel is satisfied by their undertakings.
"When you increase capacity then there's a real incentive to keep your fares low, because the last thing you want to be doing is to be flying planes with empty seats."
Virgin Blue chief executive John Borghetti says it would take a few months after final approval is given to start making changes, and the benefits of the alliance won't really be noticed until the first half of the next financial year.
Air New Zealand says it is pleased by the decision, which it argued was necessary to compete more effectively against Qantas and Jetstar.
The national carrier says it expects a decision from Transport Minister Steven Joyce within the next few days.
Neither Air New Zealand nor Mr Joyce would comment on Thursday.
