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Qantas-Virgin dispute over Italy rights goes to the heart of the new alliance partnerships

16-Oct-2012

Virgin Australia and Qantas are squaring off over a limited number of codeshare seats available for use with third airlines between Australia and Italy, setting the stage for a looming battle for Europe. The Italian dispute goes to the strategic heart of the alliances created between the two Australian carriers and their Middle East and Asian counterparts.

Qantas currently holds the entire 1,000 weekly codeshare seats available under the air services agreement between the two countries. But with an expanding virtual European network through partners Etihad and Singapore Airlines, Virgin Australia is gunning for its share to keep up with the proposed Qantas-Emirates mega-alliance to Italy.

Qantas has reapplied for renewal of the entire capacity which until now it has used in conjunction with Cathay Pacific over Hong Kong and British Airways via Singapore and London, arguing that as the incumbent it has first rights. But Virgin Australia believes it is entitled to a commercially viable share as a new Australian airline entrant on the route.

Third country codeshare seats at issue

Qantas applied on 03-Sep-2012 for a renewal of its rights to all 600 third country codeshare seats per week on the Italy route after the International Air Services Commission (IASC) opened considerations for renewal in Aug-2012. It also separately holds rights to another 400 seats it deploys in a codeshare with British Airways via Singapore and London, which was last renewed in 2010.

Under its proposed global alliance with Emirates, due to start in Apr-2013 if approved by the Australian Competition and Consumer Commission, Qantas will move its hub for European flights from Singapore to Dubai and will discontinue its current codeshare on Cathay Pacific between Hong Kong and Rome which expires on 07-Aug-2013.

Following its new partnership, Qantas will now make a separate application to the IASC to use its codeshare capacity to Italy on joint services with Emirates.

And Qantas’ new one-stop Europe access is on show

The Emirates partnership will provide Qantas with one-stop access to more than 70 of the Gulf carrier’s destinations in Middle East, Africa and 47 in Europe, including Rome, Milan and Venice in Italy.

Qantas believes it has the upper hand in retaining its entire codeshare allocation, arguing that under the criteria that the IASC must use to assess the public benefit of renewing the rights “there is a presumption in favour of the carrier seeking renewal”.

“The commission must issue a renewal in favour of Qantas unless there is evidence of both the failure of Qantas to effectively service the route and that the use of part of the capacity by Virgin Australia would better serve the public,” Qantas says in its application.


Qantas points out that it has flown the route since 1948, using its own aircraft until 2003 when it pulled out of Rome in the face of unsustainable losses against a backdrop of an “extremely difficult operating environment for international airlines” including the outbreak of SARS and the compounding the effects of the 11-Sept-2001 terrorist attacks in the United States.

It replaced its own services with a codeshare agreement with Cathay Pacific in 2003, placing its code on five weekly Cathay services between Hong Kong and Rome, increasing to daily in 2006 and finally on all available Cathay frequencies on the route since 2007.

Australia-Italy a large market with stiff competition

The Australia-Italy market is highly competitive with no fewer than nine foreign operators including Singapore Airlines, Emirates, Cathay Pacific, Etihad Airways, Thai Airways, Air China, Korean Air, British Airways and Qatar Airways. Virgin Australia competes on the route through an interline agreement with Singapore Airlines.

The Australia-Italy market has grown by nearly 20% in the two years to the 2012 financial.

While the number of passengers travelling on the route has grown over the past few years, Qantas says its market share has declined steadily to about 8% in the year ended Jun-2012, compared to about 14% in 2009. Over that time the number of passengers on the route has grown by about 19% and leisure travellers account for about 80% of the traffic.

With a large local migrant population, Italy is Australia’s 19th largest route in terms of origin/destination traffic flow; about 427,000 passengers travelling between the two countries in the year to Jun-2012.

The country is the fourth largest traffic market between Europe and Australia after Britain, Germany and France.

Passenger flows on the route are heavily weighted in favour of Australian residents, who make up more than 70% of passengers, with inbound visitors accounting for just 28%.

As with numerous other European routes, the Qantas-Emirates alliance will significantly improve flexibility of Italian services, delivering higher frequencies and schedule timings.

Half of the traffic currently flows over the UAE

About half of the passengers on the Australia-Italy route had an uplift/discharge in the United Arab Emirates and Singapore in the year to Jun-2012, compared to just 9% of passengers that travelled via Hong Kong. So the route is already highly developed, either via Dubai or Abu Dhabi.

Qantas plans to start daily A380 services from both Sydney and Melbourne to London, via Emirates’ Dubai hub, providing another daily frequency to Dubai, connecting with Emirates’ services to Italy.

The tie-up with Emirates will also allow Qantas to expand its virtual network and marketing to include Venice and increase frequencies by up to four flights per day compared to the current Cathay Pacific codeshare.

Virgin disadvantaged without codeshare rights

Unless granted codeshare capacity, Virgin Australia is only able to interline with its partners, leaving it at a substantial disadvantage because interline seats do not show as prominently on travel agent bookings screens as codeshare seats.

Emirates recently up-gauged its aircraft and increased frequencies to Italy and currently operates 46 return services a week between Australia and Italy according to Innovata, including double daily services to Rome and Venice and 18 weekly services to Milan with total seat capacity of 31,814 using a combination of A380, B777-300, A340-300 and A330-200 aircraft.

By comparison Virgin Australia’s combined codeshare with Etihad and Singapore Airlines would offer just 12 weekly frequencies to Milan and only three times weekly to Rome on Singapore Airlines. Etihad does not fly to Rome.

Emirates' frequencies to Italy (weekly one-way): 15-Oct-2012 to 21-Oct-2012

Rank

Origin

Destination

Total Frequencies

1

MXP

Milan Malpensa Airport

DXB

Dubai International Airport

18

2

DXB

Dubai International Airport

VCE

Venice Marco Polo Airport

14

3

FCO

Rome Fiumicino Airport

DXB

Dubai International Airport

14

Emirates' total seats to Italy (weekly one-way): 15-Oct-2012 to 21-Oct-2012

Rank

Origin

Destination

Total Seats

1

MXP

Milan Malpensa Airport

DXB

Dubai International Airport

12,228

2

FCO

Rome Fiumicino Airport

DXB

Dubai International Airport

12,110

3

DXB

Dubai International Airport

VCE

Venice Marco Polo Airport

7,476

Etihad's frequencies to Milan (weekly one-way): 15-Oct-2012 to 21-Oct-2012

Rank

Origin

Destination

Total Frequencies

1

MXP

Milan Malpensa Airport

AUH

Abu Dhabi International Airport

7

           

Etihad's total seats to Milan (weekly one-way): 15-Oct-2012 to 21-Oct-2012

Rank

Origin

Destination

Total Seats

1

MXP

Milan Malpensa Airport

AUH

Abu Dhabi International Airport

3,544

           

Qantas-Emirates comes with a promise of lower prices

Qantas even promises to reduce fares to Italy as part of its renewal application. Its deal with Emirates provides Qantas with “preferential booking class access”, allowing access to additional seat inventory, increasing supply. “Such access would mean that sale fares are able to be offered across broader travel periods,” Qantas says in its application.

But average fares on the Italy route have increased in recent years according to Tourism Australia, while inbound leisure travellers between 2010 and 2012 financial years have dropped 4%.

Virgin concerned that Emirates will strengthen Qantas’ already dominant position

Recognising that the Italy route grant could well be pivotal in establishing the basis for what promises to be a large number of similar confrontations, Virgin Australia is positioning for the future in this proceeding. The carrier has applied to the IASC for 300 weekly codeshare seats, half of the capacity held by Qantas, to allow it to introduce codeshare operations on Etihad and Singapore Airlines.

Codeshare services to Italy are a “high commercial priority” according to Virgin Australia.

Virgin Australia argues in the application document that the Italian route is still in start-up phase and the 300 seats a week it seeks is the minimum amount required to sustain a codeshare operation.

Virgin argues that the “pre-eminent consideration” for the IASC in allocating capacity is to introduce competition on a route to a new entrant that has not previously been allocated any capacity. 

Virgin Australian maintains it is a pioneer in forging “egocentric alliances” with a range of partners to build a virtual global network around itself.

The airline has developed relationships with airlines spanning the globe, including Etihad for Europe, the Middle East and Africa; Singapore Airlines for Asia (and for Europe from some Australian cities), Delta Air Lines for the United States and a strategic alliance with Air New Zealand on the Tasman.

Such partnerships and associated codeshare services are no longer merely supplementary to an airline’s business model as they were a decade ago, they are central to the strategy, particularly valuable in allowing carriers in relatively small end of the line markets to survive.

“It is therefore essential that on routes where capacity for code share operations is limited, airlines hold the minimum allocation of capacity necessary to ensure that such services are commercially sustainable, given the significant role that code sharing now occupies in airlines’ network and strategic objectives,” Virgin says.

Virgin Australia is confident that it will easily sell the entire 300 seat allocation, based on current interline sales. Sales would increase significantly when those interline arrangements are converted to codeshare services due to their more prominent position in travel agents’ CRSs.

Giving Virgin Australia a slice of what is a very small codeshare pie should ensure this key market will evolve in capacity and more competitive pricing for travellers.

Italy’s ancient preoccupation with protectionism sets the stage for future duels

This IASC proceeding on the Italy route has more than passing interest for Virgin Australia. For one thing, it is its CEO’s country of origin. But more importantly commercially, it promises to establish the ground rules for future contests in Australia’s refreshingly transparent process for awarding route access through the IASC. It is of particular relevance to the diminishing number of protectionist countries like Italy which insist – for no obvious reason, as flag carrier Alitalia does not fly the route – on limiting market access.

With nearly half a million passengers a year flying the route, it is near-farcical that such paltry levels of Australian airline service are permitted.

Interstested parties have until 16-Oct-2012 to notify the IASC an intention to make a submission, which must be lodged by 23-Oct-2012.


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