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Delta’s Pacific tsunami may drive defensive mergers

The competitive tsunami caused by Delta Air Lines entering the Australia-US air travel market may drive defensive consolidation counter measures by Qantas, Virgin Blue and Air New Zealand.

The Australian carriers were keeping their cards close to their chests today, but the mood is unmistakable.

They cannot afford to be smashed by the entry of the new Delta, a merger of the old Delta and Northwest Airlines.

Delta has a fleet of around 1500 jets, Qantas around 213, V Australia will only have 5 Boeing 777s by the end of 2009, and the rest of the Virgin Blue/Pacific Blue enterprise has around 100 jets.

While only part of these fleets are dedicated to trans Pacific routes, the new Delta is so big anything it does in the South Pacific is loose change.

It won’t feel a thing selling loss making seats against the Australian and New Zealand carriers.

A strategy watch list obviously includes Air New Zealand. It is going to be in play. The NZ Government is an unwilling 80% shareholder.

In a one company but multi-branded entity Air NZ with either Qantas or Virgin Blue is the nearest equivalent to the lauded Air France KLM merger. The parts are geographically close, all of the airlines involved are valuable brands, and the Australian and New Zealand governments have very similar policy settings on air traffic rights and competition.

However getting approval from the competition authorities on both sides of the Tasman killed the last attempted QF+NZ merger.

Is “No” forever? Would the same concerns affect an Air NZ/Virgin Blue merger? These are far more vital issues for Qantas to address than the BA merger talks it abandoned yesterday, for “the time being” as the terse statement from airline put it.

Another factor will be the commercial customer sharing deals of Qantas, Virgin Blue and Air New Zealand.

Delta’s statement emphasises a closer relationship with Alaskan Airlines (which is a major continental US carrier these days) which at least until this morning was an important Qantas partner in America.

And Delta’s recent merger partner, Northwest, was going to be an important code-share link for V Australia’s flights, which begin at the end of February.

Delta may choose Virgin Blue as its domestic code share here. It doesn’t have much choice. A Delta/Virgin Blue/V Australia deal would burn Qantas, and perhaps involve V Australia’s 777s in a combined trans Pacific network. All hypothetical, but not as of today fanciful.

Air New Zealand looks a bit lonely in the new situation. Its Star Alliance relationship with United is anything but stellar given that carrier’s decline on the Australia-US routes and shaky performance within the US.

Qantas can undoubtedly survive on the US routes with or without any mergers. But the rich pickings of the past, when it was the dominant player in terms of yields and capacity, are coming undone as V Australia and Delta bring their services to market.

New Qantas CEO Alan Joyce must have known Delta was coming. The marketing intelligence has been out there for months. Its announcement of a firm date, 1 July, for Delta to start its Australian flights must have made the BA merger look like a distraction the airline didn’t need.

On top of that its other bold initiative, Jetstar Pacific in Vietnam, is looking more like another Singapore based Jetstar Asia type of disappointment. The Singaporean investors in their similar trans border budget airline franchise in Tiger Airways are also struggling to get results than resemble any of the hype surrounded its expansions into Asia and Australia.

Any prospect of Singapore Airlines being allowed on the Australia-US routes in the foreseeable future is dead.

For the strategy teams in the Australian and New Zealand carriers, the holiday ‘silly season’ is going to mean a great deal of serious re-thinking.

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