Delta and V Australia/Virgin Blue Plan Joint Venture

Jul 9, 2009

More Reading on This Topic: Delta, V Australia, Virgin Blue

You know all those low fares we’ve seen on US to Australia routes lately? That’s because with two new entrants, there’s way too much capacity out there and everyone involved is bleeding as they fight for traffic. Now, those two new entrants, Delta and V Australia/Virgin Blue have decided to get together a form a joint venture. Smart move.

I actually touched on this possibility when I interviewed Virgin Blue CEO Brett Godfrey in February. When talking about Delta, he alluded to this . . .

You might say, well, does Delta want to put their traffic on Qantas in Australia? A lot of the market flies beyond Sydney, so maybe that’s an opportunity for us to say, well, quid pro quo . . . . There’s some opportunity there. No discussions held in that regard . . . but that’s an opportunity.

And here we are five months later with a deal in hand. This partnership will have frequent flier reciprocity, codesharing, and it will ask for antitrust immunity so they can discuss routes and fares. This seems like it should be an easy one for the DOT to approve, because up until this year, only 2 airlines flew the route. If this doesn’t get approved, my bet is that Delta’s days to Sydney are numbered, so there is a clear benefit to consumers to approving this deal.

It also allows Delta to feed people into Los Angeles from around the US and Virgin Blue to feed people into Sydney (and other gateways) from around Australia. I would hope that we’ll see some serious frequency cuts in order to try to get back to a more normal level of capacity on the route.

I was emailing with Dan Webb over at Things in the Sky last night about this, and he was very interested in what this means for Virgin America. This type of joint venture certainly diminishes Virgin America’s importance to V Australia. If it weren’t for space constraints, I wonder if V Australia would even rather move over to Delta’s terminal at LAX and leave Virgin America behind.

This also raises the question about what happens to the Virgin Blue/United partnership. Right now, Virgin Blue shares United’s code on flights beyond Sydney in Australia. I can’t imagine Virgin Blue would cancel this deal, but I wonder how United will feel about it. They may very well need the traffic, so it’s possible it could stay, but that would make for an odd arrangement.

I also find myself wondering if eventually Air France could join this agreement with its LAX to Tahiti flight. Virgin Blue subsidiary Pacific Blue doesn’t fly to Tahiti yet, but this could be another interesting twist.

I like this move. It should help to stabilize the routes between the US and Australia, though it should mean fares will rise for consumers. Considering that fares are too low to be sustainable right now, that’s a good thing.

Brett

23 responses to “Delta and V Australia/Virgin Blue Plan Joint Venture”

Johan Julin

Jul 9, 2009 at 7:33 am

Regarding the tie-up between Virgin Blue and United, it looks like that will end, according to the Sydney Morning Herald:

“…The announcement has resulted in Virgin ending its interline agreement with United today….”

http://business.smh.com.au/business/virgin-blue-and-delta-team-up-on-pacific-route-20090709-ddru.html

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Dan

Jul 9, 2009 at 7:38 am

Ok, gotta ask, why do you think Delta’s days on the LAX-SYD market are numbered without that JV? Don’t forget that there’s a bunch of AS feed for those LAX flights as well.

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CF

Jul 9, 2009 at 8:04 am

Johan – Interesting. I would have figured that since they kept it this long, they wouldn’t want to kill it. That tells me that this was part of the deal with Delta, if Virgin actually pulled it.

Dan – the problem is that there is way too much capacity on this route. Qantas obviously isn’t going anywhere and United is already established. V Australia has nowhere else to go, so that leaves Delta with the easiest opportunity to walk away and find something more profitable. Now with the capacity reduction, things will look better.

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The Traveling Optimist

Jul 9, 2009 at 8:13 am

This is a difficult one to figure out.

They’re both hurting for business but when you’re hurting for traffic, why agree to feed the other guy? Why would DL want to feed V-Oz at LAX when they have their own flight to fill? Conversely, why would V-Oz want to bring traffic to DL at SYD?

It seems more beneficial if they only marketed the upline on each other and retained the overwater for themselves. Otherwise DL would be better to just pull out and leave the market to V-Oz the same as UA/NZ to Auckland. Otherwise it would be the shortest and most spectacular failure in the Virgin empire to launch an airline specifically for this market (and ace Singapore out of the running in the process) only to toss it all away for the sake of Delta.

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David SFeastbay

Jul 9, 2009 at 8:30 am

You would think Virgin Blue would now have to workd more with V Australia then anyone else since they are both a Virgin product. And if V gets buddy buddy with Delta then Virgin Blue must follow. We could be watching the beginning of a complete Virgin tie up across the board into Skyteam. Sir Richard may not like having a SkyTeam board having controle over his Virgin products, but he might see the furture of himself maybe controling SkyTeam.

Another twist would be if Virgin Airways jointed Star Alliance, then V and Virgin Blue would have to dump DL for UA. VS in Star can’t be disallowed since AA and BA are tied up in One World. Could put an interesting twist in the U.K. since LH owns BD and VS/BD jointed up in LHR as Star Alliance members could stand up against BA more on their home turf.

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CF

Jul 9, 2009 at 8:36 am

Optimist – This isn’t just feeding the other guy. This is a full joint venture so they’ll split the profits regardless of who is flying. If this is approved, they’ll be able to cut capacity together while still maintaining a solid schedule for both sets of customers.

Virgin Blue owns V Australia. Did you mean Virgin America?

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CF

Jul 9, 2009 at 8:37 am

Sorry, that last line was meant for David SF

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Trent880

Jul 9, 2009 at 8:39 am

This is like two drunks holding each other up, which is definitely better than their solo prospects. Regardless, DL appears to be the first to pull capacity as they’re going down to 6 weekly in the Fall. Regarding the AS codeshare, AS @ LAX is primarily focused on Mexico, which is not going to drive a lot, if any, traffic to SYD. They do have SEA/YVR/PDX, but so does everyone else. And places like STS, MFR, and even BOI aren’t going to fill up the plane much.

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The Traveling Optimist

Jul 9, 2009 at 8:56 am

What would Delta have to cut? With only one flight a day unless they go less than daily frequency there doesn’t seem to be much for them to cancel.

If anything, be it joint venture or mere marketing alliance, it tastes rather pre-emptive on the part of V-Oz. They get tremendous US feed for all of their services, including MEL and BNE while “jointly” acing DL out of even bothering to enter those markets.

That leaves AKL for DL out of LAX with maybe the possibility of Pacific Blue backing them up on domestic New Zealand traffic.

I agree with Trent880….two drunks without a lamp post.

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CF

Jul 9, 2009 at 9:41 am

They could definitely go sub-daily. Thanks to long flight times, they’re tying up more than one plane flying this route. If they went sub-daily, they could reduce that to a single aircraft operation. Then V Australia could fill out the other days providing single daily service across two carriers. Preventing Delta from going in to Brisbane and Melbourne? I really hope Delta wasn’t thinking about that. My guess is that those might make Sydney look downright solid even though it has to be awful right now.

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Arcanum

Jul 9, 2009 at 9:56 am

Disappointing.

As unrealistic as it may have been, I was really hoping UA would be the one forced out. I flew SFO-SYD and MEL-LAX with them last month, and it was dreadful – worst plane, worst food, and worst service I’ve ever experienced (and that includes domestic no-name flights in Africa and China!)

Mind you, my OZ flights cost $890 including domestic connections to and from Toronto, compared with $1400 for a similar routing on QF last year, so the profits on the US-OZ routes are obviously being slashed.

One thing I’ve never been able to figure out is why flights from the eastern US to Asia (say HKG or SIN) have run in the $900-1100 range for the last few years, but flights to OZ don’t seem to be sustainable at the same level. It’s a similar distance using similar aircraft, so why do the numbers work in one case and not the other?

Someone knowledgeable please enlighten me!

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The Traveling Optimist

Jul 9, 2009 at 10:09 am

I wouldn’t put it past Delta at all to look at MEL, BNE and even PER, AKL and CHC the same way the opened and then dropped half of Africa. Wouldn’t have surprised me at all. Their whole strategy seems like a spaghetti test..if it sticks, it’s good.

If they went sub-daily, would V-Oz move to the Delta terminal at LAX? Otherwise the ground handling confusion for customers might be a pain.

Arcanum, UA will pull out of Australia when it liquidates. Was it coach or premium that you flew? If it was the new “C” class, give us your take on the product, please?

As for East US to Asia, I’d spec that the market capacity is right-sized and stable. No new entrants, no LCCs to worry about and tons of biz traffic connecting JFK to the SIN, HKG and TYO financial centers.

Australia? Not so much. Not as major a financial player on that level and still largely a fun & sun destination for west coasters. Not many people go to Japan for sun and sand.

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David

Jul 9, 2009 at 10:11 am

To Arcanum, I would love to know the same thing. Cranky, you say that these slightly cheaper fares are not sustainable. Do you have some solid math to back that up? I’d love to see it. QF and UA have long gouged the consumer across the pacific and prices have been ludicrous IMHO. Prices at the moment are barely evening up with prices to elsewhere in Asia as well as long hauls from the US West Coast to Europe (which are a lot cheaper than flights to Australia.)

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Dan

Jul 9, 2009 at 10:45 am

CF,

I used to be a top tier NW elite. Oz is a definite hole in the Skyteam network — absent DL, I think the only other way to get there is KE through ICN. So if DL were to exit the market, hopefully they could keep some sort of frequent flyer alliance with these guys.

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The Traveling Optimist

Jul 9, 2009 at 11:04 am

David –

I read a book a long time ago called “Flying Colors” by Robert(?) Nance, a former pilot with Braniff. He researched the history of and reasons behind the demise of that airline.

In it he shared that profits in one division would sometimes be used to cover losses elsewhere.

Given the state of things at United whatever profit they gouged from Australia it’s certainly long gone. Either they covered losses on other routes (HKG, maybe?) or it went in to direct operating costs such as labor. UA pilots on that route are the kings of the hill in seniority and payroll.

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Jordan

Jul 9, 2009 at 12:23 pm

QF and UA have raped the consumers on the US- OZ flights for decades. Its about time price came down! They can afford to operate these flights for cheaper!

And ya know.. cheaper fares will attract more people!

DL is just greedy! Views itself as the new Pan Am

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David

Jul 9, 2009 at 12:30 pm

Travel Optimist, I agree that the price gouging on the route has been going to cover other less profitable routes, which may make perfect business sense (maybe…..) but is a real shame for the consumer. Its not just UA that has been doing this, QF has also been making a sizeable chunk of profit from both the AUS-USA and the UK-AUS routes, where they have held an effective duopoly for years, charging ludicrous prices compared to dollar per mile on other routes in the world. I love competition, and if it forces unprofitable competitors out of the market while lowering prices, so be it.

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The Traveling Optimist

Jul 9, 2009 at 12:38 pm

David – We are of one accord, mate. The price is always what the market will bear. Where these airlines are in deep trouble is getting used to fat profits and suddenly having a bloated infrastructure to support behind it.

That’s where V-Oz comes in, a la Southwest undercutting. Their costs are nowhere the same as UA/QF so they can charge what the market (in the eyes of the consumer) always should have been relative to similar distances and other markets in the world.

To charge nearly twice as much for LA-Oz as someone would pay for LA-UK with a flight time of only 2-3 hours difference is crazy on the surface of things. Airlines will justify it, and heaven knows I have when charged with such duty, but it no longer flies today and neither do their customers at those super-inflated rates.

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Nicholas Barnard

Jul 9, 2009 at 12:43 pm

I can see this help V Australia and Delta drive United out of the market. As weak as they are I wouldn’t be surprised if they’re the next airline to completely go.

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CF

Jul 9, 2009 at 2:10 pm

Arcanum – The difference between Australia and Asia from the US is a big one. There’s a lot more business travel at higher fares in the premium cabins to Asia, so that can helps subsidize those cheap fares in the back. It’s the same thing to Europe throughout the non-summer months – the up front fares keep it cheaper in the back. That’s why BA is hurting so bad right now. The front cabin stuff has disappeared and that hurts them.

Optimist – The difference with Africa is that they were able to fly 757s to some of those destinations. That’s a relatively low risk proposition. Dedicating a 777-200LR to the Australia routes is a much bigger and costly gamble.

If I were V Oz, I’d want to fly to Delta’s terminal at LAX in a second. Right now they send their passengers to Alaska’s lounge in T3 and arrivals come in next door at Bradley. If they could move into T6, they could use the customs and immigration in the terminal plus passengers could use the much nicer Delta lounge in T5.

David – Ok, let’s do some thumbnail work. There really are two different issues here, but let’s focus on the low end fares. You can buy a ticket right now for $450 roundtrip plus taxes. Since the airline doesn’t keep tax money, we won’t think about that.

Let’s start with the V Australia 777-300ER. That plane seats 363 in three classes of service. Let’s assume it will take about 250,000 lbs of fuel to get that plane down to Australia. At 6.7lbs per gallon, that’s about 37,000 gallons. At $1.85 a gallon, that’s about $69,000. If we assume an 80% load factor, we’re looking at fuel costs alone of about $235. Remember, that’s each way. So effectively, the fare that the passenger is paying will not even cover the cost of fuel, let alone all those other costs involved in flying the route.

If you’re wondering, Delta’s numbers look even worse. The 777-200LR takes less fuel but it has a lot fewer passengers. That’s probably more like $280 per passenger using the same metrics as above.

Now what we don’t know is how many seats they’re selling at those levels. If it’s only 1 seat and the others are all much higher, then that’s fine. But the reality is that if they have to stoop to these levels, they have a lot of inventory to sell.

Optimist – John Nance wrote the book. (I know you were searching for the first name.)

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The Traveling Optimist

Jul 9, 2009 at 2:23 pm

Yup….been a while since I’ve picked the book up. Still got it but it is John Nance. My apologies to the author.

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The Traveling Optimist

Jul 9, 2009 at 2:29 pm

Oh..DL to Africa. Yes, the 757 markets are a lot less invested in terms of operating costs but JNB started with 777s, right? Then got downgraded to 767s. Then went back to 777s to JNB and now the CPT flight is being scrapped altogether.

Then, based on security, offices and other ground related costs relative to the price in Australia, those would be about the same. Heck, even if the offices were cheaper, I’d pay out the nose for security at Lagos. An article in Airliners (or Airways) told the story of an A330 crew provided with ARMED security just between the airport and the hotel they were not allowed to leave until time for the return trip!

So, tho’ S.Africa is by far a smaller market than US-Oz, it seems the stage lengths from the East Coast are comparable and, with all of that adjusting, just as if not more volatile. Africa, it would seem, comes with its own set of operating metrics that, while different, may add up to be just about as much.

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CF

Jul 9, 2009 at 4:22 pm

Optimist – I’m not faulting them for trying the Sydney route. I was referring to your suggestions of places like Perth, Brisbane, etc. Those are smaller markets. Also, they didn’t need the 777-200LR for Jo’burg, just Sydney. So they have more aircraft to work with.

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