Transport Minister Steven Joyce said the decision would allow airlines to work together on transtasman services and fares, and "travellers will benefit".
The decision comes a week after the Australian Competition and Consumer Commission approved the alliance.
As part of those decisions, Air New Zealand and Virgin Blue - which flies as Pacific Blue on the transtasman route - have three years to prove they can operate the alliance in a competitive manner, with specific commitments in regards to overall seat numbers on Dunedin-Brisbane routes and Queenstown-Sydney routes.
The capacity on both routes for the first year of the alliance, based on previous passenger numbers for the year ending October 31, stands at 73,000 for Dunedin-Brisbane, and 75,000 for Queenstown-Sydney.
In a signed agreement between the airlines yesterday, both Air New Zealand and Pacific Blue have agreed to grow capacity on these routes by 0.5% over the next three years.
Mr Joyce said the authorisation period of three years for the alliance would place a "strong incentive" on both airlines to operate in a competitive manner.
Air New Zealand and Pacific Blue are also required to report their compliance to the Ministry of Transport twice a year and, if the airlines fail to comply, their alliance agreement can be revoked.
Dunedin International Airport chief executive John McCall said it was particularly pleasing government authorities on both sides of the Tasman came to the same conclusion.
With capacity set to grow over the next three years, it provided "assurance for the next three years".
Mr McCall said the alliance would not be an impediment to other airlines flying the same routes, but if they did, the agreement to increase would no longer apply.
Air New Zealand chief executive Rob Fyfe welcomed the minister's decision, which recognised the benefits for consumers of the alliance.
"I'm pleased that formal approval has been given, which, combined with the Australian Competition and Consumer Commissions approval last week, enables us to implement the alliance and deliver benefits to customers."
