Air New Zealand and Air Canada have been denied permission by the Australian competition watchdog to co-operate over flights between Auckland and Sydney to Vancouver.

The airlines had planned to share the revenue from Air Canada's direct Sydney-Vancouver route and Air New Zealand's direct Auckland-Vancouver route, and to jointly promote the flights.

Air New Zealand and Air Canada are two of the four main carriers on the route.

The Australian Competition and Consumer Commission (ACCC) was concerned the agreement would reduce competition between Air New Zealand's indirect flights and Air Canada's Australia-Canada direct flights, as Air New Zealand would receive revenue from the direct flights.

"The ACCC can authorise such an agreement where it meets a public benefit test, but the ACCC considers that the test has not been met here," said ACCC chairman Graeme Samuel.

The direct flights would deliver some public benefits through increased choice and convenience for passengers, but such an agreement was not necessary to operate the flights as they had been running since late 2007, Mr Samuel said.

There was also some doubt about how revenue-sharing and joint marketing would tackle a fall in demand, the main risk to the direct flights, he said.

Air New Zealand had previously questioned the difference between its proposal and Qantas' co-operation with South African Airways on the uncompetitive Johannesburg route.

In a preliminary decision in November, the ACCC blocked the proposed agreement over competition concerns on routes between Australia and Canada.

Air New Zealand had argued that there may not be enough demand to sustain daily services without the agreement.

On November 2, 2007 Air New Zealand started direct flights three times a week from Auckland to Vancouver using a Boeing 777 aircraft configured to carry 313 passengers.

On December 14, 2007 Air Canada started daily direct flights from Sydney to Vancouver using a Boeing 777, replacing an indirect flight via Honolulu.