Virgin Atlantic and Virgin Australia have been seeking permission to co-operate on flights between Australia and the UK in an effort to seamlessly exchange passengers at both LA and Hong Kong airports.
Yesterday, the Australian Competition and Consumer Commission (ACCC) gave the proposed co-operation the green light. In a media statement, the Australian government watchdog said;
“We do not think this enhanced cooperation is likely to lessen competition on the routes between Australia and the British Isles.”
The go-ahead is issued on an interim basis but it is rare for the ACCC to flip on an interim ruling. It is a much needed boost for Virgin Australia and its Hong Kong flights which are rumoured to be under-performing.
The ACCC ruling
The ACCC received three submissions regarding the proposed Virgin agreement. Tourism Australia was supportive and Qantas was relatively neutral (not surprising given its application to extend cooperation with its OneWorld frenemy Cathay Pacific on the route).
A third submission was a surprise – from Air Mauritius, who did not object, which was nice of them. The Air Mauritius Australian presence consists of twice weekly transindian MRU-PER flights.
The Virgin agreement was allowed because the ACCC did not think it would be anti-competitive, rather it would deliver a public benefit. In addition, Virgin Australia only has 10% of the Australia-Hong Kong market and its inability to access network connections was hampering its growth.
The ACCC said it is in the public interest for Virgin Australia to stay on the route and offer an alternative to the OneWorld incumbents.
The Australia-Hong Kong route
Virgin Australia has only recently started flying into Hong Kong.
Melbourne-Hong Kong flights began in July 2017 and Sydney-Hong Kong flights began in July 2018. Both routes use A330s and feature their excellent 1-2-1 “The Business” business class product.
But the going has been hard against the big OneWorld players on the route. Qantas and Cathay Pacific have over 80% of the market tied up. Qantas has twice daily flights from Sydney and a daily flight from Melbourne. Cathay Pacific has up to four flights a day into both cities in addition to frequent flights in Brisbane, Perth, and Adelaide.
Cathay Pacific’s footprint in Australia is only slightly weakened by its decision to withdraw from the Cairns-Hong Kong route.
Qantas and Cathay Pacific have a bit of a love hate relationship. They are OneWorld partners but compete fiercely on the Australian routes. However, the two airlines have their own proposed code sharing deal currently before the ACCC. Virgin Australia is objecting.
The Virgin tie-up
The ACCC’s decision will allow Virgin Atlantic and Virgin Australia to co-operate on pricing and inventory management, scheduling, network planning (including new transit points), frequencies, marketing, frequent flyer and lounge access, and generally pursue synergies at both Hong Kong and LAX.
Virgin Atlantic used to fly into Australia via Hong Kong but withdrew from the route in May 2014, saying it wasn’t economically viable.
But given some common minority shareholdings in both airlines, the same Virgin branding, and the fact that both airlines flew into Los Angeles and Hong Kong, increased co-operation seemed like an inevitability.
The agreement is probably less of an issue for Virgin Atlantic than it is for its Australian cousin. The agreement will allow Virgin Australia to sell through tickets onto Virgin Atlantic routes, filling up their Hong Kong flights which reportedly are only running at about 66% capacity.
More importantly, Virgin Australia will take passengers coming off the Virgin Atlantic flights at both airports.
The original idea for the Virgin Australia Hong Kong flights was as an entry point into the Chinese market, funnelling passengers into China with its HNA alliance partner, Hainan Airlines. But the weakness in this strategy is that it involves a transit in Hong Kong.
While Hong Kong is a pretty good airport to transit in, Qantas and a number of Chinese airlines fly directly into mainland China from Australia. Why would you elect to transit if you didn’t have to?
The Chinese carriers in particular, have aggressively ramped up their presence in the Australian market in the last few years.
Virgin Australia’s decision some time ago not to pursue entry into Star Alliance have left it badly exposed on its international flights. Multi airline alliances like Star and OneWorld are excellent vehicles for passing passengers between different airlines at key transit points. Virgin Australia’s individual arrangements are not nearly as efficient.
But this new Virgin agreement should take some of the pressure off Virgin Australia’s Hong Kong flights. Virgin Atlantic can funnel it’s passengers down to Sydney and Melbourne via Virgin Australia metal.
Virgin Australia will then get the chance to shuttle them around Australia on its domestic services. It will be interesting to see if the performance of the Hong Kong flights pick up over the next twelve months.