Aviation developments in Australia tend to have an outsized impact, and that appears true for Japan granting Australia two new daytime slots at prized airport Tokyo Haneda. How Australia allocates the slots based on proposals from Qantas and Virgin Australia will carry larger impacts to the world of partnerships and joint-ventures.
Virgin Australia wants one Haneda slot so it can enter the Japanese market on strong footing, challenging the grip from Qantas and its wholly-owned LCC Jetstar. Virgin is expected to partner with All Nippon Airways, a relatively recent and small player in the Australia-Japan market. An ANA partnership would boost Virgin’s prospects in Japan, which casual observers initially dismissed due to Virgin’s restructuring and lack of a Japanese partner.
ANA has received one of the two daytime Haneda slots awarded to Japanese carriers for service to Australia (Japan Airlines received the other). That allows ANA and Virgin to lure each other with the promise of lucrative Haneda-Australia flights and reciprocal marketing and flight connections.
ANA has operated to Australia since 2015 but without a local partner, rare for an ANA long-haul flight. Virgin would help ANA strengthen its presence in Australia and narrow the gap with rival JAL as part of ANA’s quest to be the most relevant airline for Japan.
Greater competition between Australia and Japan could be grounds for approving joint-ventures that dominate many long-haul networks but not the Australia-Japan market. Haneda flying and an ANA partnership could bring swift pragmatism to Virgin Australia’s restructuring, led by new CEO Paul Scurrah.
Virgin has not said where in Australia it will fly from with its one Haneda slot. Qantas is requesting both slots so it can add a second Sydney-Haneda flight on an A330 or 787 while moving its existing Melbourne-Narita A330 flight to Haneda.
Qantas has advantages in talking points. It has demonstrated commitment with its 72-year history of serving Japan, which in recent times has seen new Osaka Kansai flights and forthcoming services to Sapporo. Qantas and Jetstar have a majority of capacity between Australia and Japan.
In contrast, Virgin Australia’s international footprint is smaller, shorter and financially weak. Virgin was a short-haul airline until it commenced 777 Los Angeles flights in 2009 and then used A330s to open flights to Hong Kong in 2017 in partnership with shareholder HNA, which is an investor in Hong Kong Airlines. That relationship is less important now.
HNA and Hong Kong Airlines’ own restructuring saw Hong Kong Airlines exit Australia, reducing the benefit of Virgin and Hong Kong Airlines having a joint-venture. HNA needs its investments to be profitable, and not have loss-making flying that affirms partnerships.
Virgin’s fleet is limited, so to launch Haneda flights it either needs to reduce domestic widebody flying or take out Hong Kong flights. The latter is seemingly obvious, either in part or total – and that would be an assessment for Scurrah without the prompt from potential Haneda flying.
Virgin Australia’s Hong Kong load factor is only 66%, it said in a recent regulatory submission. A spot check on fares shows is not uncommon for Virgin to earn more revenue on a domestic A330 flight half the distance of a Hong Kong service.
Virgin’s strategy is straightforward: lucrative aeropolitical rights are available, it can challenge a competitor, and have a destination for the Hong Kong capacity it likely wants to take out. But timing is difficult, with Scurrah taking the reins on March 25 as a relative newcomer to aviation. Since in office, he has postponed aircraft deliveries, made senior management changes and planned layoffs and cost cuts. Such transitions, aimed at reducing risk, are not normally when airlines make a bet by entering a new market and partnership.
The implications of reducing or exiting Hong Kong while making a pact with ANA are high for Virgin given its unique shareholder composition. Virgin Australia has stakes from Singapore Airlines, Etihad Airways, HNA, the Virgin Group and China’s Nanshan.
A Haneda and ANA deal would impact HNA as well as Singapore Airlines, which carries notable Australia-Japan traffic via Singapore. Yet doing the deal would allow Scurrah to assert himself in his complicated airline shareholder soup. Or for another culinary analogy: too many chefs in the kitchen.
Singapore Airlines and Etihad fight for who Virgin Australia preferences when selling flights to Europe. Virgin Group’s flagship Virgin Atlantic wants easy and cheap fares on Virgin Australia’s Hong Kong-Australia flights so Virgin Atlantic can fly passengers to Hong Kong and then transfer them to Virgin Australia for onward travel to Australia. Virgin Atlantic exited Australia in 2014 while British Airways still flies to Sydney.
Virgin Group’s shareholding in Virgin Australia has shrunk but its presence overhangs since Virgin Australia pays Virgin Group licensing fees to use the “Virgin” brand. The sum is not insignificant and is said to be one of the matters former shareholder Air New Zealand wanted to change, along with replacing then-Virgin Australia CEO John Borghetti. This unsuccessful push saw Air New Zealand sell its stake in Virgin.
The potential for Virgin to partner with ANA is a relatively recent development. ANA had seen Australia as a secondary opportunity. ANA was Japan’s underdog for most of its life until JAL’s bankruptcy and change in government policies afforded ANA a once-in-a-lifetime growth spurt. ANA concentrated expansion in Europe and the North America-Asia corridor.
ANA’s modern history in Australia dates to its December 2015 launch of Haneda-Sydney flights. It added Narita-Perth on September 1. The industry speculates if ANA will add services to Melbourne. Australia has come to the forefront as ANA’s growth cools in Europe and North America, the Australian dollar weakens, and ANA seeks to narrow the gap with JAL. ANA is taking on another former JAL stronghold: Hawaii. ANA is significantly growing its presence by deploying A380s to Honolulu.
Joint-ventures have come to dominate long-haul flying, especially in Japan and Australia. ANA could use Virgin Australia to form a JV for Australia, ANA’s largest long-haul market without a JV. In turn, the partnership de-risks Virgin’s Japan entry.
An ANA-Virgin JV would boost the argument for JAL and Qantas to have a JV, but their sizeable capacity share could be deemed anti-competitive. Australia is also JAL’s largest long-haul market without a JV. JAL is growing more interested in JVs, and is planning a medium-haul JV with Malaysia Airlines.
