Virgin Blue, Etihad announce alliance plan

Virgin Blue has been counting on alliances to help it compete with larger rival Qantas

1st Oct 2010


Australian airline Virgin Blue is famously proud of its transformation from low-cost carrier to hybrid mainline carrier. The company invented the term “new-world carrier” that is now being applied to the mixed business model around the Asia-Pacific region.


For this reason, many industry analysts were keenly observing Virgin Blue’s latest project: to become a virtual-network carrier with hubs on three continents.


Excitement mounted as John Borghetti, chief executive officer of the Virgin Blue Group of airlines, brought with him a special guest to the company’s annual results briefing to the Australian Securities Exchange: Etihad CEO James Hogan.


The airline’s financial results were positive: A$34 million (US$33 million) of pre-tax profit in a tough year, reversing the year-earlier loss of A$226.2 million. Then, offering an insight into the future potential of Australia’s second airline, Hogan announced a wide-ranging partnership deal between the carriers.


Under the terms of the alliance, Virgin Blue’s long-haul offshoot V Australia would launch services to Etihad’s Abu Dhabi hub, while both airlines would extensively share codes on each others’ services. Etihad was thus poised to become the third and potentially most significant of the Brisbane-based carrier’s alliance partners.


Borghetti knows that the only serious way to make a dent in Qantas’s market dominance is to pick off its European and North American routes, which underpin much of the carrier’s profits.


Unable to deploy fleets of long-haul aircraft due to a smaller market capitalisation, Virgin Blue must instead form strategic alliances with carriers around the world in a virtual network. Etihad is one of those alliance partners, alongside Delta Air Lines and Air New Zealand.


“What we want is international services that feed domestic [routes]. Abu Dhabi and Los Angeles are strategic points that open up the possibility to fly to hundreds of destinations, while New Zealand remains a huge feeder market,” Borghetti said.


V Australia thus announced that it would drop its services to Johannesburg from Melbourne, barely three months old, for not fitting into this quasi-network strategy. “It wasn’t making money and also it wasn’t a strategic fit,” the Virgin Blue chief said.


Similarly, a long-standing deal with Etihad’s Dubai-based rival Emirates is to be shelved as a result of the partnership. Virgin America, a natural US partner, is also being left out in the cold, in favour of Delta’s enhanced network from V Australia’s gateway of Los Angeles.


Code-sharing is nothing new in the Australian market. Indeed, one of Qantas’s best-performing European services, to Paris Charles de Gaulle, is flown halfway by Air France, a founder member of the SkyTeam global alliance, a rival to Qantas’s Oneworld airline grouping.


Still, two weeks after the announcement of the Virgin Blue-Etihad deal the mood had soured at the Australian carrier, punctured by a series of announcements from anti-trust bodies around the world.


First came news that the US Department of Transportation (DoT) had rejected in principle the Virgin Blue collaboration with Delta, for failing to demonstrate “benefits for consumers that are not already available”. This was a draft ruling, but one that is understood to be likely to translate into a final rejection of anti-trust immunity.


Insiders say Virgin Blue relied too much on Delta’s lobbyists in Washington DC and failed to understand the rigour with which the DoT investigates competition cases. Air fares on Pacific services have fallen by about half since 2008, following V Australia and Delta’s entrance into the market once shared between Qantas and United Airlines. What worries the DoT is the possibility of fewer flights pushing prices back up, if Virgin were to concentrate on Brisbane and Melbourne and leave Sydney flights to Delta, as seems commercially feasible.


The same week, the Australian Competition and Consumer Commission (ACCC) revealed it was also inclined to reject Virgin Blue’s tie-up with Air New Zealand. The joint venture would have made the combined entity the dominant carrier between the two countries and effectively reduced competition, despite promises not to cut services. The ACCC is a fierce protector of consumer interests and dislikes any move to trim the number of competitors in any market.


Simple code-shares often do not need ACCC approval, as demonstrated with impeccable timing by Qantas and South African Airways, who had a mildly controversial code share deal re-approved, under which the carriers agree not to compete with each other on the two biggest routes between Australia and South Africa.


The code-share in this instance is covered by bilateral air services agreements and thus under the jurisdiction of Australia’s International Air Services Commission.


It was a little political naïveté on the part of Virgin Blue that contributed to its falling foul of authorities, people familiar with the situation say.
Qantas, which deploys a small army of well-connected lobbyists in Australia’s capital Canberra to discuss aviation issues, vigorously objected to the Etihad deal. The carrier’s voice is generally heard loud and clear in Canberra, if not always agreed with. Yet the likely final rejections of the Delta and Air New Zealand deals may weigh in Qantas’s favour here.


Virgin Blue still has the option of watered-down alliances with Delta and Air New Zealand, perhaps limited to code-sharing and interlining, although this would fail to deliver the benefits of a full alliance. The Etihad deal, meanwhile, is still on the table for a few more months and Virgin Blue is sure to be more prepared during the final ACCC deliberations.

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