In the latest of a series of unlikely "new world" pairings, Air New Zealand and Virgin Blue are looking to tie the knot, writes David Knibb in Brisbane
In a move that could shift the competitive balance in Australasia, Air New Zealand and Virgin Blue are seeking approval for a strategic alliance across the Tasman Sea, between Australia and New Zealand. "The Tasman is one of the most fiercely competitive airline markets in the world," says Bruce Parton, ANZ's short-haul manager. Eight airlines compete for 5.8 million passengers flying between Australia and New Zealand each year.
ANZ and Virgin Blue propose a codeshare on all trans-Tasman flights, plus domestic connections to them, with reciprocal frequent flyer and lounge benefits. The strategic aspect of this deal, which requires regulatory approval, is their plan to co-ordinate capacity, schedules and fares, and to share revenue on all Tasman routes. These require approval from competition authorities, who previously rejected similar proposals from ANZ to team with Air Canada and Qantas, respectively.
But most analysts predict things could be different this time. The Air Canada-ANZ deal, rejected in January 2009, raised concerns about the competitive effects of direct flights on indirect flights to Canada - an issue not involved here.
By comparison, the 2003 Qantas proposal was more extensive. It included an equity stake and would have created a near-monopoly on the Tasman. Another plus for the tie-up is more airlines fly the Tasman now, reducing the competitive effect of an ANZ-Virgin Blue partnership.
Together, these two airlines offer 54% of total capacity, but it ranges from 32% to 64%, depending on the city pair. On the biggest route, Sydney-Auckland, their combined share is only 36%. For the entire Tasman, Qantas/Jetstar operate 32%, Emirates 13%, and Royal Brunei, LAN, and Aerolineas Argentinas the rest. By contrast, the Qantas-ANZ proposal of seven years ago would have locked up 80%.
ANZ has compelling reasons for this pact. As its previous unsuccessful alliance attempts show, it has worried for years about the extent and vulnerability of its reliance on the Tasman. As Rob Fyfe, ANZ's chief executive, explains: "The Tasman represents 15-20% of our revenue."
Even before Emirates launched Airbus A380s flights across the Tasman last year, Fyfe was complaining about what he called capacity dumping. "We've seen a whole lot of new capacity pile into this market and it's becoming a bloodbath."
With stage lengths of only three hours, Jetstar and Virgin Blue's Pacific Blue exploited the Tasman quickly. These two low-cost carriers now control 27% of the market. In response, ANZ has dropped business class in all its Airbus A320s and cut frequencies, even at the expense of market share. As Fyfe explains: "You either keep reducing [services] until you cease to exist or you find another way to strengthen your position, and the best way to do that is to find a partner." In short, this alliance represents ANZ's attempt to stabilise a volatile market on which it depends - primarily a defensive move.
By contrast, Virgin Blue views this as a chance to take the offensive, to match - indeed exceed - the strength of Qantas/Jetstar. As Brett Godfrey explained days before his retirement as chief executive, Virgin Blue will go from offering 70 weekly flights across the Tasman to 210, and from being a minority player in this key market to a partner in its leading alliance. This dovetails with the strategy behind its launch of V Australia and joint venture with Delta Air Lines - big initiatives designed to compete as an equal with Qantas.
It is too early to foresee all the implications of this alliance beyond Australasia. According to local observers, it may have more to do with who wanted this alliance and who was available than with any global strategy.
Meanwhile, ANZ remains a committed member of the Star Alliance. It aligned with Virgin Blue on the Tasman because it has found it needs a partner and no member of Star flies the route. The fact that Virgin Blue belongs to no global group makes this choice easier, but it was still the obvious choice. If ANZ remains committed to Star, Virgin Blue seems equally committed to its new strategic alliance with Delta. Virgin Blue has shown no interest in joining Delta's SkyTeam, but even if it had, no SkyTeam member flies the Tasman.
Virgin Blue's only commitment is to pick partners that suit its circumstances. It codeshared for seven years with United on Australian domestic routes, but when it came time to pick a US partner for V Australia's flights to the USA, it picked Delta and dropped its United codeshare. Yet, that says no more about Virgin Blue's view toward Star Alliance than does its decision to partner with ANZ on the Tasman.
Source: Airline Business
