It’s not often we see a joint venture unravel, but that’s exactly what’s happening across the Tasman as Air New Zealand has informed Virgin Australia that the party is over. Beginning October 28, the 8-year old joint venture between the two will end, and the partners will turn into enemies. You might think this would result in fewer flight options, reversing the justifications airlines often use to get joint ventures approved, but that’s not the case. The airlines are instead ramping up service to try to battle with each other.
Virgin Australia has been a mess for several years. Its strategy to try to move upmarket and compete head-to-head with Qantas has just not turned in acceptable financial results over time. It has had to raise money time and time again, and it now has 5 different major owners (Etihad, Singapore Airlines, Virgin Group, HNA Group, and Nanshan Group) pulling in every direction. Things have improved in the most recent half-year, but the airline is still in a challenging spot.
Air New Zealand used to own about a quarter of Virgin Australia. Back in 2010, the two carriers started their joint venture for travel between Australia and New Zealand so they could better compete with Qantas. A couple years back, Air New Zealand became so fed up with Virgin Australia that it tried to get new leadership installed. That failed, and Air New Zealand ended up selling its stake. The joint venture wasn’t killed immediately, but it required submitting for approval to renew this October. Air New Zealand declined, and that shouldn’t come as a surprise thanks to the history here.
Forgetting about the soap-opera level of drama here, does it make sense to end this partnership? Probably. If two airlines don’t have the same goals, then a partnership isn’t likely to work. And things have changed for Air New Zealand in particular.
Air New Zealand has spent a lot of time building up Auckland into a gateway to Australia for North American travelers. It has upgraded flights in the bigger Trans-Tasman markets to use long-haul aircraft with international premium cabins. It has also added a great deal of capacity into the US with Houston and soon, Chicago, flights coming into the mix. In other Trans-Tasman markets, Air New Zealand has focused on serving the local market with all-coach airplanes. Air New Zealand is much bigger than Virgin Australia in the Trans-Tasman market, and it thinks it has built up is presence enough that Virgin Australia isn’t as necessary.
When airlines make their pitches for a joint venture, they usually talk about all the additional traffic that tie-ups will create. The increased connectivity and coordinated schedules are supposed to result in an increase in service. So, if that’s the case, then we should expect service options to fall when a joint venture breaks up, right? Well, not in this case.
Both airlines have announced that they’ll be ramping up service individually. Here’s the plan for each.
Air New Zealand
- Auckland – Brisbane goes from 17 to 20 flights per week
- Auckland – Sydney goes from 5 to 6 daily
- Christchurch – Brisbane goes from daily to a mix of 1 to 2 daily flights
- Christchurch – Melbourne goes from daily to a mix of 1 to 2 daily flights
There are also a lot of strategic increases during seasons or on weekends. You can see those details here.
- Sydney – Wellington up to 5x weekly (new flight)
- Melbourne – Queenstown up to 4x weekly (new flight)
- Sydney – Auckland gets one additional daily flight
- Melbourne – Auckland goes from 11 flights per week to 14
- Brisbane – Auckland sees a couple extra flights per week
It’s not all an increase here. Virgin Australia is also decreasing Melbourne – Christchurch from 11 to 7 weekly flights and Brisbane – Wellington down from 14 to 9 weekly. (You can see full details.) But overall, you can see this is an increase in capacity for both airlines. So what gives?
Well, Virgin Australia says that it is changing the times on its schedules to “better suit the needs of both leisure and business travellers.” Scheduling no longer requires coordination with Air NZ’s services, so this re-timing makes sense and may help Virgin Australia to fill more seats. But is this really going to result in a huge increase in passengers? I can’t imagine so.
Instead, this to me appears to be an example of airlines trying to continue to offer the same level of service so that they can fight for the travelers who now have to pick an allegiance. In markets like Auckland to Sydney, there will be a fair bit more capacity with two additional daily flights between the two airlines. That should mean that fares will come down as the two airlines try to jockey for position.
In short, this increase in service isn’t likely a result of actual market needs. This is about trying to get the upper hand. It would be more interesting to see what happens in a year. Will there still be as much service from these two airlines in November 2019 as there is in 2018? I would expect that someone will have to either blink or get comfortable with reduced margins.