United Airlines' 787 Australia announcement marks the 5th anniversary of US open skies agreement

Liberalisation allowed Delta and Virgin to enter; Qantas grew capacity and market share

The United States-Australia market was effectively the world's most attractive non-stop duopoly in the mid-2000s as Qantas and United dominated the market, operating almost impregnably in a very seasonal market. High frequency service allowed ad hoc capacity adjustments to be made in low periods, keeping yields high, as well as makingit very hard for a smaller entrant to compete. Yields were among the highest in the world and premium bookings on the Qantas often had to be made weeks in advance.

Air Canada and Singapore Airlines both sensed the opportunity as economy and premium yields soared, but were prevented by the Australian government from inervening as fifth freedom operators. Under the respective bilateral agreements, Air New Zealand was able to fly the route, but quickly found its smaller scale service a financially unrewarding operation.

In 2008, then-Virgin Blue had made known its plans to enter the trans-Pacific market. At that stage the US-Australia air services agreement contained a cap on capacity that would not have permitted a daily service by the new entrant and the US - which had vehemently opposed the capacity restrictions for years - refused to provide an exemption, thus forcing Australia's hand.

Virgin's late-2008 entry was then delayed until early 2009 when strikes at Boeing resulted in delayed delivery of the 777s it had acquired for its long-haul service. This caused Virgin (operating across the Pacific as V Australia due to then name restrictions held by Singapore Airlines as a condition of its stake in Virgin Atlantic) to miss the peak 2008 Christmas and southern hemisphere summer holiday period. It also narrowed the gap between Virgin's launch and Delta's, ensuring that a mass of new capacity arrived in the market just as the worst of the GFC hit.

Qantas had publicly supported open skies, at least partly because Qantas preferred to have Virgin as an ally in opposing entry by the more powerful Singapore Airlines. Delta's entry (mid-2009) was unexpected, but then an alliance emerged between Delta and Virgin, quickly approved by Australian regulators and, after some "clarifications", also by US regulators who imposed a commitment to maintain certain minimum capacity levels.

(While developments in the trans-Pacific may have been revolutionary at the time, they now pale in comparison to the transformation of Virgin and its alliances, including with Singapore Airlines, and the impact this has had on Qantas. (Although Virgin and Singapore Airlines are now partners, SIA does not have the bilateral rights to allow codeshare on Virgin's trans-Pacific services - something on which Virgin might be equivocal.))

The competitive impact of the new entry on pricing across the Pacific

This report looks at passengers carried on non-stop Australia-United States (excluding Hawaii) routes as reported to the US BTS, accounting passengers carried every three years between 2000 and 2012, the most recent year for which data is available.

While comprehensive public data is not available, fares dropped considerably below the previous USD2000 benchmark for economy class travel (although off-season levels were sometimes lower). The trans-Pacific was for several years one of Qantas' most profitable markets, along with South Africa and Papua New Guinea. In the early months of liberalisation and Delta and Virgin's entry, fares dropped to unfathomable levels - a phenomenon to be repeated between Australia and Europe as Chinese carriers targeted the market.

Counter-intuitively, incumbent Qantas increased its market share from 44% in 2000 to 52% in 2012 - although it achieved a higher market share in 2003 (60%) when Air New Zealand exited, and 2006, when only Qantas and United served the market.

Fellow incumbent United has not fared as well, suffering a market share loss of almost half, from 40% to 21%. This is a reflection of a slight decline in United's passenger numbers at a time of increased capacity, especially from Qantas.

Australia-mainland US non-stop passenger market share by airline: 2000-2012

Source: CAPA - Centre for Aviation and US BTS

The Australia-mainland US market grew over 50% from 2006 to 2012

There can be no dispute passengers have benefitted from open skies - a conclusion that goes hand-in-hand with liberalisation.

Passengers on non-stop Australia-mainland US routes increased 53% between 2006 and 2012. From 2003, a depressed period due to Air New Zealand's withdrawal from Sydney-Los Angeles, to 2012 the number of passengers doubled.

Australia-mainland US non-stop passengers carried by airline: 2000-2012

Source: CAPA - Centre for Aviation and US BTS

Delta and Virgin's entry was important, not just to directly contribute growth, but indirectly as Delta and Virgin's entry spurred Qantas to grow capacity. Between 2006 and 2012, there were an additional 723,000 passengers on non-stop trans-Pacific flights. Of these additional passengers, 183,000 - or 25% - were on Qantas. 56% were on Virgin and 23% on Delta while United carried 4% fewer passengers.

Australia-mainland US non-stop passengers carried by airline: 2000-2012

Source: CAPA - Centre for Aviation and US BTS

Australian airlines have benefitted the most, but tourism benefits are firmly on the US side

Australian carriers accounted for 66% of Australia-mainland US non-stop passengers in 2006, and grew this position to 71% in 2012, indicating the benefit of open skies was firmly on their side. However, thanks to a greatly higher AUD, from a tourism standpoint, the majority benefit is firmly on the US and Americas side.

The impact on inbound visitors from the US and larger Americas region is generally positive, but there are caveats. Comparing statistics to 2000 perhaps distorts the picture as 2000 was a record year for US visitors to Australia, largely due to the Sydney Olympics. In fact, annual US short-term visitors to Australia in 2003, 2006, 2009 and 2012 were below the level of 2000.

But looking at visitors from all countries in the Americas shows stronger growth, including between 2009 and 2012.

This however is partially distorted by capacity from Canada and South America, although this is relatively small. Some visitors from South America even arrive on Gulf network carriers. The high Australian dollar in the late 2000s and early part of this decade was a negative factor for inbound tourism.

USA and Americas arrivals to Australia: 2000-2012

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Source: CAPA - Centre for Aviation and ABS

Australian outbound travel has seen far greater growth, aided by a favourable foreign exchange rate as well as having a greater inclination than Americans for long-haul travel. (Despite this, Australia typically appears as one of the top desitnations that Americans aspire to visit).

In fact, after 2006 there were more Australians travelling to the US than Americans to Australia - a remarkable fact given Australia's population of 22 million compared to the 314 million in the US.

Australian visitor departures to USA and Americas: 2000-2012

Source: CAPA - Centre for Aviation and ABS

The clear advantage to US/Americas tourism compared to Australian tourism is evident when comparing Australian visitors to US/Americas with US/Americas visitors to Australia.

USA and Americas visitor arrivals to Australia, and Australian visitor departures to USA and Americas: 2000-2012

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Source: CAPA - Centre for Aviation and ABS

Load factors have increased between Australia and mainland US

Load factors on airlines operating between Australia and the mainland US increased over the decade, although this is generally true of airlines during that period. Qantas' load factor increased nearly 14ppt between 2000 and 2012, although its load factor in 2012 was slightly below that of 2009. In the periods under evaluation in this study, United's load factor peaked in 2006 at 84% and declined to just under 80% in 2012.

Delta in 2009, its first year of operation, recorded a load factor over 80%, and in 2012 had the highest load factor in the market. Virgin Australia's performance - 71% in 2009 and 77% in 2012 - is noticeably the weakest of the carriers.

Load factor on Australia-mainland US non-stop flights by airline: 2000-2012

Source: CAPA - Centre for Aviation and US BTS

Virgin's early weak load factor demonstrates how critical it was for the carrier to gain sizeable feed beyond its US destination, something United and Delta inherently benefit from, while Qantas had and has grown over time through a partnership with American Airlines.

Estimates are that about half of all trans-Pacific traffic extends beyond Los Angeles. Qantas helps this with a continuing Los Angeles-New York service (without local uplift rights - the US concept of open skies somehow becomes much more "closed", remaining highly protective of US airlines in their own backyards - whereas Virgin terminates in Los Angeles, the sole port it serves from Sydney daily and less-than daily from Brisbane and Melbourne. All of Virgin's services are with 777-300ERs.

Qantas serves Los Angeles non-stop from Brisbane (747-400), Melbourne (A380) and Sydney (A380 and 747-400) and replaced a Sydney-San Francisco service (747-400) with a flight (also 747-400) from Sydney to Dallas Ft Worth, the hub of partner American Airlines, facilitating better connections and opening a non-stop link to an increasingly important economic centre in the US (on the return flight , the service arrives via Brisbane due to aircraft range limitations on the 15+hour flight, with the headwinds against it).

Qantas has ended Melbourne-Auckland-Los Angeles (747-400, later A330-200) services, and this route is not included in this report's data due to the mingling of local traffic on the Auckland-Los Angeles leg.

Delta links only Sydney and Los Angeles (777-200LR), but the industry has speculated it would add service to Melbourne while Virgin bulked up its network elsewhere. Since the Delta-Virgin alliance was approved, the two have not opened further trans-Pacific links. (Nor have they decreased, although this may be largely due to the capacity commitment attached to their partnership approval.)

United's dedicated 787-9 service to Melbourne will grow trans-Pacific options

United had appeared to be stagnating in the Australian market, making few changes to Sydney-Los Angeles and Sydney-San Francisco services. It had previously relied heavily on its Star Alliance partner, Australia's Ansett Airlines, to provide domestic feed to its longhaul operation; when Ansett collapsed in 2001, United was later forced to establish a less effective interline agreement with then-LCC Virgin Blue.

With only one other non-stop airline in the market, United was able to survive despite doing little to improve its product, which was little changed since it had bought the routes from a sinking Pan Am. But the economic downturn and the arrival of both Delta and Virgin, with their immunity to partner and each using better equipment, meant United struggled. The airline had bigger fish to fry as the decade progressed and Australia was not top of the pile to fix, with Chapter 11 and the Continental merger to weather.

United has always operated a larger hub in San Francisco than Los Angeles, helping make its San Francisco service sustainable. While United in the past operated a non-stop service to Melbourne, that city has more recently been served as a tag from Sydney. That had some inconvenience, but was largely tolerated by United's corporate base. United's services have been operated by 747-400s that became known for their antiquated state, including a lack of in-seat in-flight entertainment in economy for the 14-hour flight. Qantas' 747-400s had in-seat IFE and more recently have been refurbished to match the product on its A380s.

United in 2013 announced it would down-gauge its 747-400 services to 777-200ERs (with better amenities, including in-seat IFE). This represented a significant capacity decrease (28%) as its 747-400s seat 374 passengers, while the 777s it plans to use seat only 269.

In Feb-2014 United subsequently announced that from 26-Oct-2014 its two 777 services would terminate in Sydney, rather than have one continue to Melbourne.

Instead, a new six-weekly non-stop Los Angeles-Melbourne service would be opened also on 26-Feb-2014 with 252-seat 787-9s, which achieve a balance of the route's range and capacity requirements. (United Airlines is the North American launch customer for the -9, and will be the second carrier to use the -9 to Australia after global launch customer Air New Zealand.) The service will go to daily in 2015, and United says it selected its smaller Los Angeles hub over main west coast gateway San Francisco because of the stronger point-to-point traffic from Melbourne to LA than San Francisco, but range might also be a factor.

The result of United's lack of non-stop service from Melbourne has been to leave an opening for Air New Zealand to divert Melbourne-US traffic over Auckland, although it had more limited selling power beyond Los Angeles than United will.

Amadeus Air Traffic suggests Air New Zealand carried via Auckland about twice as many Melbourne-Los Angeles passengers than Sydney-Los Angeles passengers. This is perhaps unsurprising given the more limited non-stop competition out of Melbourne: one daily A380 on Qantas, whereas Sydney to Los Angeles sees a United 747-400, Qantas 747-400 and Qantas A380.

United's return with an attractive Los Angeles-Melbourne non-stop product on a 787 will be unwelcome to its fellow Star carrier Air NZ as it will dilute Air NZ's Auckland-US connecting operations.Nor are Qantas or Virgin Australia - or Delta for that matter - likely to be pleased, as competition for the Melbourne market increases.

The Sydney services will be re-timed to provide more connections, especially the San Francisco service, as that arrived comparatively late in San Francisco due to the aircraft operating the Sydney-Melbourne-Sydney tags.

This represents overall trans-Pacific capacity growth of about 1%: United with its two 747-400 services had 5,236 weekly one-way trans-Pacific seats but with two daily 777-200ER services and six weekly 787-9 services will have 5,278 one-way seats, although this is still a decrease by 32% of United's capacity in 2000 (partially inflated by the Sydney Olympics). Bringing the Melbourne 787-9 service to daily will equate to about 6% growth compared to two daily 747-400s.

The profitability gain will likely be far larger as more efficient twin-engined aircraft - including the 787 - take over routes and United no longer operates the 706km jump between Sydney and Melbourne, which was not only loss-making but saw the aircraft clock up cycles. United also stands to benefit from a better class mixture.

United sees a decrease of eight daily first class seats, reducing first class' exposure from 3% to 2% of capacity. Business class gains about 17 daily seats, increasing its share from 14% to 16%. Economy plus (which is the same economy seat but with more legroom, unlike on Qantas or Virgin) gains a large 140 daily seats, increasing its share from 19% to 37% while regular economy seats decrease by about 143 a day, dropping their share from 64% to 45%.

United sells "economy plus" with a mark-up comparatively smaller than Qantas or Virgin, although Qantas and Virgin's seats are larger and the service (meals, amenity kits) different. However, United seats its loyal frequent flyers for free in the economy plus cabin.

United Airlines Australia capacity class mixture/share and weekly capacity: 2012-2015

	First	Business	Economy Plus	Economy
747-400	12	52	70	240
777-200ER	8	40	113	108
787-9	0	48	63	141
14x 747-400s	168	728	980	3360
14x 777s, 6x 787-9	112	848	1960	2358
14x 777s, 7x 787-9s	112	896	2023	2499
Class share
14x 747-400s	3.2%	13.9%	18.7%	64.2%
14x 777s, 6x 787-9	2.1%	16.1%	37.1%	44.7%
14x 777s, 7x 787-9s	2.0%	16.2%	36.6%	45.2%

Source: CAPA - Centre for Aviation and United
Note: On the 787-9 the premium seat is defined as "BusinessFirst"

Los Angeles comprises almost all of Virgin Australia's long-haul network

The fifth anniversary of trans-Pacific liberalisation also marks the fifth anniversary of former domestic-only LCC Virgin's foray into long-haul widebody operation. In its early days, the route's future was not guaranteed, as losses were steep.

While flights to Los Angeles remained, Fiji, Johannesburg and Phuket were cut while a three-weekly Abu Dhabi service was later introduced with Virgin's partnership with Etihad Airways. Today Los Angeles comprises 82% of Virgin's typical long-haul capacity.

Virgin was due to commence a Brisbane-Singapore-Abu Dhabi service but that was postponed and now appears to be dropped. Abu Dhabi has been a challenge for Virgin, as the route benefits the Etihad partnership, allowing Etihad and Virgin to have a combined double daily presence between Abu Dhabi and Sydney. The Etihad-Virgin partnership itself has lost some of its lustre following the partnership between Virgin and Singapore Airlines, which is strategically more valuable.

But Virgin needs Etihad as it delivers wider opportunities for virtual international operations - not the least to provide it with options in its bid for corporate travellers.

Future long-haul growth is uncertain. Virgin has largely ruled out 777 growth while new business class fitted A330s are used in the domestic market. The A330s could in theory be used to serve Singapore and tap into partner SIA's hub, but serving Singapore from Australia's main cities would create further over-capacity and SIA is not likely to want to reduce its own metal deployment to Australia.

Outlook: limited chances for new entrants, but perhaps American Airlines will join Qantas

The Australian domestic market has returned to being a near-duopoly (although both full service airlines also operate low cost subsidiaries as well) while two of the three big US carriers serve Australia and the third (American Airlines) does so virtually in partnership with Qantas. A new entrant would face significant costs in operating a 14-15 hour one-way flight, and would likely struggle to access feed on either end of the service. After rapid growth, the Australia-US mainland market is entering maturity, at least temporarily.

Hawaii has recently been more dynamic with Hawaiian Airlines growing its position in Australia, but US airlines have relied upon the high exchange rate and until-now strong Australian economy to feed their inbound market.

As the AUD declines and Australia's economy slows - and, probably, the US' picks up - the directional flows will in due course change. Meanwhile, so long as reliance remains on the Australian outbound market, this Australian profile is undermining profitability for all incumbents.

There is a possibility, as rumoured some time ago in the industry, that American Airlines could re-enter the Pacific (it served Australia in the 1990s), although if it did it may be more likely be to Auckland, which Qantas no longer serves non-stop. Where, under the combined open skies agreements, both Australian and New Zealand airlines have fifth freedom rights to the US from the other country, there is still room for them to be more effectively exploited.

Other than American, further capacity from Qantas or Virgin is unlikely to be added in the short term. That largely leaves expansion to Delta, which has been reluctant to grow the market, perhaps not because of lack of opportunity but because of its large worldwide network commanding attention; Australia is a small part. As previously the case with United, Delta's attention will need to be stimulated if it is to expand.

Nonetheless, 50%-plus growth in six years is an excellent outcome. The trans-Pacific market was just one element of what is a very dynamic Australian aviation industry, but today's environment is more subdued than in the past. That may be why the fifth anniversary of Australia-US open skies passed without a mention.