Virgin Australia’s trans Tasman upgrades: how partnerships can be an impediment to innovation and market stimulation

Eyebrows were raised in the South Pacific aviation market when Air New Zealand and Qantas announced plans to resume a codeshare partnership from 28-Oct-2018.

Collaboration between the airlines had formerly been suspended since the mid-1990s.


Summary:

  • New partnership Qantas/Air NZ partnership comes just a day after termination of the previous agreement between Virgin/Air NZ;
  • Qantas has grown capacity on the trans Tasman by almost 50% in three years; Virgin has only increased its presence by 12%;
  • Virgin Australia CEO John Borghetti admits the airline’s product was “held back” because of the partnership;
  • Virgin has come to the market with more value for the consumer on several counts.

The new partnership comes just one day after Air NZ’s partnership with Virgin Australia concludes on 27-Oct-2018. For the week commencing 06-Aug-2018, Air New Zealand’s capacity share of the Australia-New Zealand market is around 35%. Qantas has approximately 28%, Virgin Australia 13% and Jetstar 7%.

Virgin Australia’s presence on the trans Tasman was buoyed by the strong capacity presence of Air New Zealand – but all of a sudden, Virgin is left as the odd man out. Together, Virgin Australia and Air New Zealand operated more than 200 return flights per week using A320, B737, B767, B777 and B787 aircraft. The joint network ultimately offered access from 44 cities in Australia to 21 cities in New Zealand.

Through Air NZ’s cooperation with Qantas, almost double the number of Australian domestic routes are involved

Despite the Virgin/Air NZ trans Tasman partnership encompassing a total of 61 routes, it pales in comparison to the new Qantas/Air NZ agreement – there will be a total of 108 routes involved in the cooperation.

Compared to the partnership with Virgin, Air NZ is adding a further nine routes, bringing its contribution to 30 New Zealand domestic routes. Qantas will offer the other 78 routes in the codeshare, all operated domestically in Australia.

Virgin’s growth in the New Zealand market was constrained by its partnership with Air New Zealand

Australia is the largest source of inbound visitors to New Zealand. However, Virgin’s Australia-New Zealand capacity has increased just 12% from Aug-2015 to Aug-2018. Qantas’ capacity has amplified by a massive 49% over the same period:

QF vs. VA Australia-New Zealand capacity from Aug-2015 to Aug-2018

Speaking at the CAPA Australia Pacific Aviation & Corporate Travel Summit on 02-Aug-2018, Virgin Australia CEO John Borghetti confirmed that the carrier’s product was “somewhat held back” by its trans Tasman alliance. Mr Borghetti’s claims seem to be true, considering that Virgin has already announced a new trans Tasman product, new route and loyalty scheme adjustments, all effective from late 2018.

All Virgin Australia flights to Auckland, Christchurch, Queenstown, Wellington and Dunedin will offer a “substantial” meal and drink included in all fares from 28-Oct-2018. There will also be baggage allowance improvements, with at least 23kg of baggage now included in all fares. Virgin will offer WiFi on all flights – including 15 minutes of complimentary access – making it the only airline operating trans Tasman with the product.

Specifically for Virgin’s Velocity loyalty programme, both trans Tasman and international short haul earnings will change. For flights booked from 01-Aug-2018 for travel from 28-Oct-2018, Velocity members will earn at the improved rate of five points per AUD1 spent. The changes also mark a notable shift – points earned are now principally determined on how much travellers spend, rather than the distance travelled.

Velocity Status Members will continue to earn a status bonus when flying with Virgin Australia on trans Tasman and international short haul bookings; Platinum members receive a points bonus of 100% of the base points earned, Gold members receive a points bonus of 75%, and Silver members receive a points bonus of 50% of the base points earned.

The new trans Tasman route to be launched by the airline is a three times weekly Newcastle-Auckland service, operating seasonally from 22-Nov-2019 to 17-Feb-2019. The route will make Virgin Australia the first airline to provide an international service from the upgraded Newcastle Airport terminal, and marks the first time the two cities have been directly linked in the last 16 years.

Virgin is also assessing the viability of deploying Tigerair across the Tasman, which could infringe on Jetstar’s lone LCC capacity between the country pair, if it comes about. The Virgin Australia Group will assess the market over the next 12 to 18 months before coming to a decision on Tiger.

Overall, we have seen Virgin come to the market with more value for the consumer on several counts and launch an assessment of Tigerair’s wider role in the group. All this was a direct product of the airline going alone on the trans Tasman – so, the question could be – Do partnerships sometimes stifle innovation and disruption in the airline industry?