The chances of a trans Pacific joint venture by the Virgin Blue group of carriers and Delta have improved after the US Department of Transport approved anti trust immunity for Continental Airlines participating in the Star Alliance, which includes its major rival United Airlines.
The Department of Justice under the Obama administration had earlier voiced its concerns over the Continental application and moves by airlines in general ‘to get together to improve competition ‘.
Meaning, the DOJ may be tough to get on side, but ‘No’ from the DOT is not a foregone conclusion either.
And there are hints that the proposed ‘Delta V’ JV, which would include Virgin Blue’s V Australia services to America, and synergies with its Pacific Blue and Polynesian Blue networks, will not be a copy of the Qantas/American Airlines tie up under the Oneworld alliance, nor even the joint services agreement or JSA between Qantas and British Airways on the kangaroo routes to Europe.
The most important hint from Virgin Blue so far is a suggestion that some form of independent entity would manage the branding, the fares, the capacity, and connectivity between itself and Delta so far as their south Pacific interests are concerned.
This is new. There is nothing quite like this is the working of the Star, Oneworld and Skyteam alliances, or in the major JSA’s that exist in the Australian market, which are to Europe, Japan and South Africa.
But will it get regulatory approval in Canberra and Washington DC and perhaps Wellington? And will there be a plausible public benefit in terms of stronger competition and better service?
The approval process will inevitably involve lobbying by all the carriers in the market, and just what happens in DC when United’s connections in the Senate and House run into those aligned with the interests of Delta, and Northwest, the airline it recently swallowed, not to mention American Airlines’ congressional friends is impossible to predict, other than that it will be vocal.
Let’s assume the DOJ and the ACCC say ‘Yes’.
In the current flat lining market conditions between Australia and US, nothing is going to make air travel between them profitable. However very good management, cost controls and the efficient use of the newest airliners is going to allow Qantas, V Australia and Delta to reduce losses significantly and wait for better times.
United doesn’t have any of these characteristics. It will stay on the route until someone in its management notices the gravity of the situation, or it collapses as a carrier in total. This is considered likely in some analysis in the US, but the bunker mentality in United (which does break guitars) is likely to last until the bailiffs remove the furniture from under the executives and change the locks.
Delta V would have clear and urgent benefits for Delta and Virgin Blue shareholders, beyond the enhancements of offering their customers interchangeable frequent flyer points, reciprocal lounge access, and smoother transit and connection arrangements.
But those consumer benefits do not require a joint venture. They just require normal code sharing, FFP and lounge access agreements which are a dime a dozen.
For the those who own Delta or Virgin Blue stock, a Delta V means leveraging the efficiency of their Boeing 777s. Delta flies the smaller but very long range 777-200LR. This is ideal for maximising freight uplift between Los Angeles and Sydney for example but loses somewhat in per seat costs compared to the larger 777-300ER model used by V Australia.
So some 777-200LRs could fly the Los Angeles-Melbourne route, which is payload restricted under some circumstances for the -300ER.
Or the -200LR might be deployed to fly deeper into the US than Los Angeles and San Francisco. It is very well suited to non-stops to Portland, Seattle and Las Vegas, but not quite there in commercially realistic terms for non-stops to Chicago, Atlanta, Denver or the New York airports. (Nothing is. Forget about ultra long haul unless it is Hong Kong or Singapore to New York, and they aren’t looking too flash at the moment either.)
Delta has built up its US domestic network connections over Los Angeles and San Francisco as a result of absorbing Northwest.
If the respective carriers could intensively work their capacity and frequency even just to California the advantages of the connections between Qantas and American Airlines flights would be at least equalled.
The two early victims of Delta V would be Air New Zealand and United, while Qantas would most likely lose more market share than it gains if United does quit the route.
Qantas would also lose through the marginalisation of Jetstar on the trans Pacific routes. At the moment Jetstar only flies to Honolulu, and pinned its hopes for non stops to the US west coast on a Boeing 787 that is now so uncertain in capabilities and delivery dates as to be out of frame. Qantas also owns a substantial equity in Fiji carrier Air Pacific, which had also pinned modernisation of its fleet on the 787 and already faces strong competition on some routes from Pacific Blue.
In that sense, there is a case for Delta V being effective in pulling Qantas/American ticket prices into line.
But the proposition that allowing airlines to ‘co-operate’ in order to improve competition is contrary to common sense instincts and difficult to sell. The response from free marketeers, indeed even Delta and Virgin Blue in other situations, is to let the weak die, or force them to give up market share.
The alternative case that Delta V’s sponsors will put to the regulators is that unless they can cooperate in such a manner, Qantas will resume charging monopoly prices on the route, extracting a rent from the tourism trade and general commerce between both countries.
Of course that also comes with an admission that they might be forced off the route if a general economic recovery doesn’t occur, which is unlikely to be something Delta or Virgin Blue would wish to emphasise.