Home' Asian Aviation : AAV October 2010 Contents AsianAviation | OCTOBER 11
Justin Wastnage / Sydney
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-Paci c
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 o cer 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.
e airline's nancial results were positive : A$34
million (US$33 million) of pre-tax pro t in a tough
year, reversing the year-earlier loss of A$226.2 million.
en, o ering 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 o shoot 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 signi cant of the Brisbane-based carrier's alliance
Borghetti knows that the only serious way to make
a dent in Qantas's market dominance is to pick o its
European and North American routes, which underpin
much of the carrier's pro ts.
Unable to deploy eets of long-haul aircra 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 ser vices that feed
domestic [routes]. Abu Dhabi and Los Angeles are
strategic points that open up the possibility to y to
hundreds of destinations, while New Zealand remains
a huge feeder market," Borghetti said.
V Australia thus announced that it would drop its
ser vices to Johannesburg from Melbourne, barely three
months old, for not tting into this quasi-network
strategy. "It wasn't making money and also it wasn't a
strategic t," 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 le out in the cold, in favour of Delta's
enhanced network from V Australia's gateway of Los
Code-sharing is nothing new in the Australian market.
Indeed, one of Qantas's best-performing European
ser vices, to Paris Charles de Gaulle, is own halfway by
Air France, a founder member of the SkyTeam global
alliance, a rival to Qantas's Oneworld airline grouping.
Still, two weeks a er 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 "bene ts for consumers that are not
already available". is was a dra ruling , but one
that is understood to be likely to translate into a nal
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 Paci c ser vices 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 ights pushing prices back
up, if Virgin were to concentrate on Brisbane and
Melbourne and leave Sydney ights to Delta, as seems
e 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. e joint venture would have made the
combined entity the dominant carrier between the two
countries and e ectively reduced competition, despite
promises not to cut ser vices. e ACCC is a erce
protector of consumer interests and dislikes any move
to trim the number of competitors in any market.
Simple code-shares o en 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 .
e code-share in this instance is covered by bilateral
air services agreements and thus under the jurisdiction
of Australia's International Air Ser vices 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. e carrier's voice is generally heard loud
and clear in Canberra, if not always agreed with. Yet
the likely nal 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 bene ts of a full alliance.
e Etihad deal, meanwhile, is still on the table for a
few more months and Virgin Blue is sure to be more
prepared during the nal ACCC deliberations. n
Virgin Blue, Etihad announce alliance plan
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