Is an ANA partnership with Virgin Australia – and an investment – on the cards?

During this decade Japan has developed as one of the most popular and fastest growing destinations for Australians. Last year there were nearly 500,000 Australian visitors to Japan, compared to only 163,000 in 2011. Australian visitor numbers to Japan have grown at a double digit rate for six consecutive years, including 18% in 2016 and 11% in 2017.


Summary:

  • The Australia-Japan market has been growingly rapidly, boosted mainly by outbound tourism.
  • Australian visitor numbers to Japan have tripled over the past six years and Japanese visitor numbers to Australia have also increased, by over 30%, in the past three years.
  • ANA has only a 10% share of Australia-Japan capacity, compared to a combined 90% for partners JAL, Jetstar and Qantas.
  • ANA could improve its position in Australia through a codeshare with Virgin Australia and may emerge as the buyer of HNA Group’s 19% stake in Virgin Australia.

Japanese visitor numbers to Australia have also been on the rise, increasing 33% over the past three fiscal years. Japanese visitor numbers to Australia were relatively flat for several years before 2016.

Australia has always been a popular destination for Japanese travellers. Japan currently accounts for approximately 5% of total visitor numbers to Australia and is Australia’s fifth largest source market after China, New Zealand, the US and the UK.

Australia is Japan’s sixth largest source market after China, South Korea, Taiwan, Hong Kong and the US. Australia accounts for almost 2% of total visitor numbers to Japan, which has more than three times as many total visitors as Australia.

Australia-Japan nonstop traffic has increased from 752,000 passengers in 2011 to 1.36 million passengers in 2017, according to Australia BITRE data. Australia-Japan traffic was up 26% in 2016 and 8% in 2017 and this year it is on pace to increase by around 10%.

Over the past year Japan Airlines (JAL) has accounted for most of the Australia-Japan growth, with a new daily service from Tokyo Narita to Melbourne from Sep-2017 (its Tokyo Narita-Sydney service is daily). Qantas has also contributed to the recent growth, with three weekly Sydney-Osaka Kansai services effective from Dec-2017.

Qantas accounted for most of growth in 2017, having launched a daily service from Melbourne to Tokyo Narita in late 2016. ANA accounted for most of the growth in 2016, with services from Tokyo Haneda to Sydney effective from Oct-2015.

Qantas accounts for a leading 45% of Australia-Japan seat capacity. The Qantas Group has a dominating 75% when Jetstar’s services are included (Cairns-Osaka, Cairns-Narita and Gold Coast-Narita). JAL has 15% of Australia-Japan seat capacity and ANA just 10%.

Qantas and JAL are close partners, both being oneworld members. JAL codeshares with Qantas and Jetstar, and Jetstar also partnered with JAL to establish the LCC Jetstar Japan.

Virgin Australia, somewhat surprisingly, does not have any partners in Japan. Virgin Australia serves, or has local airline partners in, virtually all the main outbound tourist markets from Australia. Given the increasing popularity of Japan for Australian travellers it would make sense for Virgin Australia to have a codeshare and frequent flier tie-up with a Japanese airline.

ANA is the logical partner for Virgin Australia, given the existing tie-up between JAL and Qantas. A codeshare partnership with Virgin Australia would also benefit ANA as it would provide domestic and New Zealand feed to its Tokyo-Sydney service, as well as the potential for services to Brisbane and Melbourne. It could be hard for ANA to expand in Australia without a local market – the Qantas Group-JAL combination now dominates the market (with 90% of seat capacity).

Having pursued investments in airlines throughout Asia for several years, ANA also has a strategic interest in Australia and has been considering investing in Virgin Australia.

While Australia was not initially a priority, the nation provides a more conservative (and therefore potentially more attractive) option compared to airline investment opportunities in the original target market of Southeast Asia and it has also become an important market, given the rapid growth in Australia-Japan traffic.

ANA could emerge as the buyer of HNA Group’s 19% stake of Virgin Australia, acquired in 2016. The struggling Chinese airline group has been looking to offload overseas investments to reduce debts.

ANA is a close partner of Singapore Airlines (SIA), which owns a 20% stake in Virgin Australia. SIA prefers not to increase its stake and would likely welcome ANA as a new shareholder. Etihad has been offloading some of its overseas investments as part of a restructuring and could also potentially sell its 21% stake. Richard Branson’s Virgin Group owns 10% of Virgin Australia.

ANA emerging alongside SIA as Virgin Australia’s two main shareholders would provide stability and could lead to strategic adjustments for the Australian airline, particularly given the retirement of CEO John Borghetti at the beginning of 2020. Adjustments to Virgin Australia’s international operation – potentially the launch of services to Japan but reductions elsewhere – would be likely. An increased focus on the Australia domestic market, which is much more profitable, could be part of a new more conservative strategy from two relatively conservative airline shareholders.