Virgin Blue rocks the Qantas boat with game changing moves; Etihad deal, A330s in domestic market

Virgin Blue’s shares have added 1.5 cents (or 5.4%) to AUD0.295 in early trade today on the Sydney Stock Exchange.

The Etihad agreement – a game changer, massively

Part of new CEO, John Borghetti’s route restructuring plan - the announcement of a potentially comprehensive deal with the UAE’s high quality and fast growing flag carrier - is undoubtedly the jewel in the crown of what will be Mr Borghetti’s thrust to capture corporate market share from Qantas.

From Feb-2011, V Australia will operate three Sydney-Abu Dhabi frequencies per week and a further three Brisbane-Abu Dhabi frequencies per week by Feb-2012, using its three-class B777-300ERs. This is just an initial step, “moving towards” a total of 27 weekly services between Abu Dhabi and Australia, with Melbourne-Abu Dhabi services to be opened up.

Meanwhile, from 01-Oct-2010, Virgin Blue/V Australia will start codesharing with Etihad, offering access to Virgin’s Australian and South Pacific network of 45 destinations and Etihad’s intercontinental network of 65 destinations, served from the geographically advantageous Abu Dhabi.

The bottom line of the promise for this joint venture is that Virgin Blue gains access to a wide array of European points, as well as potentially, African and Indian Subcontinent routes and beyond. It is likely that the two will seek a similar arrangement to Qantas-British Airways’ Joint Services Agreement, which effectively allows the airlines to operate as one on the Kangaroo route to London.

As Etihad CEO, James Hogan described it, “With our combined route network, we will provide all-important access from Australia to both the USA and Europe, which improves our suitability for both business and leisure travel and puts us right in the race for major corporate travel accounts.”

The great advantage of a tie-up with Etihad is the wide range of one-stop points which will become available to Virgin Blue-Etihad customers – whereas Qantas-BA services all fly via London, making continental destinations more time consuming. Qantas offers a daily one-stop to Frankfurt, but that is the carrier’s only continental European operation.

Domestic bloodbath in the offing in 2011

With his declaration that he would match Qantas’ A330 offerings in the Australian domestic market next year, Mr Borghetti has also firmed the prospect of another battle for supremacy in the Australian domestic market next year. See related reports:

• Qantas becomes a 3 brand operation: FFP, LCC & regional airline. Domestic yields still see pressure
• Aspirational Virgin Blue faces reality shock. Aftermath of another profit warning
• Jetstar surge and “two brand strategy” show way for other airlines in the region

Europe, NZ, North America ticked. Asia the next deal to be done

It is the latest in a string of international deal-making launched by Mr Borghetti’s predecessor, Brett Godfrey. In Apr-2010, Mr Godfrey unveiled an alliance with Air New Zealand on the Tasman, aimed at giving both carriers some much needed respite from the aggressive competition now occurring across the ocean.

At the time of the announcement, CAPA stated, “there will be opportunities for improving on the two carriers’ respective yields – not so much from the reduced competition, but by virtue of their joint ability to attract higher yielding corporate traffic. This quest for yield and the corporate market has been Virgin Blue’s mantra for the past three years at least, but the carrier has found it heavy going, up against Qantas, with its two-thirds Australian domestic share and some powerful vertical marketing features. Going regional with RJs, then international with B777s and, subsequently, attempting a joint venture with Delta, are all part of that strategy.” See related report: Virgin Blue-Air New Zealand “cooperation”. A game-changer - perhaps

The Etihad deal also comes less than two weeks after Virgin Blue’s pullback in New Zealand. See related report: Pacific Blue exits New Zealand domestic market. A turning point in Australia-New Zealand aviation

This – already major – move with Etihad will change the nature of Australia’s international operations. Qantas (and Emirates Airline) will look back and wonder why they did not tie up deals with Etihad and Virgin Blue respectively, but that horse has now bolted. Most importantly, Mr Borghetti now firmly stamps his mark on the corporate market, where Qantas sits across a 90% share.

Next - an Asian partner. And Jetstar to the Middle East?

So the Virgin Blue Group now has deals in the offing with Delta - on the Pacific, US routes - and with Air New Zealand. Etihad gets full coverage of Europe and more. But there is still another important deal to be done. Virgin Blue still does not gain access to the fast growing Asian market with these arrangements.

Expect Mr Borghetti’s attention to turn to Asia and a partner to help carry the Virgin Blue stable deeply into this massive emerging opportunity. Virgin Blue and Malaysia Airlines signed a codeshare agreement some years ago to great fanfare. Then, to considerably less fanfare, a potential deal between Qantas and Malaysia Airlines fell apart; Mr Borghetti would have been involved in those discussions while he was at Qantas - and surely it is only a matter of time before he tracks down another partner in Asia.

The nice thing about these deals is that they accumulate to benefit Virgin Blue's profile. So each time Mr Borghetti sits down with another  partner under his belt, his negotiating power strengthens.

Qantas and its second brand, Jetstar, cannot afford to sit still now. Hampered by the delay in delivery of the much needed B787s, Jetstar still doesn't have the range to reach the southern European points it craves. A move into either India or the UAE must now become a higher priority.

And so, already, after only a few weeks in the job, Mr Borghetti has shown he can call the shots. There will be plenty more, if the past few weeks are anything to go by.