Air NZ and Virgin Australia: Tasman capacity to surge

Summary

• Air New Zealand and Virgin Australia are each planning approximately 15% capacity expansion across the Tasman following the dissolution of their joint venture in late Oct-2018.
• Air New Zealand and Virgin Australia will both likely gain market share, whereas the Qantas Group could potentially lose market share.
• In FY2017 Air New Zealand captured a 36% share of the Australia-New Zealand market and Virgin Australia had a 16% share, for a combined 52%. Qantas, Emirates and Jetstar combined had a nearly 43% share.
• Air New Zealand could potentially match on its own the Qantas-Emirates-Jetstar combination - which has experienced has experienced a market share shift with Qantas increases partially offsetting Emirates decreases - while Virgin Australia will be a much smaller independent competitor.

Air New Zealand and Virgin Australia expand across the Tasman

On 4-Apr-2018 Air New Zealand announced the end of its alliance with Virgin Australia effective 28-Oct-2018. The two airlines have had a revenue-sharing metal neutral joint venture in the Australia-New Zealand market since Nov-2011.

On 9-Apr-2018 Air New Zealand announced the launch of two new Australia routes and additional capacity on five of its existing trans-Tasman routes. Air NZ stated that its trans-Tasman capacity will increase 15% (year-over-year) in Dec-2018.

Virgin Australia followed a week later, on 16-Apr-2018, by also announcing two new routes across the Tasman and additional capacity on three of its existing routes. Virgin Australia did not provide an overall capacity figure. However, based on CAPA calculations, Virgin Australia's capacity to New Zealand will also be up by approximately 15% once the changes are implemented (including reductions on two existing routes).

Air New Zealand and Virgin Australia to compete on four more routes

Air NZ currently has 14 year-round routes across the Tasman and Virgin Australia has 10 routes. Air NZ also has three seasonal routes across the Tasman.

Air New Zealand's trans-Tasman network will increase to 16 year-round routes with the Dec-2018 launch of Brisbane to Queenstown and Wellington. These are two of three trans-Tasman routes under the Air NZ-Virgin Australia JV that Virgin Australia now operates alone. Air NZ is unlikely to launch the third Virgin Australia-only route, Brisbane-Dunedin, as it a very small market that is not served by any other airline.

Virgin Australia's trans-Tasman network will increase to 12 routes following the 28-Oct-2018 launch of Melbourne-Queenstown and Sydney-Wellington. These are two of 12 routes under the Air NZ-Virgin Australia JV that only Air NZ now operates (includes the three seasonal routes).

The number of routes both airlines operate will increase from seven to 11. On the seven JV routes that are now operated by both airlines, Air NZ is adding capacity on five routes and Virgin Australia is adding capacity on three routes.

Air NZ-Virgin Australia JV had a 52% share of the Australia-New Zealand market

Virgin Australia operated up to 102 weekly flights to New Zealand during the last peak southern hemisphere summer season, according to OAG schedule data. Its new schedule for next summer will feature up to 15 additional weekly flights. Virgin Australia operates all its New Zealand flights with two-class 737-800s.

Air New Zealand operated up to 170 weekly flights to Australia last summer, according to OAG data, however it has more than twice as much capacity as Virgin Australia because several of its trans-Tasman flights are operated with widebody aircraft. Air New Zealand had up to 38,000 weekly one-way seats across the Tasman last summer while Virgin Australia had up to 18,000 weekly one-way seats, based on CAPA and OAG data.

Air New Zealand had approximately a 34% share of total Australia-New Zealand seat capacity last summer and Virgin Australia had a 16% share (their shares varied somewhat week by week). In the fiscal year ending 30-Jun-2017 (FY2017), Air New Zealand flew a 36% share of total Australia-New Zealand passenger and Virgin Australia flew 16%, according to BITRE data.

Air New Zealand and Virgin Australia will both likely capture larger market shares next summer as they expand following their divorce.

Based on 15% capacity increases for both airlines, Air New Zealand could potentially capture a 37% capacity share while Virgin Australia's capacity share could approach 20%.

Australia-New Zealand growth to accelerate

As the Australia-New Zealand market is very dynamic at the moment it is hard to predict with certainty where the market shares will exactly end up. However, the overall trend will certainly be intensifying competition, leading to lower average fares and faster growth.

See related report from CAPA sister publication Blue Swan: Virgin dumped. And now for war? There will be blood.

Australia-New Zealand passenger traffic was up by a relatively modest 3% in FY2017, to slightly more than 7 million. The local Australia-New Zealand market has grown consistently during the past decade but the growth rate has never reached the double digits. Over the 10 year period the market has grown by 40%.

New Zealand is Australia's largest international market and Australia is New Zealand's largest international market. But the rate of growth has been much slower than the overall international growth rates for each country. New Zealand accounted for 18% of Australia's total international passenger traffic in FY2017, compared to 23% in FY2007.

Australia-New Zealand passenger traffic (in millions): FY2007 to FY2017

FY2007	FY2008	FY2009	FY2010	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017
5.036	5.173	5.157	5.405	5.579	5.731	5.801	6.095	6.464	6.854	7.050

Note: only includes local traffic.
Source: CAPA - Centre for Aviation and Australia BITRE.

Record capacity levels and an increase in the number of competitors will pressure fares, stimulating demand and leading to a new phase of faster growth. The Air New Zealand and Virgin Australia divorce essentially results in three competitors, compared to the current duopoly between Air New Zealand-Virgin Australia and Emirates-Jetstar-Qantas.

Qantas fills the void following Emirates' trans-Tasman reductions

Recent reductions at Emirates have already resulted in significant market share shifts across the Tasman - mainly from Emirates to its alliance partner Qantas. Emirates dropped Auckland-Brisbane and Auckland-Melbourne in Mar-2018 and suspended Auckland-Sydney in Jun-2017.

Qantas has added capacity on these routes to fill most of the void. Qantas capacity to Australia is up approximately 25% year-over-year, according to CAPA and OAG data.

Emirates' share of trans-Tasman capacity has dropped more than 10pts year-over-year: from 14% in Apr-2017 to less than 4% in Apr-2018. Qantas' share is up nearly 7pts: from 20% in Apr-2017 to almost 27% in Apr-2018. Jetstar's share has been flat over the past year at 11%.

The combined Emirates-Jetstar-Qantas share of capacity has therefore dropped slightly, from approximately 45% to 42%. However, the three partners should have been able to maintain their share of traffic in the local market, given that a number of Emirates' passengers on the three suspended routes continued to Dubai.

Emirates has only one remaining trans-Tasman route - from Christchurch to Sydney. Qantas currently operates nine trans-Tasman routes and Jetstar operates 10 routes (based on OAG data for the week commencing 16-Apr-2018).

Qantas and Jetstar operate alongside each other on five routes, including Sydney-Christchurch. As a result, the Qantas-Jetstar-Emirates grouping competes on 14 trans-Tasman routes, compared to 20 for the Air New Zealand-Virgin Australia JV.

Australia-New Zealand one-way seat capacity by airline: 16-Apr-2018 to 22-Apr-2018

Source: CAPA - Centre for Aviation & OAG.

Qantas' market share may decrease

In FY2017 Emirates accounted for an 11.6% share of total New Zealand-Australia traffic (less than its capacity share, since some Emirates passengers on trans-Tasman flights continued to Dubai). Qantas accounted for an 18.5% share of New Zealand-Australia traffic in FY2017, giving the Emirates-Qantas duo a 30.1% share combined.

When Jetstar's 12.4% share is included, the Qantas Group and its alliance partner Emirates controlled almost 43% of the market in FY2017, compared to 52% for the Air New Zealand-Virgin Australia alliance.

Four fifth freedom competitors - AirAsia X, China Airlines, LATAM, Philippine Airlines and Singapore Airlines - accounted for the remaining 5% of Australia-New Zealand traffic in FY2017. (Philippine Airlines no longer competes in the Australia-New Zealand market: it dropped Cairns-Auckland in Dec-2017 as it launched nonstop service on the Manila-Auckland route.)

Australia-New Zealand passenger traffic by airline: FY2017

Rank	Airline	Passengers (thousands)	Market share	Average Load factor
1.	Air New Zealand	2,535	36.0%	79%
2	Qantas	1,306	18.5%	80%
3.	Virgin Australia	1,136	16.1%	75%
4.	Jetstar Airways	875	12.4%	81%
5.	Emirates	820	11.6%	70%
6.	China Airlines	162	2.3%	77%
7.	AirAsia X	92	1.3%	80%
8.	LATAM	85	1.2%	76%
9.	Singapore Airlines	23	0.3%	60%
10.	Philippine Airlines	15	0.2%	64%
	TOTAL	7,050		77%

Note: passenger numbers and market share based on local Australia-New Zealand traffic only (traffic continuing beyond Australia or New Zealand on same flight excluded).
Load factor is calculated based on total passengers and seat capacity, including passengers flying beyond Australia (or beyond New Zealand in the case of LATAM).
Source: CAPA - Centre for Aviation & BITRE.

The Qantas Group has been trying to maintain its market share across the Tasman in spite of the Emirates cuts. However, its share will inevitably decrease as Air NZ and Virgin Australia expand.

As highlighted earlier in this report, Air NZ's share of capacity will likely reach 37% next summer while Virgin Australia's share may approach 20%. That would leave approximately a 38% share for Qantas-Jetstar-Emirates.

Air New Zealand could potentially even surpass, on its own, the Qantas-Jetstar-Emirates grouping as it is now contemplating further increases to Australia.

Air NZ is already by far the largest single airline presence in the Australia-New Zealand market and is confident that it is able to compete without a partner. It was Air New Zealand's decision to not extend the JV with Virgin Australia, which itself would have extended the partnership and is now left in a relatively weak position.

Competition on trunk routes intensifies

Air NZ is increasing capacity to the three main Australia destinations of Brisbane, Melbourne and Sydney. Capacity will be flat at its five smaller Australia destinations - Adelaide, Cairns, Gold Coast, Sunshine Coast and Perth. Cairns and Sunshine Coast are only served seasonally.

Brisbane will have the largest Air NZ capacity increase, 44%, as Air NZ launches services to Brisbane from Queenstown and Wellington. Air NZ now has a relatively small presence in Brisbane, while Brisbane is the largest gateway for trans-Tasman services for Virgin Australia.

Virgin Australia currently has 40% more seat capacity in the Brisbane-New Zealand market than Air New Zealand. This explains Air NZ's focus on expanding in Brisbane after the JV with Virgin Australia ends on 27-Oct-2018.

Virgin Australia is relatively underrepresented in Melbourne and Sydney. Air NZ currently has three times more seats in the Melbourne-New Zealand market than Virgin Australia and has more than four times as many seats in the Sydney-New Zealand market. Virgin Australia is addressing this shortcoming by launching its own services from Melbourne to Queenstown and from Sydney to Wellington - as well as by increasing capacity from Melbourne and Sydney to Auckland.

From a New Zealand perspective, Virgin Australia is underrepresented in Wellington. Virgin Australia is increasing its presence in the New Zealand capital with the new service from Sydney. Virgin Australia only currently serves Wellington from Brisbane, a route which will become more competitive as Air NZ enters with its own metal.

Virgin Australia could partner with SIA on Melbourne-Wellington

Virgin Australia may also boost its presence in Wellington by codesharing on Singapore Airlines' new Melbourne-Wellington flight, which is launching on 3-May-2018. Virgin Australia is not currently selling the new SIA flight and is still selling Air New Zealand's Melbourne-Wellington flight until the JV ends in late Oct-2018. After the Virgin Australia-Air NZ partnership ends it would be logical for Virgin Australia to use SIA to maintain a nonstop presence in the Melbourne-Wellington market.

Virgin Australia now uses its code on SIA's Canberra-Wellington service, which is being dropped as Melbourne-Wellington is launched. Canberra-Wellington does not conflict with the Virgin Australia-Air New Zealand JV as the route is not operated by Virgin Australia or Air NZ (or any other airline).

SIA could potentially launch more trans-Tasman services, which would benefit Virgin Australia. However, SIA is generally not interested in the trans-Tasman market and it will want to avoid rocking the boat with Air NZ. SIA and Air NZ have been JV partners in the New Zealand-Singapore market for more than three years. SIA is best off keeping a distance as two of its closest partners battle it out.