United Airlines launching Houston-Sydney complicates Air NZ-United JV

United Airlines’ planned new Houston-Sydney nonstop 787-9 service, which is launching 18-Jan-2018, offers United’s response to recent waves of expansion in the Australia-US market from Qantas/American Airlines and then Virgin Australia (with JV partner Delta).

United’s new flight follows Qantas’ and Air New Zealand’s links with Texas, in Dallas and Houston respectively. United serves 53 domestic US airports from Houston that it does not serve at Los Angeles and San Francisco from its existing Australian gateways. Although United will be the third operator from the American south to Australia/NZ, it is the first with a strong US point of sale in Texas.

United’s improvements in Australia complicate Air New Zealand JV

With United’s Houston-Sydney service, United is partially eating into Air New Zealand’s North America-Australia transfer business. This is complicated, since Air New Zealand and United have a joint venture for the US-New Zealand market. The JV excludes Australia, and the two airlines are not allowed to discuss, let alone coordinate, matters relating to Australia.

The JV is impacted since Air New Zealand’s US-New Zealand flights, which are covered in the JV, have passengers connecting to Australia on tickets sold in competition with United.

The Air New Zealand-United JV covering only two of their combined online markets (US and New Zealand) differs from the as yet unapproved American Airlines-Qantas JV. American and Qantas would include all three of their online markets (US, Australia and New Zealand). American and Qantas’ JV application was rejected by US authorities in 2016 – arguably on very questionable grounds, but the two plan to resubmit their JV under the new Trump administration, which is seen as more pro-business. But there is a growing wariness about expansive JVs among US regulators, given the market power delivered to the big three groups in the North Atlantic market.

Outlook: United and Air New Zealand have more cooperation opportunity

United’s growth in Australia will slightly dilute American and Qantas’ market share, which was a sticking point cited in the reason US DOT rejected their JV application. American and Qantas were inevitably going to have a majority position, since Qantas accounts for approximately half of the nonstop market. American’s incremental presence brings more capacity and gives Qantas more strength in US point of sale.

A combined Qantas and American gives further reason for United and Air New Zealand to extend their JV to include Australia. Without a larger footprint, the US-New Zealand JV is undermined by United and Air New Zealand competing in the US-Australia market, which is far larger than US-New Zealand.

Between 2011 and 2014 (latest figures disclosed from private data) Air NZ expanded its share of the Australia-US market from 5.2% to 5.7%, but this was while some capacity was being injected into the market, so the percentage does not fully show the volume increase.

Although 5.7% may seem a small market share, this is higher than Delta‘s 5.0%. Delta serves Australia with a daily Los Angeles-Sydney 777-200, so Air NZ effectively carries a widebody aircraft’s worth of passengers between Australia and the US. Air NZ’s 5.7% share was slightly more than half United’s 10.1% share.

Australia-US market share among major operators (over 5%): 2011-2014

Source: CAPA – Centre for Aviation and Qantas citing ABS data.

Air NZ’s share of the Australia-USA market is tilted towards the leisure segment – to be expected, given that it is an intermediate operator and does not have a local presence in either the US or Australia.

From 2011 to 2014 Air NZ’s share of the Australia-US market grew from 5.2% to 5.7%, but its business share grew slightly faster, from 3.7% to 4.8%. It is there that Air NZ is focussing its attention now, with Air NZ CEO Christopher Luxon announcing recently that the airline would be “launching B787-9 Code 2 with increased premium configuration to Houston”.

With greater US-Australia nonstop competition, Air New Zealand is actively aiming to increase its visibility as a transfer hub for Australia, mostly to North America but also South America. Auckland Airport is an easier transfer point for Australia’s non-capital city travellers than, for example Sydney, with separate domestic and international terminals on opposite sides of the airport.

In recent years Air New Zealand has pursued a strategy of successfully turning competitors into JV partners. This is a hard tightrope to walk, as its – usually larger – partners have other competition to respond to. In this case, in a growing trans-Pacific market, United is responding to the need to increase its competitive position against its powerful US majors. If Air NZ becomes collateral damage, that is a subsidiary matter.

But for Air NZ and others there is a silver lining in United’s new move. The added competition does add weight to the argument in favour of approval of the Qantas-American JV application; and in turn there would be a symmetry in approving an expansion of the United-Air NZ JV to embrace Australia too, if that is what they seek. The politically powerful Delta is a likely opponent, as it is appears not to be greatly focussed on expanding in the market; smaller airlines like Hawaiian would also again rise to oppose either or both.

But despite the past 12 months being characterised by its CEO as having ” faced an unprecedented increase in the level of competition from some of the world’s largest airlines”, Air New Zealand “effectively rose to the challenge”. There is little reason to expect the plucky little flag carrier not to continue in that vein.

The CAPA-ACTE 2017 New Zealand Aviation & Corporate Travel Summit, scheduled for 17-18 October, at the Grand Mercure Auckland, will include variety of thought provoking discussions and keynote speeches. To find out more or register click here