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War on the Pacific: Delta's Pacific route to hit V Australia, Qantas, United and Air NZ hard

Delta Air Lines CEO, Richard Anderson
Delta Air Lines CEO, Richard Anderson
  • Delta to launch daily B777-200LR Los Angeles-Sydney service from 03-Jul-09;
  • Major competitive threat to V Australia, Air New Zealand and United Airlines;
  • Qantas expected to launch vigorous response;
  • SIA's dream of US route receives another setback.

Delta Air Lines has announced plans to introduce a new daily B777-200LR trans-Pacific service from Los Angeles to Sydney from 03-Jul-09. Delta will enter the route amid a deepening recession in the US, the threat of recession in Australia and just months after Virgin Blue subsidiary commences services on the route.

The fledgling V Australia, which has been forced to delay the start of services from Dec-08, plans to commence three times Sydney-Los Angeles service on 27-Feb-09, rising to daily on 20-Mar-09 following the delivery of additional B777-300ER aircraft. V Australia has also confirmed plans to launch Brisbane-Los Angeles service on 08-Apr-09. The carrier, perhaps anticipating the entry of Delta Air Lines, this week launched a fare sale offering "thousands" of return tickets from Brisbane, Sydney and Melbourne to Los Angeles from AUD1199 (USD804) inclusive.

In Mar-08, V Australia and Delta's merger partner, Northwest Airlines, announced a ticketing partnership to allow passengers to offer travellers seamless connections (including single ticket purchase and full luggage through-check) to key cities in the US and Canada. Delta's introduction of its own service could put this partnership in doubt, undermining V Australia's US feed opportunities.

Delta has announced a special launch fare of USD499 from Los Angeles to Sydney until 12-Jan-08, for travel between 01-Jul-08 and 21-Sep-08. Passengers on the Sydney-LA service can remain on the same plane and continue to Atlanta, Delta's main hub.

Delta's entry also completes a blank spot on the SkyTeam Alliance's global network. All three major global alliances will be present on the route from mid next year - further intensifying the pressure on the as yet unaligned V Australia.

The entry of both V Australia and Delta - and the competitive response from Qantas - will have a significant impact on Air New Zealand, which carries some 270,000 roundtrip passengers on the Australia-US route via its Auckland hub each year. The airline, which previously operated the Sydney-Los Angeles route with B747-400 equipment, now faces an increasingly challenging revenue outlook in many of its core markets.

Qantas, which dominates the Australia-US market with almost 50 services per week earning a significant proportion of the group's profits, is operating new A380 equipment on the Melbourne/Sydney-Los Angeles route. A vigorous response can be expected from Qantas, which now enjoys the best unit costs on the route, courtesy of its A380 investment.

These moves will also challenge the competitiveness of the incumbent United Airlines, which has been taking a different approach from Delta amid the economic downturn by reducing its international capacity (particularly to Asia). The carrier operates older B747-400 equipment on the trans-Pacific route. The aircraft have been recently refurbished, offering flat beds in First and Business classes, but United's product will be challenged by its rivals' fresh offerings and new aircraft.

Delta's entry puts a further hurdle in the path of Singapore Airlines, which has campaigned for years for entry into the Australia-US route. The Australian Government recently stated it would maintain current access arrangements to enable V Australia establish itself on the route. The Australian Government is expected to eventually open the route to more fifth freedom carriers, with Emirates and Etihad expected to be keen participants.

Recent pricing initiatives on the Australia-US route look set to become entrenched as competition intensifies. Yields and profits will fall for the incumbents, while the new entrants' capacity will help ensure a resurgence of two-way travel between Australia and the US.

But the experiences of the early 1990s, when multiple airlines entered this uniquely long-haul point-to-point market suggest one outcome: a pricing bloodbath.

This will be (temporarily) good for tourism and airports, but not for airlines. And even Qantas, for whom the Pacific has been its golden goose, will see a major source of its profits take flight.

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