The collapse of the Air New Zealand-Virgin Australia partnership: good news for airports and consumers

Part 1: Virgin Australia’s new routes to Australia?

Since being unceremoniously – and unexpectedly – dumped by Air New Zealand, Virgin Australia is having to recast its New Zealand strategy in haste.

One thing it will certainly mean is that its low cost subsidiary Tigerair will begin trans Tasman routes, probably early in 2019.

But there has to be more substance if Virgin is to be a genuine Australasian airline. And that means some new routes, as well as more capacity on routes already served by Air NZ and Qantas, where Virgin has previously relied on its former partner to deliver market presence.

That will be good news for New Zealand airports and for consumers on both sides of the Tasman.

A bit of background – as Air New Zealand searches for an Australia market strategy

For decades Air New Zealand has been desperate to gain access to the highly valuable Australian domestic aviation market. The peak – and nadir – of this desire was reached in 2001, 17 years ago this month, when Air New Zealand collapsed under the weight of an overambitious strategy to buy Ansett Airlines. That resulted in renationalisation of the flag carrier and a complete rearrangement of the airline systems in both Australia and New Zealand.

A boisterous Air New Zealand chairman had leveraged the airline’s debt to buy the clunky second airline in Australia. When Ansett collapsed in the face of a new low cost entry in Australia’s domestic market, his rash strategy came crashing down and the Australian domestic cause seemed lost.

Much later, as one of those low cost airlines morphed into the full service airline that is today Virgin Australia, Air New Zealand tried again, making a pre-emptive move onto the Australian airline’s share registry. At the time, it was probably management’s intention to take full ownership of the domestic carrier, something that is possible under the respective legislation. Other foreign airlines, however, then entered the fray and Air New Zealand was left with a minority shareholding in a loss-making airline.

However the relationship had come to include a strategic alliance with an extensive codeshare, which lasted seven years and helped both carriers to compete much more aggressively in the two domestic markets against the near-monolithic Qantas.

Virgin’s complex ownership profile and the Australian airline’s loss-making trail eventually resulted in acrimony between the two CEOs, and from that time it was probably only a matter of time before the deal fell apart.

All of this time there had been on-again-off again love affairs with Qantas and, earlier this year, on 04-Apr-2018, Air New Zealand again surprised virgin Australia’s management by unceremoniously dumping Virgin, simultaneously announcing a new codeshare relationship in their respective markets with – of all people – Qantas.

It’s a reciprocal codeshare agreement covering each carrier’s domestic networks; it can’t extend to actual trans Tasman services for competition reasons because the two airlines have approximately 72% market share on those routes (Virgin has about 19%)

So, given the dominance of Air New Zealand and Qantas in the Australia–New Zealand market, this codeshare relationship had to be more limited than the very close Air New Zealand–Virgin Australia alliance had been; but it has sealed the rift between the two former partners.

So, in fact the airline has major challenges ahead of it without the relationships it has made the most of in the past. Not just on the Tasman itself, but in sustaining a volume of domestic oncarriage (against changed competition) to points beyond the gateways in both Australia and New Zealand. There are some options ahead to be considered.