Comment: Cosy down under

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Published: July 22, 2011

There is a frenzy of activity among Asia-Pacific airlines to form alliances and strategic partnerships, and more could be in the offing. But what is the motivation behind the moves, and who is likely to gain the most?

The Asia-Pacific may be a big place, but it’s all been getting very cosy among the region’s airlines.

Virgin Australia, whose chief executive John Borghetti is the subject of our cover interview this month, has been in the vanguard of this drive to join hands across the vast oceans. And at the same time the group is undertaking a transformation, bringing its disparate divisions together under a single brand as it gears up to play hard ball with full-service rivals by transitioning its business from the low-cost sector.

Last year the airline – then called Virgin Blue – forged a strategic tie-up across the Tasman with Air New Zealand, which involved both equity and network collaboration, and Air New Zealand acquiring a 14.9% stake. This deal was followed swiftly by a link with Abu Dhabi-based Etihad Airways. Then in June, a link with Singapore Airlines was confirmed, by which time it had rebranded as Virgin Australia.

Meanwhile, Qantas and Malaysia Airlines may get closer thanks to the latter’s recently announced intent to join the Oneworld alliance. Qantas is also linked to Japan Airlines’ plans for a low-cost subsidiary, possibly through the Australian carrier’s Jetstar arm.

So why all of a sudden are there these transpacific love-ins?

The Virgin Australia tie-ups with SIA and Etihad could tap a wealth of new business. SIA and Etihad will gain more access to the Australian market, while Virgin taps into international traffic to Asia and Europe through its partners’ hubs in Changi and Abu Dhabi, respectively. For SIA and Virgin the tie-up thus achieves its aim by enabling them to cut out Qantas and Jetstar.

However, the strategy could have flaws, particularly given Virgin’s drive to secure higher yield passengers. From ­Virgin’s perspective Singapore’s geographic location is not ideal from most parts of Australia to points in northeast Asia.

Although connecting through a hub is viable for flights into secondary cities and for discretionary travellers attracted by low fares, many passengers may baulk at a stop at SIA’s Changi hub when they could fly direct.

And the tie-up doesn’t include SIA flights to Europe, as that would put Virgin Australia in close competition with its Northern hemisphere sibling Virgin Atlantic (that SIA of course holds a 49% stake in), which serves Sydney from London via Hong Kong. For European traffic feed, Virgin Australia is banking on its Etihad tie-up.

The opportunities for any Qantas/MAS alliance are less obvious. The Malaysian carrier’s Oneworld move is probably of more benefit to it for accessing other alliance members, rather than Qantas itself.

And the geographic proximity between the two continents mean that an alliance between an Australian and an Asian carrier, with a gateway hub somewhere on the edge of Asia, doesn’t make much sense as a way to move traffic between the two. Particularly as most of Asia’s major cities already have non-stop services to Australia.

So what of the possible Qantas/JAL low-cost carrier link? Jetstar already has a significant presence in Japan and a tie-up could benefit both carriers. Not because it would generate Japan-Australia traffic, but rather that it would create a Japanese low-cost carrier with Australian input and possibly some equity. And the low-fare target market would not just be in Japan, but also across the region, especially China.

Any Japanese low-cost airline, ­however, faces the challenge of tackling the relatively high cost of operation in the country.

But with significant strategic moves by its regional rivals, Qantas has to take some hard decisions about its broader strategy and how it tackles the threat to its beleaguered international business. And the pressure is on to make these decisions sooner rather than later.

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