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Delta-Virgin Blue Group Joint Venture. At last a challenge to Qantas?

9-Jul-2009

V Australia/Virgin Blue and Delta are to seek anti-trust immunity in the US and Australia to establish a “joint venture” in their US-Australia markets. There was no further clarification of what is covered by the expression or of any timing. But it is clearly intended to describe a relatively close relationship.

The two are already “moving forward to implement” codesharing, frequent flyer programme reciprocity and reciprocal lounge facilities.

According to the joint release, “The alliance will allow Delta and the Virgin Blue Airlines Group to compete more effectively in those markets (“between the U.S. and Australia and the South Pacific”) by collaborating on route and product planning, codesharing on their respective networks and extending frequent flyer program benefits and lounge access to customers of both airlines.”

As the carriers’ releases are not explicit, it is not clear if the JV is intended to extend to behind gateway service - “between the US and Australia and the South Pacific” appears less than that. However, the intention is apparently for each airline respectively to codeshare on all routes connecting directly into the point of arrival or departure. So, for example all points linked directly to Los Angeles will be available for codeshare on V Australia services.

In Mar-2009, Virgin Blue announced an interline agreement between the two, allowing “travellers to purchase a single ticket from V Australia or Delta for travel on the networks of each carrier.” A codeshare would go a lot further.

A full marketplace – good for consumers, not for profits

There are today four non-stop operators flying their own metal across the Pacific, Qantas, which dominates still, United Airlines, V Australia and Delta.

One-stop service is also available on Air New Zealand (which actually has rights to fly non-stop Australia-US, but dropped them some years ago) and Hawaiian Airlines.

Qantas’ dominance and ability to feed the Australian end of the route still allows it to command a premium on fares relative to the others, although it has been forced quietly to cut back on frequencies as premium demand has wilted and the flood of new economy seats has depressed back of the aircraft fares. This once golden goose of a route for Qantas is still probably profitable – just – but it is a far cry from providing the carrier with a treasure chest as it did up until a year ago.

Who will blink first?

At the current levels of demand, it is highly unlikely that the other carriers on the route will be making money. Indeed it is a certainty that V Australia is losing heavily. Delta too will also be anticipating considerable and prolonged losses as it enters a new long haul market for the first time. It will have budgeted for that, although the combination of a flurry of new entry and the global downturn will exacerbate the losses.

United meanwhile is still hanging in there, with daily services from Sydney to Los Angeles and Sydney to San Francisco. There have been many suggestions that UA will pull out or at least pull back. Its hub is in San Francisco, which gives it a very strong presence there, but Los Angeles is the more lucrative business route. With the greatly increased competition on the Los Angeles route, it may become attractive for United to pull back to just a San Francisco operation, but otherwise there is little indication that any of the current protagonists is about to throw in the towel.

There is always an outside possibility that United and Star Alliance partner, Air New Zealand will get back together to offer a more competitive product, but, since Ansett failed and the three-way relationship collapsed, the prospects of that are not strong. The loss of Ansett was a real negative for United at the time, although it progressively built up a more limited behind gateway set of connections with Virgin Blue. This relationship fizzled when V Australia started to go head to head with United.

Enhancing competition

A stronger V Australia/Delta link would certainly go some way to offsetting the powerful position of Qantas, which allowed it to drive fares to world-high levels for a long haul route. This market power reflected the unusual nature of the Australia-US route, essentially a very big point to point market, where traffic feed at each end is essential to economic operation.

It would also help the bottom line of Delta and Virgin Blue Group. Important to Delta’s profitability on the route will be gaining access to traffic feed in Australia, the main source of traffic. The carrier has a pretty good network of connecting routes at the US end (although Delta itself is a primarily east coast operation, with the Northwest network helping more in the midwest and western US markets). This is where, logically, Delta and V Australia’s interests coincide.

The three elements of an enhanced market position for the two carriers are:

  1. behind Australian gateway feed for Delta;
  2. behind Los Angeles feed for V Australia; and
  3. en route combined services between Australia and the US – allowing each to advertise a much wider range of frequencies than they can individually.

Virgin Blue’s basically LCC domestic system still makes connectivity less straightforward than between two full service airlines. However, the fact that V Australia operates to and from Los Angeles to Brisbane and Melbourne as well as Sydney offers a stronger enhancement for Delta; it can offer its customers a greater variety of in- and outbound routings, comparable with Qantas.

Meanwhile, V Australia desperately needs improved beyond-Los Angeles connectivity, but Delta’s network planners still appear to be reluctant to give too much away to this foreign minnow.

The joint venture – will fares go up? Don’t hold your breath

Apart from enhancing the competitive position of the joint operation against Qantas, it would perhaps take some heat out of the current price war. That is unsustainable anyway and will need to settle down eventually.

But gaining immunity from two separate competition bodies – Australia’s Competition and Consumer Commission and the US Department of Transportation – does not happen overnight and may well be circumscribed by pricing conditions in any case. And each authority would look askance if there were any immediate hint of capacity reductions.

So, it would be premature to leap to conclusions that this particular price war is about to end soon. Demand is so slow and there are so many seats out there that they must still be filled by offering low fares.

In morning trading today, the market appears to think that Qantas will benefit from any JV, as it would rationalise pricing. That assumption is premature at best.

And the end result of a JV, where two carriers, each operating with a high quality, new B777 fleet and with enhanced market positioning, will only be to establish a competitor much better equipped to steal traffic from Qantas.


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