And then there was one: Virgin Atlantic's withdrawal leaves BA as only European airline in Australia

Virgin Atlantic's Sydney route, launched in 2004, looks distinctly old world. It has limited partners on either end of the journey - and in the middle too. Virgin itself is undergoing a round of pragmatism and there is no room for a high profile but unprofitable service. This is not a new conclusion: Virgin Atlantic is the 12th European carrier to have exited Australia over the past two decades. But there is perhaps more to it, namely that with Virgin's new owner - heavily risk-averse Delta - just across the pond, Virgin's future will swing more towards the Atlantic. Ironically, this comes as other European carriers begin to refocus on Asia.

Virgin Atlantic is the 12th European airline to exit Australia

Virgin Atlantic will suspend Australian operations in May-2014, with the carrier's last Hong Kong-Sydney service departing on 04-May-2014 and the last Sydney-Hong Kong service on 05-May-2014. Virgin operated the A340-600 with local pick-up rights between Hong Kong and Sydney. In ending the Sydney tag, Virgin frees up aircraft but no Heathrow slots as the Hong Kong service will be retained. Virgin gives up a prime pair of Hong Kong slots. Virgin said the route is "no longer considered profitable". Loads (78% in the 12 months to 30-Jun-2013) were strong, indicating yield and cost problems.

Hong Kong-Sydney is Virgin's sole route to Australia, launched in 2004 after a protracted decade-long attempt at directly serving the market. Wars of words were fierce in the 1990s, but by the middle of the decade most European carriers had exited. By the time Virgin finally arrived in 2004, only Lauda Air (later Austrian Airlines) and British Airways were left. Lauda exited in 2005, when Austrian Airlines took over, with Austrian departing in 2007. Counting the two as separate, Virgin Atlantic is the 12th European airline to have left Australia over the past two decades or so. By the time Virgin arrived, the market was past its prime for Virgin but was a marketing bonanza.

In recent history the prospects of flights between Australia and Europe, and Sydney-London specifically, were higher in prestige than profits. And in more recent years, with British Airways and Qantas reducing services, established carriers have been willing to forgo prestige as ever competitive dynamics leave less room for vanity. At Qantas especially marketshare was thought to be significant, with the under-performing Kangaroo Route theoretically keeping passengers on Qantas' profitable domestic network. But as partnerships like Virgin Australia and Etihad showed, a single carrier did not need its own extensive global network to be competitive in the more lucrative markets.

Contrary to popular thought, it was carriers from Asia, not the Gulf, that made Australia unsustainable for most European airlines. Emirates did not arrive in Australia until 1996, by which point Air France, Lufthansa and Aeroflot had already exited the market. The Gulf carriers would, however, go on to pose a competitive threat to Qantas, BA and Asian carriers for their one-stop combinations. While Qantas suffered, Australia's tourism and economy indisputably benefited.

History of European carriers serving Australia: through May-2014

Carrier	Country	From	To	Aircraft types operated
AOM French Airlines	France	Nov-95	Nov-00	DC-10-30
Aeroflot	Russia	May-93	Mar-96	767-200
Air France	France	Jan-93	Oct-95	B747-300
Alitalia	Italy	Unknown	Oct-00	DC-8 / DC-10 / 747
Austrian Airlines	Austria	Jul-05	Mar-07	777-200 IGW / A340-300
British Airways	UK	Jul-38	Current	VC-10 / 707 / 747 / 777
KLM Royal Dutch Airlines	Netherlands	1938, 1960	Mar-01	DC-8 / DC-10 / 747 In Jet Era
Lauda Air	Austria	May-88	Jun-05	777
Lufthansa German Airlines	Germany	Oct-65	Mar-95	707 /DC-10-30 / 747
Olympic Airways	Greece	Dec-84	Nov-02	707
Union de Transports Ariens	France	May-63	Dec-92	DC-8 / DC-10-30
Virgin Atlantic Airways	UK	Dec-04	May-14	A340-600
Yugoslav Airlines	Yugoslavia	Apr-75	May-92	707 / DC-10

Source: CAPA - Centre for Aviation and John M C King (ITLS)

British Airways is the last remaining European airline in Australia

While British Airways, onetime part owner of Qantas, becomes the last passenger airline to serve Australia, it does so having also seen tremendous change. BA ended service to Brisbane in 2000 and in 2006 ended service to Melbourne and Perth. BA and Qantas' Mar-2012 restructure saw the two consolidate their network, with BA ending the Bangkok-Sydney continuation while Qantas ended its Hong Kong-London and Bangkok-London continuation. BA retained its sole other service, London Heathrow-Singapore-Sydney.

The BA-Qantas joint service agreement was losing thrust as the market itself diminished in stature. It was dissolved in Mar-2013 when Qantas implemented its alliance with Emirates and shifted the stopover of European flights from Singapore to Dubai. BA retained its London-Singapore-Sydney service but changed the operating aircraft from 747-400 to 777-300ER, which it said has impacted the route tremendously - a statement consistent with other airlines that have switched from 747-400s to 777-300ERs.

With all other European carriers withdrawing from Australia and Qantas itself reducing its European footprint, are there factors to keep BA in Australia? That was the question when BA and Qantas dissolved their JSA, and no doubt will be asked again. One factor influencing its decision making is that British Airways still has a relatively strong corporate presence in the Australia-UK market, offering it advantages that are less immediately visible, but which impact on the wider network operation.

BA has mulled how it might be able to work with Qatar Airways, a newfound partner. BA was the advocate for bringing Qatar into oneworld, and formally sponsored the carrier's entry. One theoretical example is for Doha to replace Singapore as the stop over point for Australia, allowing BA to tap into Qatar's feed and give Qatar an offline link to Sydney. Qatar only serves Melbourne and Perth in Australia.

Then again, there is the argument a single service to Australia, with high costs, is unnecessary when there are many partnership options. (And with BA having out-lasted Virgin, any pride factor is reduced.) Already BA partners with Cathay Pacific over Hong Kong, from where Cathay serves six Australian cities. BA retains codeshares - although not always at competitive rates - on Qantas from Singapore as well as on domestic Australian flights. But Qantas has a more limited Australian network from Singapore (four cities) than Cathay has from Hong Kong.

Point-to-point traffic between Singapore and Sydney has been impacted by the entry of Scoot, providing low fares, in addition to numerous one-stop options.

Virgin Atlantic had weak connecting options in Europe, Australia and Hong Kong

Virgin Atlantic was best positioned to sell London-Sydney itineraries, a large market but highly competitive, with nearly three dozen carrier itineraries possible. Virgin's Kangaroo Route traffic was small, with BITRE data indicating that in the 12 months to 30-Jun-2013, only 37% of Virgin Atlantic's Sydney traffic originated in Europe while 55% of British Airways' Sydney traffic originated in Europe.

Virgin, unlike BA, had no short haul capability of its own and lacked a European feeder network. Virgin relied on interlines - including from BA. In Australia, Virgin Atlantic had Virgin Australia as a sister carrier, but the relationship was never strong, limiting Virgin Atlantic-Virgin Australia itineraries.

Virgin Australia was perhaps looked down on as the inferior short-haul little sister, and once she gained a long-haul network - and more critically, partnerships with competitors Etihad and Singapore Airlines - she was smartly charting a course best for her.

It was only in 2012 Virgin Australia and Virgin Atlantic became formal commercial partners as Virgin Australia commenced codesharing on Virgin Atlantic's Sydney-Hong Kong service. Prior to that the two had a limited partnership, mainly centred on marketing and loyalty.

Virgin also suffered from a lack of connectivity at its stopover point of Hong Kong - critical for its higher reliance (according to BITRE) on local traffic rather than through traffic. BA had, and to a degree retains, options with Qantas out of Singapore as well as its new partnership with Cathay out of Hong Kong. BA has double daily services from London to both Hong Kong and Singapore. That enables BA to open more connectivity options and find the best combination between Europe and Asia and then Asia and Australia.

In both ports BA has non-stop access to numerous Australian cities whereas Virgin had to rely on its single daily Hong Kong flight that had access only to Sydney. A lower-yielding London-Sydney passenger displacing a higher-yielding London-Hong Kong passenger had a greater impact at Virgin than at BA. Virgin was further impacted by a late evening arrival into Hong Kong, limiting onward connections.

The strong have become stronger

Virgin's position, supported in the early days by a relationship with Malaysia Airlines, was limited to start with and became more challenging as the competition around it became stronger. Gulf carriers as well as Malaysia Airlines and Singapore Airlines added capacity into Australia (and Malaysia grew in London with A380s) while others benefitted from consolidation, such as Air New Zealand and Qantas exiting the Hong Kong-London market. While those moves helped Virgin, it gave Cathay and BA greater power.

A few years ago Virgin had suggested it would ideally have a second daily Hong Kong flight to bolster its single Sydney service, and use that second daily Europe-Asia flight to grow its position in Australia. But in more recent times Virgin mulled a second daily Sydney service or starting Melbourne, a prospect which now especially seems fanciful.

Australian dollar is depreciating while Virgin's A340-600 was costly

Never in Virgin's favour was the A340-600, whose capacity is too large for the little feed it receives while the economics are far surpassed by Cathay's A330s to Australia or BA's 777-300ER from Singapore to Sydney.

Even an A330 service from Virgin between Hong Kong and Sydney could have been questionable - without considering the impracticality (with current technology) to bring the aircraft from London to Hong Kong.

A more recent souring of events has been the depreciation of the Australian dollar. In addition to the directional bias from Australia, carriers typically have higher yields out of Australia than inbound, disadvantaging Virgin, especially considering the carrier had been working to grow outbound Australian passengers.

Virgin's future partnership option for Australia - and Asia - is unclear

European carriers have exited Australia physically but not virtually - codeshares proliferate, and the Australian government is reasonably liberal with codeshare allocations. KLM for example serves Australia with codes on China Southern, Etihad and Malaysia Airlines. (In a powerful display of virtual strategy, Etihad's Sydney service carries eight codeshares, not counting Air New Zealand or Virgin Australia.)

So does Virgin create a partnership for Australia? One seemingly obvious answer is to link Virgin Atlantic and Virgin Australia by having Virgin Australia serve Hong Kong - which it had considered in the early days of its Virgin Australia long-haul operation, when Virgin Group influence in the Australian airline was greater.

But this is far from clear-cut. Virgin Australia would be entering a competitive market: Cathay has four daily flights from Sydney alone, and can show fierce competitive responses to new carriers. Cathay's size and network also means such responses can be relatively aggressively priced. Qantas' Hong Kong network is also in an adjustment phase with the discontinuation of service to London; Hong Kong is sold as a destination or for Qantas' limited onward traffic options.

Even aside from the competitive element, London-Sydney traffic is likely too small for Virgin Australia to rely on with just Virgin Atlantic. Onward feed to other cities could be limited. There is little justification for Virgin Australia to enter Hong Kong. And if it did, some fundamental problems would remain, such as the range of destinations that could be served.

Being without a global alliance, there is no logical other partner for Virgin Atlantic to turn to. Theoretically, as a new satellite of Delta, SkyTeam is a logical place to look; but KLM and Air France already have their positions in the market, as do the other SkyTeam members in Asia, so working with the always tough Virgin Group will not be a preferred choice.

Virgin Atlantic has its history of commercial relations with Malaysia Airlines, but Virgin no longer flies to Kuala Lumpur. In Hong Kong, Cathay is working with BA while Hong Kong Airlines has Australian ambitions but lacks traffic rights. Elsewhere in Asia, Virgin flies to Shanghai, but locally based carrier China Eastern partners with Qantas. Virgin also flies to Tokyo, but only JAL - another Qantas partner - flies to Australia. Virgin's other points in the region (India, with limited Air India service; Dubai, where Emirates partners with Qantas) present no straightforward solution.

Alliances and partnerships have expanded outside of traditional lines, but Virgin would ultimately need a creative solution for what is a small market. This would come as Virgin faces enough internal tasks as it restructures its business. From a revenue perspective, an Australian solution should be low on the list of priorities.

The biggest change is not in Australia, but in London, as Virgin matures with new parent Delta

Virgin Atlantic's withdrawal from Australia is the latest chapter in a changed Europe-Australia market. It may also be one of the last developments until a new era starts with, likely, massive Chinese carrier capacity - on a much larger scale than currently.

But Virgin's withdrawal is part of another story: Virgin's own re-shaping and maturity. That process arguably started with Virgin's losing bid for bmi. A strategic re-organisation was in order, and with SIA finally finding a buyer for its unwanted holding and selling its stake to Delta, the subsequent joint venture very quickly changed Virgin - operationally, commercially and strategically. Yet much is left. Virgin's heartland, as its name suggests, is across the Atlantic, where 60% of ASKs are devoted. North Asia accounts for only 15%.

Virgin Atlantic Airways international ASKs by region: 3-Feb-2014 to 9-Feb-2014

Source: CAPA - Centre for Aviation and OAG

For many European carriers, Asia carries the vision of growth. This is in the extreme for Finnair, whose future is almost a singular bet on Asia. BA is also planning growth while KLM is now larger in Asia than North America. Virgin Atlantic is in a difficult position. Alliances and partnerships are changing, but Virgin's options for Asia are not clear. The situation is further complicated by lack of growth opportunities at Heathrow.

Consolidating Sydney was practical - finally - but the fear is future attention at Virgin will focus across the Atlantic, where there is familiarity and partners. Much can rightfully be achieved with Delta in Virgin's key market. But that is not the sole opportunity.

Virgin has already traded an avant-garde ideal for complacency. It would be a sad end if the onetime industry trendsetter were to become a mere extension of Delta's Atlantic aspirations.