UPDATE 2-Australia's competition regulator proposes to deny Qantas-Japan Airlines deal

* Regulator believes deal would undermine competition

* Qantas and JAL the only carriers on Melbourne-Tokyo route

* Qantas says will respond to regulator’s concerns (Adds Japan Airlines comment)

SYDNEY, May 6 (Reuters) - Australia’s competition regulator said on Thursday it proposed to deny authorisation for a joint business agreement between Qantas Airways Ltd and Japan Airlines Co Ltd (JAL) covering flights between Australia, New Zealand and Japan.

Australian Competition and Consumer Commission (ACCC) Chairman Rod Sims said such a deal between two key competitors, which would allow them to coordinate fares and schedules, could be authorised only if the public benefits from cooperation outweighed the harm to competition.

“At this stage we do not consider that Qantas and Japan Airlines’ proposal passes that test,” he said, noting that before the pandemic they were the only airlines offering flights between Melbourne and Tokyo.

On the Sydney-Tokyo route, ANA Holdings Inc also offers flights. Virgin Australia had been set to fly between Brisbane and Tokyo when the pandemic hit, but it has since got rid of widebody planes capable of the flights.

“This proposed coordination would appear to undermine competition significantly by reducing the prospect of a strong return to competition on the Melbourne–Tokyo and Sydney–Tokyo routes when international travel resumes,” Sims said.

The ACCC is seeking submissions from interested parties in response to the draft determination by May 27 and will make a final decision after considering those submissions.

Qantas said it was disappointed with the negative draft decision and it would respond to the ACCC’s concerns to help convince the regulator of the deal’s merits before the final decision.

In 2015, the ACCC proposed initially to deny a similar joint venture between Qantas and China Eastern Airlines Corp due to concerns over fares on the Sydney-Shanghai route, but it was ultimately approved.

Japan Airlines said it would work with Qantas to determine the best course of action to gain ACCC approval for their proposed joint venture. (Reporting by Jamie Freed; Editing by Sam Holmes and Jacqueline Wong)