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Restriction of Publication of Part Claimed
-,mission in su ort of the Application .:fir Authorisation
U L Venture [Public version]
9 July 2009
Contents
Executive summary
1 The Applicants
1 . Virgin Blue Group
1.2 Delta
Virgin Blue 1 Delta Joint Venture
2.1 Interline, Codeshare and Marketing Agreements
2.2 Joint Venture
2.3 Term
3 Overview of carrier cooperation arrangements
3.1 'Marketing Alliances" and 'Integrated Alliances"
3.2 Codesharing
3.3 Interline agreements
3.4 Integrated alliances vs. codesharing
4 Industry Overview - the supply of Trans-Pacific air services
4.1 Overview
4.2 Regulatory Framework
4.3 Australia - United States Open Skies Agreement
4.4 Trans-Pacific routes
4.5 Historic trends in relation to the supply of passenger services on Trans-Pacific routes
4.6 The need for effective beyond-networks for caniers operating on Trans-Pacific routes
4.7 The supply of freightlcargo services
5 Caniers currently providing Trans-Pacific air passenger services
5.1 Qantas
5.2 United Airlines
5.3 Air New Zealand
5.4 Other carriers
6 Framework for analysis of competitive effect and public benefits arising from the Virgin Blue I Delta Joint Venture
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6.1 Market definition
6.2 Market concentration 9 Australia - United States Air Passenger Market 29
6.3 Market concentration 9 Australia - United States Air Freight Market 32
7 The future with and without the Virgin Blue 1 Delta Joint Venture
7.1 The factual
7.2 The counterfactual
8 Public Benefits arising from the Virgin Blue I Delta Joint Venture 34
8.1 Routes and frequencies
8.2 Greater choice and convenience for customers
8.3 Lower fares
8.4 Sustained effective price and product competition on Trans-Pacific routes 37
8.5 Increased tourism
8.6 Additional employment
9 The Virgin Blue 1 Delta Joint Venture will not result in anti- competitive detriment
Annexure A - Virgin Blue Group
. Annexure B - Delta Los Angeles Netwok P
Confidential Annexure C - Overview of Virgin Blue 1 Delta Joint Venture
Annexure D - Summary of passenger traffic rights involving the United States route in Australia's air services agreements 48
Annexure E - Summary of major carriers operating Trans-Pacific Routes (excluding Hawaii) (1 991 .) present) 49
Annexure F - Overview of oneworld carriers 9 Qantas and American Airlines
Annexure G - Overview of Star Alliance Carriers 9 United Airlines I Air New Zealand I Air Canada
Annexure H - Overview of other carriers
Annexure I - Executed copies of agreements
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Executive summary
Application This submission is made by Virgin Blue Airlines Pty Ltd (ACN 125 580 823), Virgin for Blue International Airlines Pty Ltd (ACN 125 580 823), Pacific Blue Airlines (Aust) Pty
Authorisation Ltd (ACN 097 892 389) and Pacitic Blue Airlines (NZ) Ltd (together Virgin Blue) and Delta Air Lines, Inc (Delta) (together the Applicants) in support of applications for authorisation pursuant to s 88(1) of the Trade Practices Act 1974 (TPA), to give effect to the Coordination Agreement, the Cooperation Agreement and Joint Venture Agreement (together the Virgin Blue I Delta Joint Venture).
For the reasons set out in this submission, the Applicants consider that the Virgin Blue / Delta Joint Venture meets the net public benefit test imposed under the TPA and should be authorised by the Australian Competition and Consumer Commission (ACCC).
Overview of Through the Virgin Blue / Delta Joint Venture, the Applicants are seeking to establish Virgin Blue I a deep commercial relationship in order to provide customers with a broad and c e
Delta Joint ordinated Trans-Pacific air passenger network (Trans-Pacific routes being those Venture between Australia and mainland United States). Such a network would enable the
Applicants to more effectively compete with the incumbent carriers on the Trans- Pacific routes (being Qantas with its oneworld partner American Airlines and United Airlines with its Star Alliance partners -Air New Zealand and Air Canada).
Subject to regulatory approval, the Virgin Blue / Delta Joint Venture contemplates coordination and agreement between the Applicants in respect of Trans-Pacific routes in relation to:
I schedules, capacity and routes flown;
passenger sales and marketing activities;
I pricing and revenue management;
I enhancement of frequent flyer and lounge program offerings; and
purchasing and procurement.
It also contemplates the pooling of revenue under arrangements founded on the principle of 'metal neutrality". This means the Applicants will adopt revenue allocation arrangements that make it irrelevant, from the perspective of either Applicant, which Applicant's aircraft a passenger travels on.
Background On 14 February 2008, Australia and the United States concluded the Open Skies to the Agreement. This permits airlines of both Australia and the United States to operate
Virgin Blue I unrestricted capacity on routes between any point or points in either country. Delta Joint
Venture Prior to entry into the Open Skies Agreement, new airline entrants between Australia and the United States were only guaranteed a start-up of four services a week. This made it very difficult for new airlines to commence operations on a commercial basis and compete effectively with incumbent airlines, such as Qantas, which were operating many more sewices than this. Moreover, camers from each country were restricted in the markets which they could serve between and beyond the temtory of the other country with local traffic rights. The Open Skies Agreement removed all these routing and capacity restrictions.
A key policy rationale behind the introduction of the Open Skies Agreement was the Australian Government's desire to introduce fur&her and sustained competition on what it considers to be 'one of Australia's most important air routes", particularly by
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enabling new entrants such as V Australia to operate. At the time the Open Skies Agreement was concluded, the only airlines operating direct services between Australia and the mainland United States, in what has often been described as a "virtual duopoly", were Qantas and United Airlines.
The lack of effective competition to the incumbent carriers on these routes was widely acknowledged to have led to higher fare levels, restricted seat availability, a concentration of direct services originating or terminating in Sydney and a corresponding negative impact on tourism and employment growth.
As a result of the Open Skies Agreement, the Virgin Blue Group launched its new longhaul international carrier V Australia. It commenced direct services between Sydney and Los Angeles on 27 February 2009 (now daily) and direct services between Brisbane and Los Angeles on 8 April 2009 (now 3 times a week). V Australia is scheduled to commence direct sewices between Melbourne and Los Angeles in September 2009. Delta also commenced daily services between Los Angeles and Sydney on 1 July 2009 as a result of the Open Skies Agreement.
Historic The Applicants, as new entrants, face a particularly difficult set of challenges in background developing and sustaining a durable network of competitive services on Trans-Pacific
to Trans- routes. These difficulties are exacerbated by the current volatile economic conditions. Pacific route They indude:
= the geography involved on Trans-Pacific routes, which necessitates the use of specialised long range and large gauge aircraft (not easily redeployed on other routes). It also means there is a limited set of city-pairs and an absence of intermediate points;
the need for access to effective beyond networks at either end of Trans-Pacific routes. These beyond networks are required in order to attract customers and feed traffic onto Trans-Pacific services (for example, the Applicants estimate that 60% of Sydney-Los Angeles traffic travels beyond Los Angeles). They are also necessary to maximise passenger load and to enable an airline to effectively respond to any changes in directional passenger flows driven by external factors such as exchange rates; and
the strong position of the incumbent carriers servicing Trans-Pacific routes being:
- Qantas, which has developed an unparalleled market presence on Trans-Pacific routes. It has a deep schedule and extensive network of city-pairs in Australia and the United States, fed by its codesharing and oneworld alliance partner American Airlines. This enables it to strongly respond to any new Trans-Pacific entrants. Qantas cartied 53.9% of all passengers between Australia and the United States in 2008. Based on projections for December 2009 Qantas will represent 50% of seat capacity on non-stap flights between Australia and mainland United States.
The dose relationship between Qantas and American Airlines has given Qantas deep penetration on Trans-Pacific routes and has been a key factor in Qantas' success - giving it an ability to sell a broad range of city-pairs, increase its load factors, achieve and maintain its current scale (in terms of routes and frequencies); and
- United Airlines, which has its own extensive United States domestic network meaning it can offer the largest number of connection options for customers flying from Australia. It operates the largest number of domestic US flights at both Los Angeles and San Francisco airports which are the two key hubs on the US west coast for Trans-Pacific
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flights. United Airlines carried 15.6% of all passengers between Australia and the United States in 2008. Based on projections for December 2009, United Airlines will represent 21 % of seat capacity on non-stop flights between Australia and mainland United States
United Airlines has an enhanced Transpacific presence through cooperation with its Star Alliance partners -Air New Zealand and Air Canada. United Airlines codeshares on Air New Zealand's flights from Auckland to Sydney, Brisbane and Melbourne and on Air New Zealand's beyond flights to Los Angeles and San Francisco. Similarly, Air New Zealand codeshares on United's Sydney to San Francisco and Sydney to Los Angeles services. Additionally Air New Zealand and United Airlines have been granted broad antitrust immunity by the United States Department of Transportation enabling them to coordinate all international services, induding between United States and New Zealand and the South Pacific region.
The diiculty of competing effectively on Transpacific routes can be seen from the fact that three major United States airlines have withdrawn from the route since 1991, whilst Air New Zealand also commenced and ceased its own direct services between Australia and the United States over this period.
Rationale for The overriding policy objective which led to the Open Skies Agreement was a desire the Virgin to introduce further and sustained competition on Trans-Pacific routes (with
Blue I Delta corresponding increases in services and routes and reductions in airfares). Joint Venture
Whilst the Applicants consider their entry has gone a considerable way to promoting this objective, in light of the difficulties outlined above the Applicants consider that the Virgin Blue I Delta Joint Venture best achieves the key objective of the Open Skies Agreement. It does this through better positioning the Applicants to:
maintain existing routes and services and develop new routes, schedules and frequencies whilst optimising use of the carriers' aircraft and facilities (both existing and new), creating operating efficiencies and increasing consumer choice and benefits;
achieve operational and overhead cost savings and drive increased passenger numbers in a way that cannot be achieved under codesharing and interlining agreements;
optimise their existing networks and activities to feed traffic onto new routes and thereby reduce the commercial risk in the establishment of such new routes. It will therefore increase the likelihood of such routes being established as well as the speed of their establishment; and
more effectively develop a deeper, coordinated and integrated Trans-Pacific passenger network to better rival and more effectively and comprehensively compete with the incumbent airlines in the market on a long term basis.
As a result it will give passengers a greater degree of flexibility in terms of city-pairs, anival and departure times and beyond connection options.
In turn, it drives the public benefits outlined below.
"Metal As noted above, the Virgin Blue 1 Delta Joint Venture is intended to be a 'metal Neutral" neutral" joint venture - that is, based on the pooling of revenue in such a way that it is
Joint irrelevant to the Applicants which Applicant's aircraft a passenger travels on. In order Ventures to achieve this 'metal neutrality", the Applicants need to jointly coordinate scheduling,
yield management, inventory allocation, pricing and network planning to ensure that
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schedules, prices and availability across the joint network are set efficiently.
The Applicants consider that such an integrated alliance is necessary to achieve the objectives of the Virgin Blue 1 Delta Joint Venture and the public benefits that flow from them - that is, the same result cannot be achieved solely with standard forms of airline cooperation (such as codesharing).
In codesharing and other standard arrangements, parties continue to have an incentive to maximise their own economic benefit. They are therefore unwilling to reduce the profitability of their own operations and will seek to individually profit maximise within the scope of the codeshare. They will develop a network that is optimal for each individual airline rather than for their pooled capacity, often resulting in a concentration of routes or timings as each partner seeks the same 'sweet spotn in the market. They also will price the seats they operate themselves to induce passengers to buy these, rather than seats the airline buys on codeshared services operated by its partner (with each airline seeking a profit margin on the same seat), even if the partner offers better routing or timing.
Under a 'metal neutral" integrated alliance, where the airlines share the revenue, the airlines have an incentive to focus on maximising the benefits for the alliance parties as a whole. The revenue of each carrier will be the same regardless of which alliance carrier actually transports the passenger. As such, the carriers will seek to win the passenger's booking for the alliance by creating a joint network with the best spread of routes, frequencies and the most competitive fares. The alignment of financial incentives in this manner drives the carriers to grow and to optimise their product offering. Such an alliance eliminates 'double marginalisation", enables more efficient codesharing and convenient scheduling. It also enables the carriers to jointly introduce new routes and services that would not be sustainable as a product for each individual carrier. Their joint network thus has a greater scope and more convenience than their individual timetables.
The economic and consumer benefits that flow from these alliances include the offering of a better optimised network with a better spread of routes and timings; considerable increases in passenger loads, which lowers fares by lowering the cost per seat sold; and further lowering of fares through the removal of the 'double marginalisation" incentive. The presence of a more comprehensive, integrated network will provide more effective competition against the dominant incumbents than will two more marginal separate networks with simple codeshare connections.
The Applicants consider that Qantas and American Airlines have effectively achieved a key benefit of a 'metal neutral" integrated alliance by having Qantas operate all Trans-Pacific sectors whilst American Airlines operate all domestic United States sectors. As Qantas is the sole operator of the critical Trans-Pacific sectors, it controls all scheduling and with regard to pricing, American Airlines is neutral regarding which Trans-Pacific sectors it sells.
Public In enabling the Applicants, both new entrants, to replicate the network advantages of Benefits the incumbent carriers to effectively compete and grow their presence on the Trans-
Pacific routes in a way not facilitated by codeshare, the Virgin Blue I Delta Joint Venture promotes the public policy objectives underpinning the Open Skies Agreement. More specifically, the Applicants will be better able to maintain existing and introduce further Trans-Pacific services (routes and frequencies) faster than would occur absent the Virgin Blue I Delta Joint Venture. This is particularly true in respect of direct services. This in turn:
means customers travelling between Australia and the United States will be offered greater choice and convenience;
- facilitates lower fares on the Trans-Pacific (as a result of new capacity
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supported by the Virgin Blue I Delta Joint Venture, the removal of 'double marginalisation" incentives and the facilitation of cost savings);
results in sustained effective price and product competition on Trans-Pacific routes in the medium to long term; and
will facilitate increased tourism and employment in aviation and other sectors.
No anti- Not only does the proposed Virgin Blue 1 Delta Joint Venture drive the public benefits competitive outlined above, it will not result in any anti-competitive detriment. More specifically:
detriment the Applicants are new entrants on the Trans-Pacific routes. The Virgin Blue I Delta Joint Venture will assist their entry, and continued survival and growth in this market. It therefore has a fundamentally pro-competitive effect on what, until recently, has been a virtual duopoly;
the Applicants have limited incentive and ability to remove capacity from Trans- Pacific routes (either before or after commencement of the Joint Venture). Further, the Joint Venture does not give the applicants the incentive to remove capacity where, even together, the Applicants will still be relatively small in the market;
the purpose of the Virgin Blue 1 Delta Joint Venture is to enable the Applicants to maintain existing capacity as well as to develop new routes, schedules and frequencies in order to more effectively compete against the entrenched incumbent carriers' alliances;
following the commencement of the Virgin Blue I Delta Joint Venture, the Applicants will continue to vigorously compete with Qantas and United Airlines as well as the range of indirect carriers including Air New Zealand and Air Canada. Air New Zealand also retains the ability and capacity to offer direct services between Australia and the United States; and
there are a large number of alternative air freight I cargo providers to the Applicants including Qantas, United Airlines, UPS and FedEx (as well as those carriers that fly via Asia). Additionally, the Applicants are currently small suppliers of air freight I cargo services on Trans-Pacific routes.
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1 The Applicants ;.; k; ::. . . :,... . ! * , , p., ,. . . , p.-& '. . ., ' , .; . +. , .., 8
1.1 Virgin Blue Group
The Virgin Blue Group (Virgin Blue Group) commenced operations in Australia in August 2000. Since that time, it has grown from having two aircraft ftying one domestic route to having a fleet of 81 aircraft with annual revenues of $2.4 billion in 200849. The Virgin Blue Group is now
.CW comprised of the following domestic and international brands: Virgin Blue, Pacific Blue, Polynesian Blue (a joint venture with the Samoan Gwern~e-no and VvAustraJia. - . --7->-*. ; p u r -9-
\ -.
Virgin Blue is the flagship carrier of the Virgin Blue Group and is based in Brisbane. Marketing itself as a 'New World Carrier" (pitched between a full service carrier and a low-cost carrier), Virgin Blue operates a fleet of 69 Boeing 737-700,737-800 and Embraer El90 and El70 EJet aircraft. Virgin Blue currently operates approximately 2800 flights a week to more-than 25 Australian .-; , -.r-~F?--cTp... ,i.-- 7-->...-2- , , .-- * ,; r -. .,- -
. , . . . .
destinations. . . - . .
Pacific Blue was launched in 2004. It consists of two carriers. Pacific Blue Airlines (NZ) Limited (PBNZ) is the New Zealand-based subsidiary of the Virgin Blue Group and operates domestic services within New Zealand, as well as Trans-Tasman services between Australia and New Zealand. Pacific Blue Airlines (Aust) Pty Ltd (PBA) operates services between Australia and New
:Zealand, Fiji, Bali, Samoa, Vanuatu, Papua New Guinea, the Cook Islands, the Solomon Islands and Tonga as a designated Australian international carrier. PBA operates aircraft wet leased from PBNZ and Virgin Blue. PBNZ has hubs in Christchurch and Auckland. Pacific Blue currently operates a fleet of 9 Boeing 737-800 aircraft. .h -
a* .? ,w h i f , ¶ . - . > , - ! I . : - ---. :Y-- ,<;,.+. . . . , : :,.-- , L
*I I L I C R ~ ~ )UTM??CI .&zA~,! r'.>Jt+=.. ,P>L err* - h i . 1 1 , lr , , . v ui 4
V Australia is the Virgin Blue Group's newest carrier. It commenced flight operations on;-,, 27 February 2009, providing non-stop Sydney - Los Angeles services 3 times a week. C)n 20 March 2009, V Australia introduced daily Sydney - Los Angeles services. In April 2009, V Australia began flying on the Brisbane - Los Angeles route 3 times a week. A third Trans-Pacific route,
,gss between Melbourne and Los Angeles, is scheduled to begin operations in September 2009. V ~:@j Australia is currently operating a fleet of three Boeing 777-300ER aircrafl : +,. %
I
The Virgin Blue Group also has a joint venture with the Samoan Government: Polynesian Blue. Polynesian Blue is a designated carrier of the Government of Samoa. It operates between Sydney. - -
-. ~risbane, Auckland and &ia with a single Boeing 737-800. Polynesian ~ i u e is not a participant in "' ' .l4 the Virgin Blue I Delta Joint Venture.
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A more detailea overview or the Virgin Blue Group's operations, as well as its route network, is set out in Annexure A.
1.2 Delta
\ . Delta Air Lines (Delta) is a United States carrier with hubs in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York (JFK), Salt Lake City, Amsterdam and Tokyo (Narita). Delta, its Northwest Airlines subsidiary, and its Delta Connection regional partners operate a combined
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network of service to 368 destinations in 66 countries and serve more than 170 million passengers each year. Delta, Northwest and Delta's wholly owned regional caniers operate a combined fleet of more than 1,000 aircraft, ranging in size from the 403-seat Boeing 747-400 to the 34-seat Saab 340.
Delta began non-stop services on the Sydney - Los Angeles route on 1 July 2009 operating Boeing 777-200LR aircraft. These aircraft are relatively new to Delta's fleet.
Delta is the fourth largest operator of domestic services from Los Angeles after United Airlines, American Airlines and Southwest Airlines respectively.
A route map of connections available from Delta's Los Angeles hub is set out in Annexure 6.
2 Virgin Blue 1 Delta Joint Venture
The Applicants are seeking to establish a broad commercial relationship in order to provide customers with a m-ordinated Trans-Pacific air passenger network. '
2.1 Interline, Codeshare and Marketing Agreements
The Applicants have entered into a joint codeshare and marketing agreement and have previously completed an interline agreement2
Under the codeshare agreements, subject to relevant regulatory approval:
V Australia will codeshare on Delta's United States domestic network;
Delta will codeshare on Virgin Blue's Australian domestic network and Pacific Blue's network; and
both Delta and V Australia will codeshare on each other's Trans-Pacific services.
The terms of the marketing agreement provide for reciprocal airport lounge access for Delta and Virgin Blue and reciprocal recognition and participation in each other's frequent flyer programs - including the ability to eam and redeem frequent flyer points on each other's network.
2.2 Joint Venture
The Applicants are seeking Authorisation in respect of a deeper joint venture arrangement that will enable them to better develop an integrated and highly competitive Trans-Pacific air passenger network.
The Applicants have therefore entered into a Cooperation Agreement, a Coordination Agreement and a Joint Venture Agreement, together establishing a joint venture between the Applicants (Virgin Blue I Delta Joint Venture).
Subject to regulatory approval, the Virgin Blue 1 Delta Joint Venture contemplates coordination and agreement between the Applicants in respect of Trans-Pacific routes in relation to:
schedules, capacity and routes flown;
' As noted above, Polynesian Blue (the joint venture between the Samoan Government and the Virgin Blue Group) wlll not be DarUdDaUtW in the Vlmin Blue I Delta ldnt venture. ' V &lralG, 'V Au&lb and Delta Airlines sign interline agreement' avallabk at hll~://www.vaustralia.wm.aulabout-uslmedia- reieases/viewedia-release* 008186.hlrnl [accessed 2 July 20091.
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passenger sales and marketing activities;
pricing and revenue management;
enhancement of frequent flyer and lounge program offerings; and
purchasing and procurement.
It also contemplates the pooling of revenue under arrangements founded on the principle of 'metal neutrality". This means the Applicants will adopt revenue allocation arrangements that make it irrelevant, from the perspective of either Applicant, which Applicant's aircraft a passenger travels on.
A detailed overview of the terms and governance arrangements of the Virgin Blue 1 Delta Joint Venture is set out in Confidential Annexure C. Copies of the Cooperation Agreement, the Coordination Agreement and the Joint Venture Agreement are set out in Confidential Annexure I.
The Applicants submit that the ACCC should authorise the Virgin Blue 1 Delta Joint Venture for a period of not less than 5 years.
3 Overview of carrier cooperation arrangements
3.1 "Marketing Alliances" and "Integrated Alliances"
A development in international aviation in recent years, as previously acknowledged by the ACCC, has been the 'proliferation of airline alliancesw 3. Of the rationale for these alliances and broader cooperation arrangements, the ACCC noted that they represented:
... an industry response to strong competition, low yields and low ptvfftability [that] enabled airlines to ex nd networks and services whilst controling costs and increasing productivity. P
The ACCC has classified alliances as generally being either a 'marketing alliancew or an 'integrated alliancew.
The ACCC has stated that 'marketing alliances":
. . .omr the consumer the benefits of broader networks, more seamless travel and expanded loyatfy programs. However, alliance airlines generally continue to offer their fares, schedules and services independently and airlines within the same marketing alliance may compete with each other if on the same route.=
In respect of Trans-Pacific routes, the key marketing alliances are oneworld (members of which include Qantas and American ~irlines)' and Star Alliance (members of which include United Airlines, Air Canada and Air New zealand)'. Delta is a member of the SkyTeam alliancea The Virgin Blue Group is not currently a member of a marketing alliance.
' ACCC, Qentas Airnays Limited end Brlblsh Ainveys PYc Applk.eMMs lbreuthorkretion (A30226 end A30227) Final Determination, 8 Febnraty 2005 at [4.42]. ' ibid. ' Id at [4.45].
For informatJon regding maworld see htt~://www.oneworld.co~ ' For information regarding Star Alliance $80 ~tt~://www.s1araiiiance.com/enltraveiie~.htmi
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The ACCC has stated that 'integrated alliances":
. . .fupicaIly involve a high degree of integration of the airlines concerned, including coordination of fares, schedules, s e ~ c e levels and yield and capaciiy management.'
The proposed Virgin Blue / Delta Joint Venture is properly characterised as an 'integrated alliancen.
Codesharing is the arrangement that allows carriers to use their brand to sell tickets on flights that are operated by a different carrier. The ACCC has noted that codesharing can occur "within both integrated alliances and marketing alliances, as well as outside such
The International Air Transport Association (IATA) assigns each camer a code used to identify it in international schedules. Each flight is designated by the relevant carrier's code followed by a flight number. For example, the codes for V Australia and Delta are VA and DL respectively.
Codesharing allows a single flight to carry the codes and flight numbers of multiple carriers. Although the individual flight is maintained, staffed and scheduled entirely by the carrier that owns and operates the aircraft, the flight is listed on the schedules of multiple carriers under their own codes.
This allows multiple caniers to sell seats on the same flight through their own ticketing system, with each carrier using its own designator code and flight number to refer to the same flight. This can be arranged using blocked space (one carrier pre-purchasing a predetermined number of seats on the other carrier's metal) or freesale (a direct sale of seats on the other carrier's aircraft, with no obligation to pre-purchase any volume of seats) arrangements.
The ACCC has noted that the competitive impact of codesharing:
..will depend upon the nature of both the codeshare payment arrangements and the market in which it occurs. It is fair to say that competition benefits generally will only arise where the codeshare invokes a blocked seat arrangement whereby the purchasing airline effectively commits to purchase a fixed number of seats and therefore has an incentive to market them. When codeshares involve '?be sale" arrangements (where the marketing camer effectively only pays for the seats it sells), there is nonnally no increase in competitive pressure. "
Additionally, the ACCC stated:
Codesharing may add competition, albeit at the margin, on mutes where multiple airline operation is not economically feasible.. .I2
... Generally, where codeshating is used to extend mutes by offering seats on other carriers' flights, there is litfle competitive impact.. .13
. . Codesharing may give rise to competitive benefits if it allows an airline to develop a market to a stage where own aimraft operation is feasible. It may also allow an airline to
For informath regarding the SkyTearn alliance, see htta:lhnrww.skvtearn,wm/ ACCC, Qentas Airways UmHed and Wtish Aimeys Plc Applhthms Ibr autlmifsathm (A30226 and A30227) Final Detemination, 8 FeaUaly 2005 at [4.44].
lo Id at (4.461. " Id at [4.473-(4.50]. lZ Id at [4.48]. '' Id at [4.49].
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maintain a pmsence following withdrawal from an unsustainable market pending possible m-entry at a later stage.14
The Virgin Blue I Delta codeshare outlined in section 2.1 is a freesale codeshare.
3.3 Interline agreements
lnterline agreements are arrangements between caniers designed to facilitate passengers travelling on itineraries that involve multiple carriers. Interlining operates through the reservation or ticketing system of the carriers in the agreement. Where codesharing involves applying multiple codes to a given flight, interline agreements allow a customer to purchase separate flights from multiple carriers in one transaction and with one ticket. One canier (the plating carrier) receives all the revenue and is responsible for redistributing it proportionally among the other caniers in the itinerary.
As noted above, the Virgin Blue has already entered into an interline agreement with Delta. Virgin Blue also has interline agreements with Alaska Airlines and Virgin ~merica."
3.4 Integrated alllances vs. codesharing
The benefits flowing to customers of an integrated alliance, such as the proposed 'metal neutral" Virgin Blue I Delta Joint Venture, are substantially greater than under more standard forms of carrier cooperation (such as codesharing).
In codesharing and other standard arrangements, parties continue to have an incentive to maximise their own economic benefit. They are therefore unwilling to reduce the profitability of their own operations and will seek to individually profit maximise within the scope of the codeshare through:
operating on the routes and with the frequencies that each carrier perceives to provide the greatest potential for profit, such that codeshare partners will often end up competing head- to-head (in some cases, flying Wng-tip to wing-tip"). A party to a codeshare agreement is unlikely to unilaterally cede a particular timing or route to their codeshare partner in order to offer a different time of day or city of departure where it considers it is giving up a potentially more profitable service. This results in a continuation of wing-tip flying end therefore continuing loss of potential scheduling efficiencies; and
- channelling passengers onto their own aircraft regardless of whether their codeshare partner may offer a better routing or more convenient timing, because their profit margin is higher.
In addition, they will also ordinarily seek a profit margin on the passengers they put on their respective codeshare partner's aircraft, which in turn will be seeking a profit on the seat they are selling to the booking carrier (termed 'double marginalisation"). The effect of this "double marginalisatiin" is to increase fares compared with the position under an integrated 'metal neutral" alliance.
As an illustration, consider a United States passenger seeking to fly from Los Angeles to Brisbane under a standard codeshare arrangement involving Delta and Virgin Blue (absent a revenue sharing arrangement). When booking this passenger, Delta would have an incentive to accommodate them on its own non-stop Sydney flight, with a subsequent intra-Australia connection operated by Virgin Blue canying the Delta code. This is because Delta maximises its
'' Virgin Blue and Vlrgin America signed the interbe agreement on 3 June 2009. The Interline agreement became fully operational on 8 June 2009. VWn America is a rekthrely new carrier In the United St-, having launched in August 2007. Vhgln America flies to San Frandsco, L a Angeles, New York, Washington D.C., Seattle, La8 Vegecl, San Dlego, Bcyston and Orange County.
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share of the profit from the transport of the passenger by canying them itself. 'Buying" a seat from Virgin Blue on the direct Los Angeles-Brisbane flight will generally be less profitable for Delta than providing the seat on its own service and the short connecting flight because Virgin Blue will be seeking a profit on the sale of the seats.
The better and more efficient routing would be to fly the passenger under the Delta code on V Australia's non-stop Los Angeles-Brisbane service. To give Delta the incentive to do this (by attractively pricing its codeshared Los Angeles-Brisbane service), it needs to achieve the same profit as it would by canying that passenger over Sydney on its own aircraft (or 'metal"). Revenue sharing and co-ordinated pricing achieve this so-called 'metal neutral" state of affairs.
Under a 'metal neutral" integrated alliance, where the airlines share the revenue, the airlines have an incentive to focus on maximising the benefits for the alliance parties as a whole. The revenue of each carrier will be the same regardless of which alliance carrier actually transports the passenger. As such, the carriers will seek to win the passenger's booking for the alliance by creating a joint network with the best spread of routes, frequencies and the most competitive fares. With the alignment of financial incentives, caniers that are part of the 'integrated alliance" will drive to grow and optimise the convenience and scope of their overall product offering such that they:
avoid 'double marginalisation" by jointly pricing a fare without separate profit mark ups;
efficiently codeshare without pricing or other restriction^;'^
agree on schedules that increase passenger convenience by adding flights or shifting flights to provide broader time of day coverage;
- route customers between city-pairs via the most efficient routing regardless of which carrier ultimately operates the flights; and
seek to jointly introduce new routes and services that they may not be able to launch unilaterally so as to expand the scope and breadth of their joint network to the benefit of consumers.
Importantly, in order to achieve these outcomes it is necessary for caniers to jointly coordinate scheduling, yield management, inventory allocation, pricing and network planning to ensure that schedules, prices and availability across the joint network are set efficiently.
The overall result in the integrated alliance (not achieved under a standard codeshare) is the optimisation of the joint network offering such that it is more attractive to potential customers and more competitive - leading to overall increased passenger loads across the network and subsequently lower average seat costs.
In generating the incentives and outcomes outlined above, 'integrated alliances" facilitate key economic and consumer benefits:
first, as already outlined above, it enables carriers to offer lower fares overall as a result of the absence of 'double marginalisation" incentives. In this respect, the elimination of double- marginalisation has been shown to lead to fare decreases of approximately 16%.17
second, it enables the carriers to offer a more comprehensive joint network with better spread of routes and frequencies that services the broader market rather than both aiming
" The United States Government Accountability Office noted the practical difficulties involved in network-wide codeshare arrangements stating Ulithout Immunity, airlines that are slgnMcant competilors cannot discuss pricing hues and must develop prorate agreements in 'arms-length' negotiations to divide revenues, a cumbersome process when thousands of dty-pain are involve&. (United States Government Accountability O h , GAO Repott, April lSW, OAOIRCED-9599 at page 29). " J.K. B~erJcner, 'International Airfares in the Age of Alliances: The Effects of CodeShatlng and Antitrust Immunity' in Review of Ecanatnics mi Stalistics (2003) 85 at pages 1061 18.
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for the same 'sweet-spot" resulting in wingtip-to-wingtip flying. The more comprehensive network also facilitates recovery when operations are disrupted by operational issues (such as weather or technical issues); and
third, considerable increases in passenger loads and incremental revenue per available seat kilometre are delivered under an 'integrated alliance" as opposed to standard codeshare arrangements. These increased loads are facilitated by the existence of aligned commercial incentives and the consequent lower fares, optimally planned network (in terms of routes and frequencies) and the increased customer convenience. In general, the Applicants consider the improvements in terms of incremental passenger loads and incremental revenue per available seat kilometre are substantial and are the greatest under an 'integrated alliance" (such the Virgin Blue 1 Delta Joint Venture).
The net effect of the 'integrated alliance" as opposed to standard codeshare arrangements is that with higher passenger loads and revenues, as well an ability to share risk, carriers are better positioned to maintain services (in the face of volatile economic times) as well as to develop new routes and enhance their joint network schedules and frequencies. Moreover, the increased loads lower the cost per occupied seat, and competitive forces will place downward pressure on prices so the benefits are shared between the carriers and consumers.
- - -- -
4 Industry Overview - the supply of Trans-Pacific air services
The Applicants participate in the airline industry, providing international and domestic air services for the public transport of passengers and freight by aircraft.
Relevantly, the Applicants are involved in the provision of air services between Australia and the United States (following the launch of sales for flights by Delta on 1 July 2009). Both Applicants also operate extensive domestic networks in their home countries and service a range of other international routes.
Whilst both carriers carry freightlcargo in addition to passengers, neither carrier is currently a significant carrier of freiclhtlcargo on the Trans-Pacific route.
As is discussed further in the following section, both V Australia and Delta have only commenced services on the Trans-Pacific route since the conclusion of the Open Skies Air Services Agreement between Australia and the United States (Open Skies ~greement)."
4.2 Regulatory Framework
International aviation is subject to several layers of regulation. The basic regulatory system was established by the 1944 Convention on International Civil Aviation (the Chicago Convention) and the 1945 International Air Sewices Transit Agreement (IASTA). The basis of this framework is that individual countries have absolute sovereignty over their airspace. IASTA, however, provides for basic reciprocal rights between all of its 118 signatories. These basic rights are limited to:
flying over the sovereign territory of another signatory; and
landing in the sovereign territory of another signatory, provided it is for non-traffic purposes (i.e. does not involve picking up or dropping off passengers or freightlcargo).
However, this basic regulatory system clearly does not provide a sufficient level of access to operate an international airline.
'' Air Transport Agmement between the Government of the Unlted States of Americe and the Government of Australia. 1944.
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International aviation is primarily regulated through intergovernmental bilateral air services agreements. These agreements determine the terms and conditions under which respective national carriers can access routes which terminate or begin in the countries concerned. There are currently more than 3,000 aviation treaties worldwide, which represent more than 900,000 city-pair combinations. This network of treaties constitutes the practical regulatory framework for the international air services network.
International air services treaties are complex trade agreements and involve a number of national interest considerations. As a consequence, access to markets is conditional. In general, bilateral agreements are premised on reciprocal rights. They generally grant the same rights to national carriers from both participating countries in respect of international travel between (or occasionally in) the two countries.
An open skies arrangement is a form of air services arrangement between countries, usually in a bilateral format. Although there is no formal definition of an open skies arrangement, it generally involves the removal of air traffic and market access restrictions.
4.3 Australia - United States Open Skies Agreement
On 14 February 2008, Australia and the United States concluded the Open Skies Agreement. This permits carriers of both Australia and the United States to operate unrestricted capacity on routes between any point or points in either country." Atthough the points to be served are theoretically unlimited, as a practical matter the initial point of entry in each country must be an international gateway (implying that not all points are open for access). Any Australian or United States carrier can now, should they desire, operate services between Australia and the United States, provided they are a propriately licensed and are effectively controlled and substantially owned by their nationals. #
Prior to entry into the Open Skies Agreement, new airline entrants between Australia and the United States were only guaranteed a start-up of four services a week. This made it very difficult for new airlines to commence operations on a commercial basis and compete effectively with incumbent airlines, such as Qantas, which were operating many more services than this. Moreover, carriers from each side were restricted in the markets which they could serve between and beyond the territory of the other country with local traffic rights. The Open Skies Agreement removed all these routing and capacity re~trictions.~'
Under the Open Skies Agreement, the carriage of ~ a b o t a g e ~ ~ traffic is not permitted.23 Consequently, the carriage of traffic over domestic sectors is reserved for national carriers. While the treaty permits the beyond-carriage of genuine international traffic between international gateways (for example Qantas' own traffic between Los Angeles and New York) there are few points which can support extra sector operation^.^^ Consequently, commercially viable access to beyond gateway markets effectively remains dependent on robust and expansive commercial arrangements with domestic carriers (for example, the strong relationships between Qantas and American Airlines or United Airlines and Air New Zealand).
Is Id at Article 3. " Id at Article 3, section 2(a). " Id at Article 3. 27. Cabotage is a Right between two points within a foreign country, canying residents whose travel begins and ends in that country. The relevant definition in the Chicago Convention is that "[]a& state shall have the right to refuse permission to the airaaft of other contracting states to take on Its temHory passengers, mail, and cargo destined for another point within L territory.' This prevents, for example, an American canier from operating a domestic service behveen Sydney and Melbourne. Air Transport Agreement between the Gomment of the United Slates of America and the Government ofAustmlla, 1944,
Aliide 2. Air Tmnsport Agreement behvgen the Government of the United States of America and the Government of AustmIia, 1944,
Annex I, secbion 1.
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Under the Open Skies Agreement any carrier of one party may enter into cooperative marketing arrangements such as blocked-space, codesharing, or leasing arrangements with:
a carrier or carriers of either party;
a carrier or carriers of a third country; and
a surface (land or maritime) transportation provider of any country;
provided that all participants in such arrangements hold the appropriate authority and meet the requirements normally applied to such arrangement^.^'
A key policy rationale behind the introduction of the Open Skies Agreement was the Australian Government's desire to introduce further and sustained competition on what it considers to be 'one of Australia's most important air routes". Of the rationale and effect of the Open Skies Agreement, when announcing its signing, the Minister for Aviation, Infrastructure, Transport, Regional Development and Local Government stated:
Over the last 10 years, the Australia-U.S. route has seen an avemge annual growth of 3.3 per cent, a figure with real hope of substantial improvement through this landmark open skies agreement. The Rudd Labor government is committed to opening furfher opportunities for Australian aviation, trade and tourism, resulting in the creation of jobs for Australians. Tourism is already responsible for around haFa million jobs in Australia, and this agreement should help to further strengthen our tourism industry. The agreement allows airlines to determine how many flights they opemte and the destinations they wish to setve in the United States and beyond, based on consumer demand and commerciel decisions without interference from government. This enables a wider range of options for consumers and a more competitive market.. . Libemlising Australian skies and opening markets for Australian camers will drive growth through competition and remove unnecessary regulatory burden on businesses. Aviation is a major industry in Australia and growth can only mean more jobs h r Austraian workers in the aviation industry and more choice for Australian consumers. Australia has been a long- standing leader in the benems of libemlisation, and the international aviation sector has been no small element of the picturn. Australla has extensive experience of the benefits of libemli~ation.~
The Minister went on to state:
Australian travellers, trade and tourism will benefit as designated airlines will be able to opemte unlimited services between the two countries, via other countries and beyond to other countries. Over time this will lead to greater choice through increased competition, and provide significant employment opportunities for Australians in the aviation and tourism industries.. . The new agreement will provide great opportunities for increasing trade and commercial links between Australia and the United States. We will have more competition in the market for Australian travellers through the entry of new caniers, such as v ~ u s t m l i a . ~ ~
" Id at A M 8, aectbn 7. as Commonweallh House of RepmmtaUve~, M I n M SWementrr, Monday 18 February 2008 at page 534. w.
as The Hon Anthony Albaneae MP (Minister br Infrastwcture, Tran$port Regkmal Dw&pmmt and Local Government), 'Historic AusbaliaUnited state^ 'Open Skkw' Avtath Agmmmt Reeched', 15 February 2008 avPUeMe at m D : l ~ . m i n i s t e r . i n f r a s t r u ~ r e r e a o v . a ~ 1 2 2008.htm [accessd 2 July 20091.
Gilbert + Tobin --l .doc page 1 14
The United States Secretary of Transportation similarly stated:
This agreement will strengthen the already close ties between the United States and Australia.. . Today's agreement begins a new era where American and Australian consumers, airlines and economies can enjoy the benefits of lower fares and more convenient service.29
The Australian and United States Governments have not been alone in identifying and emphasising the benefits the Open Skies Agreement potentially generates. For example, Tourism ~ustralia~' released a press release noting that the United States travel market provides around $2 billion in export income to Australia annually whilst stating that the Open Skies Agreement would:
. . . help Australia to grow tourism from the important U. S. travel market.. .
. . . provide a further boost in air services from one of Australia's most important tourist markets; and
. . . allow airlines to more readily increase airline semMces on the Trans-Pacific route. Once new services begin, increased seat capacity promises easier access to Australia particularly during peak periods?'
The Tourism and Transport Forum stated:
[t]he new arrangements will result in more choice and improved access for U.S. visitors, enabling the industry to more etbctively market Australia's tourism experiences in the USA."
In addition, the Victoria Tourism Industry Council (WlC) focused on the likelihood of new andlor increased direct routes to cities other than Sydney, stating:
... the agreement to expand air travel and competition on the Trans-Pacific mute augurs well for Melbourne and the Victorian tourism industry.. .
. . .Curmnt incumbent providers have tended to priotitise Sydney as a hub and it is hoped the increased opportunities for other airlines will cater for the strong demand for Melbourne as a destination.. .33
For the reasons set out in more detail below, the Applicants consider that the Virgin Blue 1 Delta Joint Venture is consistent with the intent behind the Open Skies Agreement as it will deliver passengers a wider range of options, whilst maintaining the competitive market established since the commencement of operations by V Australia and Delta.
4.4 Trans-Pacific routes
Travel between Australia and the United States is possible on both direct and indirect flights, although under the terms of the Open Skies Agreement only Australian and American owned caniers are able to provide unlimited direct services (with the exception of Air New Zealand, which
United States Department of Transportation, 'U.S. Transportation Secmtary Peters Announces New OpenSkiea Avlation Agreement with Australia', 14 February 2008 available at ~lt~:llwww.dot.aovlaffairsldo12208.htm [accessed 2 July 20091.
SO Established in 2004, Tourism Australia is a statutory authority of the Australian Government, which promotes Australia as a tourism deatiWn internationally and dotneetically and delivers research and fomcasts for the sedor. " Tourism Australia, 'Tourism Awtrelia Welcomes US Open Skies Agiwment', 15 Fekuary 2008 available at h~~:/lwww.twrism.australia.com~NewsCentre.as~?lana=EN&sub=0315&al=281 Q [accessed 2 July 20091. " Commonwearth House of RepresentaUves, MiniWal Statements, Monday 18 February 2008 at page 534. " Victoria Tourism Industry Council, Open W s to benefit Melbourne end Violwian Toun'sm, 15 February 2008 avaiiabta at
.vecci.om.au/vecdnews+reieases/boen+skies+to+benefit+melume+and+victorian+lourisml .asp [acceswd 2 July
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can provide unlimited direct services by combining rights established under the US-NZ Open and the Australia-NZ Open Skies arrangement^.^' There are currently four direct city-pain offered between Australian cities and mainland cities on the west coast of the United States:
SydneyC3Los Angeles;
SydneyC3San Francisco;
MelboumeC+Los Angeles; and
BrisbaneC3Los Angeles.
The SydneyC3Los Angeles route offers the greatest number of frequencies.
In addition to these direct routes, there are also a number of indirect one-stop routes (from both East and West Coast Australian cities) largely provided by foreign owned (i.e. non-Australian or non-United States) carriers. The major one-stop services are via New Zealand and Hawaii as these are substantially more convenient than most routings over Asian intermediate gateways. Indirect services include:
AustraliaCAuckland (NZ)+Los Angeles and San Francisco;
AustraliaCVancouver (Canada)+Los Angeles, San Francisco, Las Vegas and New York;
AustraliaCBeijing (China)+Los Angeles and San Francisco;
AustraliaCHong Kong (China)+Los Angeles and San Francisco;
AustraliaCTaipei (Taiwan)+San Francisco and Los Angeles;
AustraliaCSingapore+Los Angeles and New York;
AustraliaCNadi (Fiji)+Los Angeles;
AustraliaCPapeete (Tahiti)+Los Ange le~ ;~~ and
AustraliaCHonolulu (United States)+Los Angeles, Oakland, Sacramento, San Diego, San Francisco, San Jose, Las Vegas, Phoenix, Portland and Seattle.
4.5 Historic trends in relation to the supply of passenger services on Trans-PacIfic routes
The ACCC has previously contemplated the considerable commercial risk and costs (both capital and operating) involved in operating air passenger services, particularly long haul services. The Applicants consider that introducing services, continuing operation and expanding operations on Trans-Pacific routes, particularly in respect of direct services, involves additional risk for a carrier (particularly for a new cartier). This is particularly so in the current1 volatile economic climate - where carriers face both a global recession and rising fuel prices!& such, the Applicants face a
Multilateral Agreement on the Uberallzation of international Air Transportatbn, available at htt~:l/www.maliat.aovt.~aareemmVenaIishtext.Ddf [accessed 2 July 091. DFAT, Agreement between the Gornemment ofAurbr,Iie and the Government of New Zealand ReleUng b Air Services [2003]
ATS 18. Australia has entered into bilateral air mvkes agreements with a number of countries that give same limited rights b carry passengers behwm Australia and the United States. A summary table of those dghb is set out in krrwxuro D. Theee servhe, prwMed by Air Tahiti Nui, are seasonal. '' The cumnt finand diffiarltleQ faced by airlines globally has been widely reported in the media. See for example Aviation Week, 'IATA predicts airline losses of $9B', 8 June 2009 available at h : .avia. w ri I . ? nn I= id=n I . ml [acceswd 2 July &% a i . o e ~ f l ~ ~ n $ ~ I d ~ o " & C " , " M ? n ~ ~ Lha9 d i I ~ u ~ % l a ~ ~ G b 0 8 " J " ~ 0 ~ g o s X available at
Gilbert + Tobin 2ewm5-l.doc
particularly difficult set of challenges in developing and sustaining a durable network of competitive services.
The key difficulty of launching and providing Trans-Pacific services is the geography involved. Trans-Pacific services generally involve non-stop flight segments of over 12,000km and in excess of 14 hours travelling time. There is also an absence of intermediate stopover points with the limited exception of Hawaii. This geography has a number of key flow on effects.
First, the geography necessitates the use of specialised long-range aircraft to service the routes, such as the Boeing 747-400, the Boeing 777-200LR or 777-300ER, the Airbus A380, the Airbus 340-500 or 340-600. These types of aircraft are not part of many carriers' fleets due to their specialised nature and the fact that their use is optimised on long-haul routes such as those across the Pacific. These aircraft are not easily redeployed on other routes. This is particularly true for new carriers such as V Australia that do not have established long-haul operations in other markets.
Second, the large gauge of aircraftm capable of operating the route non-stop means that additions of capacity are relatively large compared to the annual rate of growth of the route. That is, it is not possible to easily increase or decrease seat capacity in increments matched to small changes in demand. This means the route is subject to capacity digestion issues from time to time, especially when capacity is added by more than one player simultaneously.
Third, due to the distances involved, there are relatively few city-pairs available to carriers (for example, it is not currently possible to fly non-stop from New York or Toronto to Sydney or Melbourne with a viable payload). This means that all routes connect on the east coast of Australia and the west coast of the United States, leading to a hubbing of operations in Los Angeles, San Francisco and Sydney. This was recently acknowledged by Tourism Australia which noted:
Los Angeles-Sydney is the busiest route with over a third of all flights from the U.S. to Australia operating on this mute. The current frequencies and capacity to Australia's key gateways are focused on the east coast of Australia and West Coast due to current aircraff ranges.39
Finally, the absence of intermediate points (in contrast to the 'Kangaroo" route) mean that carriers operating on Trans-Pacific routes operating without the benefit of an alliance partner are particularly susceptible to any changes in demand and directional passenger flows between Australia and the United States (for example as a result of currency depreciation in either the A$ or $US). The absence of an ability to market services between intermediate points (not affected by factors such as currency depreciation) means it is not possible to readily offset any changes in passenger flow between Australia and the United States or respond to changes in demand.
The difficulty of competing effectively on Trans-Pacific routes can be seen from the fact (shown in Figure 1) that three major United States carriers have withdrawn from the route since 1991, whilst Air New Zealand also commenced and ceased direct services between Australia and the United States over this period. This has created the situation detailed in section 5, where Qantas and United Airlines (both part of major carrier alliances) have been the only carriers servicing this market with direct flights for many years.
htta:llnews.amh.com.aulbreakina-new-~0dd/~IobaI-aidin8&to-10~e9biI1'm-~sdolIar&in-2009-20090608cOd6.htm [accessed 2 July 20091. For example, V Australia's Boeing 777300ER in a threedass configuration has 361 seats, Qantas' Airbus A380 in a fwrclass
conliguration has 450 seats, United Aidin68 747-400 in a threedeso conffguratlan has 374 seats and Delta's 777-200 in a two- dass conflguratlon has 278 seats. Tourism Australia, USA Avlefkn~ Pmtlk,: Understanding the USA to Au86nlk) Aviation Envlmnment, June 2008 at page 1.
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A summary table of carriers operating to Australia since 1991 is set out in Annexure E.
Figure 1 - Summary of carrier withdrawal from Australia - United States routes
Amdcan Airlines ceased Australia - United States operations in 3 1992. American Airlines now codeshares on Australia - United - States mutes with Qantas. --------------------------.-------------------------------------------------------------------------
Continental Continental Airlines ceased Australla - United States operations in Ahlines m. OctDber 1993.
., ... ,, , Northwest Airlines ceased Australia - United States oparations in
---------------------------.------------------------------------------------------------------------- Air New Zealand ceased direct Australia - United States operations in 2003. Air New Zealand continues to codeshare on United Airlines'
MNEWML*ND~ Australia - United States services and operates indirect services via Auckland. . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
This pattern of carrier withdrawal should be contrasted with the large number of carriers and setvices offered between Australia and Europe (which benefits significantly from the existence of multiple intermediate points not existent on the Australia - United States routes). A number of carriers have entered these markets in recent years including Virgin Atlantic, Gulf Air, Emirates, Qatar Airways, Ethihad and AirAsia X. There have also been increases in the number of Australian city-pair connections and frequencies offered by mid-point carriers such as Singapore Airlines, Malaysia Airlines, Thai Airways and Cathay Pacific.
4.6 The need for effective beyond-networks for carriers operating on Trans-Pacific routes
A key issue for caniers on Trans-Pacific routes is the need for access to effective beyond domestic and Trans-Tasman networks. Such networks are required in order to attract customers and feed passenger traffic onto Trans-Pacific setvices in order to maximise passenger loads. The need for this access is a result of two factors.
First, as noted above, aircraft range limitations mean that passengers are generally required to travel through gateway points being either Los Angeles, San Francisco and Vancouver (when
.-r travelling to North America) or Sydney, Brisbane, Melbourne and Auckland (when travelling to Australasia). Where a significant number of passengers are travelling to destinations other than those gateway cities it is important for carriers to be able to offer these additional city-pair connections. It is particularly important for Australian carriers to have access to a strong United : States domestic network that enables travel connections beyond existing gateway ports because Los Angeles and San Francisco's catchments are only approximately 8% of the population of the United States contiguous states (with the whole of California representing only slightly more than 10% of the United States population). In this respect, the Applicants estimate that 60% of
., Sydney - Los Angeles traffic travels beyond Los Angeles. As such, a carrier flying to the United States with an Australian network behind it but no United States domestic network can only service a small proportion of the United States market without being able to reach beyond the United -, States gateway port. In contrast, a carrier flying on Trans-Pacific routes with a comprehensive
., I United States domestic network but no Australian domestic network is better able to service a , significant proportion of the United States - Australia market because of the relative concentration
of the population on the east coast of Australia. For example, the Australian gateway city airports of Sydney, Melbourne and Brisbane are within a few hours driving distance of approximately 60% of the entire national population (with Sydney alone accounting for 26% of the national population).
A second feature of Trans-Pacific air passenger travel is what is called 'Dual Destination" traffic. Because of the length of the trip and the crossing of multiple time zones, a significant proportion of North Americans visit both Australia and New Zealand in the one trip, usually passing into one country outbound from North America and home via the other country. For example, Auckland International Airport, drawing on information from Statistics NZ, estimates that 32% of Americans arriving in Auckland do so from Australia, 57% direct from the United States and the remaining
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Gilbert + Tobin 7~e1m-l.da m e 1 18
11 % via the Pacific Islands and other points.40 In addition, figures from the Australian Department of Immigration and Citizenship shows that 10% of Americans arriving in Australia do so via New Zealand. Conversely, many Australians and New Zealanders visit both the United States and Canada in the one trip.
As discussed in section 5, the incumbent carriers on the Trans-Pacific routes have well established domestic and Trans-Tasman networks - Qantas, through its oneworld, codeshare and interline arrangements with American Airlines (in addition to its own extensive Australian~Trans-Tasman network) and United Airlines through its Star Alliance, codeshare and interline arrangements with Air New Zealand and Air Canada (in addition to its own extensive United States domestic network). Air New Zealand and United Airlines have been granted broad antitmst immunity by the United States Department of Transportation (DOT) enabling them to coordinate all international services, including between the United States and New Zealand and the South Pacific regi~n.~'
From a commercial perspective, the ability to penetrate domestic markets in Australia and the United States is particularly important where it allows carriers on the Transpacific routes to more effectively respond to changes in passenger flows driven by factors such as currency depreciation. As can be seen from Figure 2, passenger flows on Transpacific routes are substantially influenced by fluctuations in the A$/US$ exchange rate - i.e. the weaker the Australian dollar, the weaker departures are from Australia and vice versa.
Figure 2 -The Australia I United States InboundlOutbound Ratio and the A S R I S ~
I - lnboundlOutbound RRlo (Trend Serln, LHS) - A$IUS$ (reverse scale, RHS) I 160 0.40
150 0.50
140
130 0.60
120 0.70
110
100 0.80
90 0.90
80
70 1.00
$9 , ,ac*~' , ,,p' ,*c*+' ,&" ,*NQ' ,&"' ,&
By having a strong United States and Australian domestic network (beyond the Transpacific gateway points) and being able to service traffic originating from either end equally well, a carrier is better able to manage load factors and yields to cope with the inevitable changes in demand on either side of the Pacific caused by currency depreciation or other external factors. Because a carrier can operate a domestic network at only one end of its Trans-Pacific routes it is, of course, much more limited in its ability to respond to swings in the balance of demand towards the market where it has poor penetration.
40 Source: Statistics New Zealand. " DOT Order 2001-3-4 (UnitedIAir New Zealand). This Order is a grant of broed-based world-wlde immunity from Unlted States antbust law for United airline^^ and Air New Zealand. This immunity allows a very high level of operational cooperation for all United Airlines and Air New Zealand alliance acthrih indudlng rerenue sharing, route planning, flight scheduling, purchasing, marketing sales and distribution. Source: Reserve Bank of Australla, Australian Bureau of Statistics
.................... ~ .......................
Gilbert + Tobin 29nma-1.doc f ~ e 1 19
The need for an effective network partner in order to compete on Trans-Pacific routes has been a key issue noted and discussed by analysts in recent months. See, for example, the following comments regarding V Australia and Delta's operations:
V Australia's product is sttvng, but both V Australia and Delta face distribution issues, V Australia in the U.S. and Delta in Australia. V Australia has more choice for pertners (Detta can real& only choose from W N or VBA, both of which compete with Delta) and management indicated it is pursuing a solution.43
Management also indicates that it is in the process of addressing the distribution disadvantage that it is at relative to Qantas for the U.S. market. Whilst this is not expected to include the Star Alliance, it is likely to include Virgin U.S. which we believe still leaves Qantas with a significant distribution advantage in the U.S. market4
Distribution network lacking: Qantas will pit its oneworld alliance connections from LAX with Ametican Airlines against United's Star Alliance and Delta's SkyTeam. V Australia will compete with no alliance but a series of agreements with airlines ... 46
While we believe the opportunity exists for V Australia to secure a significant presence in the Trans-Pacific market, the lack (as yet) of any North American dimbution is likely to weigh on VBA's efforts in building position in this market in what are possibly the worst conditions possible.. .46
...we do however anticipate that Delta Airlines will ultimately need a strong distribution & feeder presence in the Australan market for their foray into the Trans-Pacific market to be successful. We do not expect Qantas Ainvays to provide this support - being the main competitor. As a result, Delta will have to rely on Virgin Blue domestic - having their own domestic operations seems impractical given their nominal presence in the Trans-Pacific market. Intuitively, such an outcome would bode well for Vitgn Blue and may even allow V Australia to enter into an earnings accretive arrangement with Delta (e.g. a codeshare); however, we consider these possibilities to be p m t u r e to consider in our financial forecast.. .47
4.7 The supply of frelghtlcargo sewices
Air cargo I freight is carried between Australia and the United States via:
a mix of dedicated air freighter services and in the cargo hold of passenger jets; and
on both direct and indirect flights with a large amount of freight being transported via intermediate points in Asia.
As is discussed in section 6.3, Qantas and United Airlines are significant carriers of air cargo 1 freight between Australia and the United States. Qantas carries air freight both in the cargo hold of its passenger fleet (including on both Jetstar and Qantas) as well as via dedicated Boeing 747-400 freighter services. In respect of its cargo services, Qantas Freight states:
We have the most extensive airline network into and out of Australia. Internationally, Qantas and Jetstar combined operates nearly 750 flights a week, offering services to 86 international destinations (including codeshare semMces) in 40 countries. Add to that the
" CommSec, 'EquMes Research Report, Virgin Blue Limited lH09 Result: Riding the skwdom', 23 February 2009 at page 7. Credit Sulsae, Equity Research, 'Virgin Blue Holdings lH09 result - beats expecbtrOns', 24 Febrwry 2009 at peee 4.
" Galdman Sachs JB Were, 'ResuM Commentary - Virgin Blue Wings Limited 1 H09 Result, Tough Operating Conditions to Continue', 23 February 2009 at page 3. " Id at page 1. '' Deutsche Bank, 'Emerging Companies - Virgin Blue', 23 February 2009 at page 5.
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added strength of the Qantas domestic network you can rely on fast and efficient delivery of your goods to any de~tination.~'
FedEx and UPS also transport a significant volume of air cargo / freight between Australia and the United States via their dedicated freighter service^.^'
5 Carriers currently providing Trans-Pacific air passenger services
Currently, the majority of Trans-Pacific air services (on either a one-stop or non-stop) are provided by incumbent carriers Qantas and United Airlines. As noted above, the Applicants have only recently entered onto the Trans-Pacific routes.
Between them, Qantas and United Airlines, account for a large majority of all air travel between Australia and the United States. As described in further detail in section 6.2, in 2008:
Qantas and United Airlines carried 100% of direct passenger traffic between Australia and the mainland United States;
Qantas and United Airlines carried 69.5% of all Trans-Pacific passengers when both direct and indirect travel routes are taken into account (this proportion is higher when United Airlines' extensive codeshare arrangements with Air New Zealand and Air Canada are taken into account); and
over 65% of Trans-Pacific bookings were for Qantas services (i.e. flights booked on Qantas or American Airlines) or for United Airlines services.
It is for these reasons that the Trans-Pacific routes have often been described, prior to the entry of the Applicants, as a "virtual duopo~y".~~
5.1 Qantas
(a) Ovetview of Qantas Trans-Pacific operations
A general overview of Qantas' operations, and its oneworld partner American Airlines is set out in Annexure F.
Qantas commenced Trans-Pacific services in 1954.~' In recent years, Qantas has developed an unparalleled market presence on Trans-Pacific routes providing a deep schedule and extensive network of city-pairs in Australia and the United States (with its oneworld alliance partner American Airlines which has the second most numerous United States domestic flights onwards from Los Angeles after United ~ i r l i nes ) .~ Qantas has recently announced an expansion of its codesharing arrangements with American Airlines such that it now boasts a North American network of 42 cities - 36 in the United States and 6 in Canada.
a Qantas Freight, 'About Us' available at htt~:l/www.aantas.corn.auKreiaht~dvnlaboutUs [accessed 2 July 20091. a As at February 2009. For information regarding UPS see htto:l/www.u~s.com and for information regarding FedEx see htt~:/lfedex.wm/~ " Shu-Ching Jean Chen, Forbes.com 'Door Opened b Competition on U.SAussie Air Route, 15 February 2009 available at httD://www.forbes.~)~2008102115/ausbalia-uir-maeu-cx ic 0215marketsl orint.htrnl [acoesoed 2 July 20091. " Qantas, 'Qantas at a Glance' available at htt~:l/www.aantas.com.au/infodetaiVabouffFactFiI~.Ddf [accessed 2 July 20091. " Qantas' strong relatkmhip with American Airlines is discussed bekw in sedkn 5.1 (c). An overview of American Airlines' operations is set out in Annexure E.
Gilbert + Tobin --1 .doc pace 1 21
As at December 2009, Qantas will operate 40 return services per week between Australia and mainland United States consisting of:
35 to Los Angeles - 14 non-stop from Sydney, 14 from Melbourne, (7 non-stop and 7 via Auckland) and daily services from Brisbane; and
5 between Sydney and San Francisco.
Qantas also offers one beyond daily service between New York and Los Angeles.
Qantas and Jetstar (part of the Qantas Group) also operate services to Honolulu, combining to a daily service.
Qantas has recently announced that it will increase its Airbus A380 offering on the Sydney - Los Angeles and Melbourne - Los Angeles routes.53 The changes will increase Qantas' Airbus A380 flights between Sydney and Los Angeles from three to four a week on 6 August 2009. This will increase again in November. From November, Qantas will offer a daily Airbus A380 service . between Sydney and Los Angeles whilst flights between Melbourne and Los Angeles on the Airbus A380 will increase from two to three per week. It has been reported that these new capacity changes and the expanded codeshare arran ent between Qantas and American Airlines are a specific 'pre-emptive move" to Delta's entry. F
Qantas services mainland United States routes using Boeing 747-400 and Airbus A380 aircraft.
(b) Qantas' Trans-PacMc capacity shares
Qantas is, by a significant margin, the largest provider of capacity on the Trans-Pacific routes." More specifically, as set out in section 6.2:
53.9% of all passengers (on both indirect and direct flights) between Australia and the United States travelled on Qantas in 2008;
in December 2009 (following the entry of V Australia and Delta) it is projected that:
- Qantas will represent 50% of available seat capacity on flights between Australia and mainland United States; and
- in terms of weekly seat capacity on the existing key Trans-Pacific city-pairs, Qantas will represent 43% of seat capacity on direct flights between Sydney and Los Angeles, 37% of seat capacity on direct flights between Sydney and San Francisco, 70% of seat capacity on direct flights between Melbourne and Los Angeles and 67% of seat capacity on direct flights between Brisbane and Los Angeles. Relevantly, prior to commencement of operations by V Australia on the Brisbane to Los Angeles route, Qantas provided 100% of available seat capacity on direct flights on that route.
Due to the scale of its operations, Qantas is now reported to be the largest long-haul foreign-based canier at LAX airport.s6
" Qantas, 'Qantas to In- A 380 Services, to London and La% Angeles', 15 June 2009 available at h~JEwww.aantas.com.au/mimsldvn/aul~~bIi~~ffairsldetaiIs?ArtideID=2OO9li~n09I3927 [acceseed 2 July 20091. " Matt WSullivan, ' Exh Qantas flights to counter Delta; 16 June 2009 available at httD://business.theaae.mm.a~usiness/extra- ~ntas- f l iahts- t~nterde l ta -2009061~.htmI [accessed 2 July 20091. " For the masom set out bebw (see note under Fgure 6 and Figure 7) the Qantas' capacity shares dlsamed here are likely to be wrderstated.
mu Peter Pae, La% Angel- Times, ' L A X - b m alrfam may fall'; 16 February 2008 available at Mto.l/articles.latimes.coml2008/feWl6lbusinesslR-skiesl~ [accessed 2 July 20091.
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(c) Qantas and American Airlines
Qantas and American Airlines began their relationship in 1989 through the world's first codeshare agreement." American Airlines ceased its own aircraft operations to Australia in 1992. Since that time, American Airlines has had a codeshare arrangement with Qantas - codesharing on both Qantas' Transpacific and domestic Australian and New Zealand operations. Qantas additionally codeshares on American Airlines' American domestic operations (as discussed above, this codeshare arrangement has recently been expanded). This is in addition to the other areas of cooperation between the two carriers facilitated by participation in the oneworld alliance.
The oneworld alliance, codeshare and interlining relationships between Qantas and American Airlines had given Qantas deep penetration on the Trans-Pacific routes and has been a key factor in Qantas' success. First, it gives Qantas the ability to sell a broad range of city-pair connections that it could not offer uni~aterally.~~ Second, the decision of American Airlines to exit the market has meant that American Airlines now directs significant amounts of United States feeder traffic onto Qantas aircraft and has enabled Qantas to leverage off the strong American Airlines AAdvantage frequent flyer program (where AAdvantage members can earn and redeem points on Qantas flights). This has greatly assisted Qantas in achieving and maintaining the significant scale it currently enjoys on Transpacific routes. Effectively, Qantas and American Airlines have achieved a key benefit of a 'metal neutral" integrated alliance by having Qantas operate all Trans-Pacific sectors and American operate all domestic United States sectors: because Qantas is the sole operator of the critical Transpacific sectors it controls all scheduling, and with regard to pricing American is neutral regarding which Trans-Pacific sectors it sells. Delta and V Australia could only achieve a similar competitive outcome through the Virgin Blue I Delta Joint Venture and with appropriate regulatory approval.
Although Qantas does not publicly report on the profitability or revenue it generates on particular routes, it is a widely held view by equities analysts, industry commentators and the media that Qantas' Trans-Pacific operations have been, in recent years, very profitable for the carrier. For example, it has been estimated that, in recent years, at least 20% of Qantas' profit was generated from operations on Trans-Pacific routes, despite the relatively small proportion of Qantas' overall operations that these services represent.=
(d) Qantas' unparalleled position on Trans-Pacific routes
As a result of Qantas' established presence, extensive long-haul infrastructure, deep network of routes and frequencies on Transpacific routes and deep penetration into both Australian and United States domestic markets, Qantas has an almost unique ability to flexibly respond to changes in passenger flows and demand, commercial risks (such as the current financial crisis), and prevailing trading conditions (altered by, for example, the entry of a new competitor). More specifically Qantas is best placed to flexibly swap or introduce aircraft, reduce or increase frequencies on routes, and/or suspend direct or indirect routes with relatively little risk that passengers will shift to competing carriers. Similarly, with its large number of direct services in the event that Qantas has to, or chooses to, cancel services (for either commercial or operational reasons), it can reaccommodate passengers on earliernater services from the same city or through re-routing passengers through other eastcoast Australian cities (through its extensive domestic network operations). They are able to do this with relatively minimal schedule change to
" Qantas, 'Qantas at a Glance' available at htto:l~.aantas.com.au/infodetaiWabouffFaFil. [accessed 2 July 20091. " As noted above, Qantaa advertises that it offers a Nocth American network of 42 cities (36 cities in the United State and six in Canada). See media release from Qantas, 'Qantas to Expand European and North American Networks', 15 June 2009 available at hHD~W.aantas.com.au/reclions/dM11aul~ubIicaffairs/detaiIs?ArtidelD=2009/iun09/3928 [accessed 2 July 20091. " Brent Mitchell, research manager at SHAW Stodcbroking, speaking on Radio National's PM programme on 15 February 2009, available at htt~:l/www.abc.net.au/~m/contenff2008/s2164244.htm [accessed 2 July 20091; The Age, 'Open skies deal frees U.S. routes', 16 February 2008 available at htt~:/W.theaae.com.aula1ticles/2008I02/15/1202760604739.htm1 [accessed 2 July 20091; Peter Pae, Lo8 Angeles Time, 'LAX=bAustralia airfares may fall'; 16 February 2008 available at http://artdes.labmes.com/2008/feb/l[6 2 July 20091 and UBS Investment Research, 'Qantas Aimays Limited: MM cyde EPS likely to now be 25c: 22 June 2009 at page 7.
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passengers. That is, passengers are generally still able to fly on the desired travel dates. The result of this is that Qantas, with its established position and current scale, is well placed to adjust and manage the difficulties that operating on the Trans-Pacific route involves (as discussed in section 4.5) - , ' . : j r .
In contrast, the Applicants, with comparatively limited routes and frequencies, are less able to flexibly respond to external factors and changes in passenger demand without significantly inconveniencing and ultimately losing passengers (particularly time-sensitive passengers) or ceding their competitive position. For example, due to the risks involved and the limited number of aircraft in its overall fleet, V Australia is less able to either significantly increase services to meet short term peaks in demand or similarly shift around services and aircraft to adjust to drops in passenger levels without undermining the convenience of their overall offering. At an operational level, if V Australia needed to reaccommodate passengers from a Sydney - Los Angeles flight, this might involve putting passengers onto Brisbane - Los Angeles flights. This is likely to significantly inconvenience passengers since they are likely to have to travel a day later than they were originally booked and will arrive in Los Angeles in the morning (where the Sydney - Los Angeles flight arrives in the evening).
The ability of Qantas to alter capacity in order to maximise passengers loads and respond to changes in demand can be seen from Figure 3. Of note is the fact that following the terrorist attacks of 11 September 2001, a time when total passenger levels dropped significantly (both globally and on Trans-Pacific services), Qantas was able to redeploy fleet (some of it to its domestic network following the collapse of Ansett), taking capacity from the Trans-Pacific routes in order to increase and maintain load factors. Whilst the Applicants recognise that Qantas would not as easily be able to redeploy capacity as it was in 2001, Qantas remains the only carrier flying Trans-Pacific routes that is able to significantly alter capacity on these routes (to maintain load factors) without sacrificing its competitive position in the market.
Figure 3 + History of Trans-Pacific route (Including Hawaii) 1991 to 200F
T d Poc
w
Qantas' strong position on Trans-Pacific routes, and the difficulties this creates for competing carriers, especially new entrants, was recently noted by Peter Harbison, Chairman of the Centre for Asia-Pacific Aviation. Specifically discussing new competition on the Trans-Pacific route, he commented:
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Gilbert + Tobin mm62-1 AOC page 124
It is almost impossible to penetrate the Australian market because Qantas virtually has it all. Anyone to come on the mute is battling with half the weapons Qantas has."
5.2 United Airlines
(a) Overview of United Airlines' Trans-Pacific operations
A general overview of United Airlines' operations and that of its Star Alliance partners (Air New Zealand and Air Canada) is set out in Annexure G.
United Airlines has been operating Trans-Pacific services for 24 years. As at December 2009, United Airlines will operate 14 return services between Australia and the United States consisting of:
daily non-stop flights between Sydney and San-Francisco; and
daily non-stop flights between Sydney and Los Angeles with a connecting service between Melbourne and Sydney.
United Airlines operates Boeing 747-400 aircraft on these routes.
United Airlines is the largest operator at Los Angeles and San Francisco. With 44% of United States domestic passengers at San Francisco, it is more than three times the size of the next biggest carrier American Airlines, which has with 13% of United States domestic passengers.@
(b) United Airlines' Trans-PacMc capacity shares
United Airlines is the second largest carrier by market share on the Trans-Pacific. It is also the largest hub canier at Los Angeles. More specifically as set out in section 6.2:
15.6% of all passengers (on both indirect and direct flights) between Australia and the United States travelled on United Airlines in 2008;
in December 2009 (following the entry of V Australia and Delta) it is projected that:
- United Airlines will represent 21% of seat capacity on direct flights between Australia and mainland United States; and
- in terms of weekly seat capacity on the existing key Trans-Pacific city-pairs, United Airlines will represent 63% of seat capacity on direct flights between Sydney and San Francisco and 21 % of seat capacity on direct flights between Sydney and Los Angeles.
(c) United Airlines' Trans-PacMc positioning
United Airlines has recently made significant product improvements in relation to its long haul first and business class products. It has retrofitted its aircraft such that all of United Airlines' Trans- Pacific services now provide business class passengers with 193 cm long lie-flat business class seats. It has also completely upgraded its first class service. Another result of this aircraft
at The Age, 'Open skies deal frees U.S. routes', 16 February 2008 available at htt~://www.theaae.com.aularlicles/2008102/15/1202760604739.htmi [accessed 2 July 20091. " anna.aero. 'SF0 welcomes new airlines to support growth', 3 August 2007 available at http:lhnrww.anna.aer0/2007IO8/03Isfo- welcomes-new-airlines-to.support*rW [accebised 8 July 20091.
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Gilbert + Tobin ze~wa~-l .doc m e I 25
refurbishment is that United Airlines has increased the overall seating capacity of its 747-400 aircraft (as there are now more economy class seats).
Given that more than 60% of Australia - United States traffic flows beyond or from behind the west coast gateway ports of Los Angeles and San Francisco, a key competitive strength of United Airlines' Trans-Pacific offering is the connections it provides customers from its Los Angeles and San Francisco hubs to its extensive United States domestic network. United has more domestic flights from each of Los Angeles and San Francisco Airports than any other carrier. In relation to this, United Airlines states:
Through its hubs in San Francisco and Los Angeles, United offers its Australian customers more destinations across the U.S. than any other airline.63
Discussing United Airlines' new product enhancements, United Airlines Vice President for the Pacific recently also reaffirmed this view stating:
We feel that offering that product line with an unsurpassed network [compared to] any of the competitors will remain quite a strong offering. Our hubs in Los Angeles and San Francisco offer more daily services to more destinations across the U.S. and North America.
At the same time, he also affirmed United Airlines' commitment to aggressively compete on the basis of product and price strategies in the face of new entry on the Trans-Pacific routes commenting:
[w]e know how to hold our own and we're certainly going to fight for our position in the Australian market.. . We feel very strongly about it, as I think our investment in the routes here over the years shows ...
... We have a very large database of frequent flyers here whom we continue to serve, and we're just delighted to bring them the best product we have at United Airlines, and put it here in this marketplace.. .
We are going to hold our share in this market, make no mistake about that.''
(d) United Airlines and the Star Alliance position on Trans-Pacific routes
As noted above, United Airlines, together with Air New Zealand and Air Canada, is a member of the ~ t a r ~ l l i a n c e . ~ Membership of the Star Alliance has enabled United Airlines to have a further significant presence on Trans-Pacific routes in addition to those services outlined above. As set out in Figure 4, United Airlines codeshares on Air New Zealand's flights between Auckland and Sydney, Brisbane and Melbourne and Air New Zealand's beyond flights to Los Angeles and San Francisco. As noted above, Air New Zealand and United Airlines have been granted broad antitrust immunity by the DOT enabling them to coordinate all international services including those between the United States and New Zealand and the South Pacific Region.
United Airlines,' LiiFlat to the Land Down Under - United bolsters its service to Australia, Offering customers new flat-bed business dass seats, world-class cuisine and on-demand entertainment', 12 February 2009 available at h t b : / / w w w . u n i t e d a i r l i n e s . w m . v n / c o r e l e n a l i s W A U l ~ . S . 0212.html [accessed 2 Julv 20091.
fheuktralian, 'Battle over Pacific hots up - United vows to fight as V Aus starts LA Rights', 27 February 2009 at page 32. 8s IMd. eu United Airlines is one of the founding members of Star Alliance, which consists of Air Canada, Air China, Air New Zealand, ANA. Asiana Airlines, Austrian, bmi, EgyptAir, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Shanghai Airlines, Singapore Airlines, South African Aimays, Spanair, Swiss. TAP Portugal, Thai, Turkish Airlines. United and U.S. Airways. Star Alliance provides connedions to 912 destinations in 159 countries worldwide.
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Gilbert + Tobin --I .do0 pasel28
Figure 4 + Star Alliance codesharing arrangements on TransPacific routes
+ Los \ --.- Angeles+ Francisco+
Marketed servre SYD 1 MEL , BNE P . K L ~ SYD ~ A K L A SYD SYD ~ A K L
Through these codeshare arrangements, United Airlines together with the two other Star Alliance members is able to offer, between them, 12 Trans-Pacific city-pairs between the North American gateway ports of Los Angeles, San Francisco and Vancouver and Sydney, Melbourne, Brisbane and Auckland (including one-stop services to Brisbane, Melbourne and Auckland). 10 of these 12 city-pairs cany the codes of all three carriers and the other two city-pairs cany the codes of two of the carriers. That is, each of these three carriers is able to offer its customers 11 or 12 pairs of gateway cities despite not operating their own aircraft on all of these routes.
5.3 Air New Zealand
4 2 AIR NEW ZEALAND F
Air New Zealand has, at times, operated direct services between Sydney and Los Angeles between November 1994 and April 2003. Air New Zealand now codeshares on United Airlines direct flights between Australia and the United States. It also has codeshare arrangements with United Airlines on its United States domestic operations. Air New Zealand also codeshares on Air Canada's direct flights between Sydney and Vancouver.
Notwithstanding the absence of direct services between Australia and the United States, Air New Zealand canies a significant proportion of passengers between Australia and the United States with passengers transiting in Auckland. In this regard, in December 2009, Air New Zealand will operate 18 return weekly services between New Zealand and mainland United States consisting of:
12 direct services between Auckland and Los Angeles and 1 indirect service via the Cook Islands; and
5 direct services between Auckland and San Francisco.
Air New Zealand also operates multiple beyond connections from its Auckland hub to Perth, Adelaide, Cairns and the Gold Coast as well as to Sydney, Melbourne and Brisbane.
In 2008, Air New Zealand canied 7.7% of all passengers between Australia and the United States.
As noted above, Air New Zealand can enter the direct Australia - United States market at any time by combining traffic rights available to it under the Australia - New Zealand and New Zealand - United States Open Skies agreements.
5.4 Other carriers
In addition to Qantas, United Airlines and Air New Zealand, some passenger traffic between Australia and the United States is carried by other carriers via onastop services. These carriers include Air Canada , Hawaiian Airlines, Cathay Pacific, Singapore Airlines, Air Pacific and Air
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Gilbert + Tobin 2 ~ 6 ~ 2 - 1 .da pgge I 27
Tahiti Nui. However, third-country services via gateways in Asia account for a de minimis share of traffic given the generally highly circuitous routings invoked.
An overview of each of these carrier's operations, particularly in respect of Trans-Pacific routes, is set out in Annexure H.
6 Framework for analysis of competitive effect and public benefits arising from the Virgin Blue 1 Delta Joint Venture
6.1 Market definition
On the basis of the ACCC's previous approaches to market def ini t i~n,~ the Applicants consider that the appropriate markets to adopt for the purposes of assessing this Authorisation Application are:
(a) the markets for the supply of passenger flights, both direct and indirect, between Australia and the United States (Australia - Unlted States Air Passenger Market); and
\PI the market for the supply of air freight services between Australia and the United States (Australia - United States Air Freight Market).
The Applicants consider there are arguments that the relevant market may, in fact, be broader being a market for the supply of Trans-Pacific services incorporating services between North America (incorporating the United States and Canada) and Australasia (incorporating Australia and New Zealand). However, to assist the ACCC with its analysis of the Application, the Applicants have adopted the narrower Australia - United States markets for the purpose of this submission.
In relation to passengers, the Applicants note that the ACCC has previously recognised separate markets for business and leisure passengers for the purpose of assessing arrangements such as that contemplated in this Authorisation app~ication.~
The Applicants do not consider that assessment of the Virgin Blue I Delta Joint Venture on the basis of either the broader 'all passenger" market or the segmented 'leisure" andlor 'business" passenger segments will have a material effect in terms of the ACCC's analysis of the CooperationlCoordination Agreement. In particular, the Applicants do not consider that the Virgin Blue I Delta Joint Venture would be considered to have the effect of substantially lessening competition in respect of either a general passenger or any more narrowly segmented passenger markets.
In relation to freight, the Applicants note that the ACCC has previously advised that it considers that different types of freight represent dierent freight segments rather than different types of markets, and the availability of indirect route options renders a regional market approach appro~riate.~
On this basis, the Applicants submit that the relevant market, at its narrowest, is the Trans-Pacific Air Freight Market. Such a market would include the carriage of freightlcargo via the full range of direct and one-stop services between Australia and the United States, including those services that fly through Asia.
~7 Being the ACCC's draft determination In respect of the pmposed Trans-Tasman Nehmic Agreement between Qantas and Air New Zealand (3 November 2006), the Australian Competstlon Tribunal's determination in respect of the QantasIAir New Zealand decision of the ACCC (16 May 2009, the ACCCs decision with respect to the r0-g- of the Jdnt Services Agreement between Qantas and BrWgh Aimys (8 February 2009) and the ACCC's deddon with respect to the propoeed Air New Zeeland/Air Canada Cooperation Agreement (27 February 2009). ACCC, Qantes and M t k h Almays Restated Jolnt Services Agreement Final Detminallon A30226 - A30227.8 February 2005
at p.811. Id at [9.17j.
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6.2 Market concentration Australia - United States Air Passenger Market
The Applicants note that there are a number of measures of market concentration in respect of passenger air travel. These measures include carrier passenger shares (derived from country of originldestination data) and booking data shares (based on MlDT data).
Figure 5 provides a summary of the historical 2008 passenger share and booking share data for Trans-Pacific flights. The 'passenger share" data in Figure 5 is based on data derived from immigration arrival cads where a passenger states their point of origin and destination. It captures all passenger travel between Australia and the United States (via direct and indirect routings). This data would include those passengers travelling to both mainland and non-mainland United States.
Figure 5 -Australia - United States passenger and booking shares 2008
I Year Passenger share (based
on orig inldestination data) I Source: DIAC
Booking Data Source: MlDT
Airline 1 Passengers 1 % I
15 406 0.8%
10 753 0.6%
AIR CANADA @ 8 355 0.4%
C T H M 12 772 0.7%
Other 111 957 5.8% 17%
Total 1 927 941 100% 100%
A
= =
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Gilbert + Tobin 2ew8zs-1 .doc pege 1 29
b- E U N I T E D
/3 M R N E W Z E A m D r
Jew -DOUDU- Q-- 57 863 3.0% 6%
SI~GAPORE AIRLI~ES 40 243 2.1%
1 039 41 5
301 601
148215
117349
53.9%
15.6%
7.7%
6.1%
44% (includes Jetstar) + 5% on American Airlines
19%
9%
See above
As V Australia and Delta are new entrants on Trans-Pacific routes, neither cartier IS lncluaea in tne historical market shares outlined above. As such, to assist the ACCC with its analysis, the Applicants have set out projected capacity shares of each canier for the period beginning December 2009 (both in aggregate for non-stop services to mainland United States (see Figure 6) and on a city-pair basis (see Figure 7)).m December 2009 was used for this purpose as by this time Delta would have completed its entry (there are normally some 'ramp upm service fluctuations in the first six months of operation). This time period also will ensure that Qantas' recently announced capacity changes to Trans-Pacific services (resulting from increased Airbus A380 services) are reflected in the capacity shares. - - -<
, + , - ;,
apacity share -Australia ++b mainland United States
66 24592 50% -
BJ"wm 28 10108 21%
@ U N I T E D 28 10472 21%
A D E L T A 14 3892 8%
Total 136 49,064 100.0%
T h b ~ l ( y ~ . u u n m O m ( r o p m l r o d * . o t ~ - L o r , A n g . k h W m y - & n F m c b . n d Y . l b o u m - L o r , ~ w r v i c w
mlng Alrbm UIO 8- and 307 ..rt B#ing 747 8hrmR (- b cumnlly k.d.d Inb Um Alrporl Coorrlldlon Authorfly (MA) dd.kw).
~ n t u ~ h o o ~ h n ~ d . i ) y ~ h k h m n Y . l b o u n w m d L c w ~ ~ A u & b n d ) * m k h b n o ( I r # l u d . d I n U m ~ ~ . O u h . h . . ~ ~ ~ 7 4 7 4 0 0 ~ ~ m d 4 1 2 . u t ~ ~ o n t k . u m u t . . n d o p m ( . . 4 1 2 . u t W n ( ( 7 4 7 ~ o n t h .
[ k b b u n - ~ ~ r r w b ( 8 n d p w l o u . l y o n U m ~ ~ ~ r o u t r ) . k w & . U m Q . n t . r t . p . o i t y . h . n b I l k e l y
b b . u ~ . T h . A p p l I a n t . h n n p r o v f d . d upl(y.hur(bmhbnd Unl(rd#.b.onlyonUmh.lh(hrnrwRkwdUm
AppRunt .opmdr~toH.mHorOurn .
'O The Applicants do not consider that dty-pairs are markets for competition Law purposes. " Source: Virgin Blue Group Network Planning using APGdata and ACA data. APGdata is a tool produced by Seebury Airline Planning Group which summerises Mine schedule data sourced through their website. ACA provides schedule data on slot fllings which includes airaaft configuration.
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Gilbert + Tobin 2mm25-I AOC page 150
Carrier Sydney Sydney Brisbane Melbourne C+ ++ ++ ++ Los San Francisco Los Angeles Los
Angeles Angeles
Figure 7 - Projected NonStop Flight Capacity Share (Citypair) - as at December 2009"
I Total I 100.0% I 100.0% I 100.0% I 100.0% I Thb upachy s h m 8 u u m u antn opuatn dlmt 8ydmy-Lon Ang- Sydnoy - 8.n Fnncboo and hlbounw - Lor; An@- ..nriuo
wing mu# A360 .Iran a d 307 rut W n g 747 (8a b cumntly loaded Into tho ACA d.tlb.w). Quttn a1.o o h a dally
aawka b.(wnn Y.lbounn and Lor; Angola (vb Autklmnd) whkh b not 1nclud.d In the abow muma Qant8s h.. abo o m Booing
747400 wlth 355 and 412 rut up.olty on th#. mut.. and apmta 412 s u t M n g 747 alrcrmfl on tho M.b.mLw Angela rout. (and
pmvlowly on th. Y.lbounw-b&a&ba Angola rout.). k ruth tho Omt.. up8city ahu, Is lDuly to bo undu8md. Unlbd Alrllnn
fllghta botw88n MoRowm ud Lo8 Angola u, 'unm fllgM nu- wrvhs tha m rout8d thmugh Sydmy.
Relevantly, Figure 6 and Figure 7 only capture seat capacity on non-stop flights between Australia and mainland United States. As such, the capacity shares do not include seat capacity that is offered by indirect services (including Qantas' daily service from Melbourne to the Los Angeles via Auckland) or via Hawaii. This is particularly relevant in respect of the Star Alliance cartiers - being Air New Zealand via its one-stop Australia - Auckland - Los Angeles or San Francisco services (described in section 5.3) and Air Canada via its services between Australia and Canada (with beyond connections to the United States). Including these routes would give the combined Star Alliance partners a significantly greater capacity share than Delta and V Australia. F" -' . .
" Source: Virgin Blue Group Network Planning using APGdata and ACA data.
~ ..................
Gilbert + Tobin 2w6m-1 .do0 pege I 31
6.3 Market concentration + Australia - United States Air Freight Market
Figure 8 sets out the combined inbound/outbound freight (in tonnes) carried between Australia and the United States (including Hawaii) and the relevant market shares of each carrier between February 2008 and February 2009.
- * ,
Figure 8 - Combined inboundloutbound air freight tonnes and carrier market shares between Australia and the United States (Feb 2008 to Feb 2009)'~
Month I
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Mar-09
Note: Whilst Air New Zealand does n dedicated cargo freighter service thal
1 operate direct Australia to United States passenger services, it doe ~ m t a a direct leg belween Australia and the United States.
Freight
have a
The ACCC has previously recognised the difficulty of measuring an individual carrier's share of the air freight market as the Bureau of Infrastructure, Transport and Regional Economics (BITRE) compiles data on the basis of port of uplift and discharge rather than origin and destination of the cargo.74 Where cargo is ofRoaded at an intermediate port en route to its final destination, the cargo is attributed to the intermediate port.T5 Nevertheless, the shares in Figure 8 demonstrate that Qantas carries a significant quantity of air freight, whilst there are a number of other significant competing suppliers of pure air freight services including Fed=, UPS and Cargolux.
, 7 7 I C.. I .t..- ; .? ..-:r , , - , . , I . , 7 - ,"
" Source: BITRE. Where figures do not add up to 100%, variation is due to rounding. " ACCC, Qentas Aimeys Limlted and Brllsh Almgys Plc AppUcatkms for AuthorlseUon (A30226 and A30227) Final Deterninetion, 8 Febnrary 2005 at [4.193.(4.203. " Id at [4.21].
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7 The future with and without the Virgin Blue 1 Delta Joint Venture
7.1 The factual
The factual scenario involves the Applicants making and giving effect to the elements of the Virgin Blue I Delta Joint Venture described above. The implementation of these arrangements will allow the Applicants to:
jointly allocate, plan and manage their operations (including routes, schedules, pricing and marketing arrangements) in a highly coordinated fashion;
ensure that the most efficient and appropriate operating aircraft is deployed on each route;
coordinate scheduling, pricing and marketing arrangements in such a way as to maximise passenger loads on each route serviced;
share passenger revenues from Transpacific routes on a 'metal neutral" revenue reallocation model designed to compensate each party fairly for its contribution while maximising each carrier's incentive to pursue service, sales and marketing for the collective benefit of the Joint Venture; and
in respect of beyond segments, the Applicants will price codeshare segments in a way so as to maximise the overall revenue for the Joint venture.''
At a general level, it will enable the Applicants to pool the benefits and risks associated with the operation of services covered by the Virgin Blue I Delta Joint Venture.
As an 'integrated alliance" providing aligned commercial incentives, the Virgin Blue 1 Delta Joint Venture will have the benefits outlined in section 3.4 - including increased passenger loads and incremental revenue per available seat kilometre (where such benefits are less likely to develop in the standard codeshare and interline agreements that form part of the counterfactual). As a result, the Applicants, as new entrants to the Trans-Pacific, will not only be better able to weather the current volatile financial conditions but, further, will be better positioned to:
maintain existing routes and services and develop new routes, schedules and frequencies whilst optimising use of the carriers' aircraft and facilities (both existing and new), creating operating efficiencies and increasing consumer choice and benefits;
achieve operational and overhead cost savings and drive increased passenger numbers that could not or would not be able to be achieved under codesharing and interlining agreements;
optimise their existing networks and activities to feed traflic onto new routes and thereby reduce the commercial risk in the establishment of such new routes. It will therefore increase the likelihood of such routes being established as well as the speed of their establishment; and
more effectively develop a deeper, coordinated and integrated Transpacific passenger network to better rival and more effectively and comprehensively compete with the incumbent carriers in the market on a long term basis.
As a result it will give passengers a greater degree of flexibility in terms of city-pairs, anival and departure times and beyond connection options.
" See Exhibit B to Joint Venture Agreement.
Gilbert + Tobin 2wm%-l.doc page 1 33
The public benefits that flow from the development of a deeper Trans-Pacific network are discussed in further detail in section 8.
t .
7.2 The counterfactual ' ' - , 1 - .
- In the absence of Authorisation being granted, the Applicants would not give effect to the proposed Virgin Blue 1 Delta Joint Venture. In this event, Virgin Blue and Delta would continue to implement on a more limited basis some of the terms of the interline, codeshare and marketing agreements - - as outlined in section 3.1,
* l - * . . ' * d - . > 4 I
The inherent limitations of a codeshare and interline arrangement, absent aligned economic incentives, is discussed in section 3.4. [Restriction of Publication of Part Claimed]. Therefore, notwithstanding the continuing operation of the interline, codeshare and marketing agreements between Virgin Blue and Delta, in the counterfactual the ability of the Applicants as new market entrants in a particularly volatile economic climate to compete against the incumbent carriers will be considerably weakened.
i t 1.k-J' , <
Acting unilaterally:
the overall competitiveness and attractiveness of each Applicants' offer will remain limited due to their narrow network (in terms of routes and frequencies) and the other issues discussed in section S.l(d) - limited flexibility to respond to changes in directional passenger flows and levels and changes in demand) etc;
the Applicants will have a significantly reduced ability and incentive to take the risk of introducing new routes and frequencies or expanding current operations, particularly new direct routes. As a result, the Applicants will be less able to develop a broad network that is comparable to, and could effectively compete with, Qantas' and United's networks. In such an event, it is less likely that such network-based competition will occur; and TI:"'
even in the event that the Applicants continue to seek to develop a broader Trans-Pacific network over time, they would be considerably slower in their ability to achieve this objective. As such the consumer will be less likely to see the benefits of this deeper network-based competition, outlined above, in the short to medium term.
8 Public Benefits arising from the Virgin Blue 1 Delta Joint Venture
In enabling the Applicants, both new entrants, to effectively compete and grow their presence on the Trans-Pacific routes (in a way not facilitated by codeshare), the Virgin Blue I Delta Joint Venture promotes the public policy objectives underpinning the Open Skies Agreement (as discussed in section 4.3). More specifically, the Applicants will be better able to maintain existing and introduce further Trans-Pacific services (routes and frequencies) faster would be the case absent the Virgin Blue / Delta Joint Venture. This is particularly true in respect of direct services. This in turn:
means customers travelling between Australia and the United States will be offered greater choice and convenience;
facilitates lower fares on the Trans-Pacific (as a result of new capacity supported by the Virgin Blue 1 Delta Joint Venture, the removal of 'double marginalisation" incentives and the achievement of cost savings);
results in sustained effective price and product competition on Trans-Pacific routes in the medium to long term; and
will facilitate increased tourism and employment in aviation and other sectors. . . . - . L . . .
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8.1 Routes and frequencies
As discussed in sections 2 and 7.1, the purpose of the Virgin Blue / Delta Joint Venture is to enable the Applicants to maintain existing capacity as well as to develop new routes, schedules and frequencies such that they are able to offer customers an integrated Trans-Pacific network. The introduction of competitive offerings on new routes was, as discussed in section 4.3, a key driver of the Open Skies Agreement.
As an integrated alliance (the benefits of which are described in section 3.4), the Virgin Blue / Delta Joint Venture facilitates and supports the introduction and continuation of new Trans-Pacific services by the Applicants. The key reason for this is that the Joint Venture facilitates the sharing of commercial risk between the Applicants. As such they are more able to consider launching services which, unilaterally, they would not be able either in the short term or at all (particularly in the current economic climate). In addition, for the reasons set out in section 3.4, it is likely to result in overall higher load factors than could be achieved with purely codeshare and interline agreements.
Although the Applicants have not yet been able to discuss in detail the routes and frequencies that may be offered under the Virgin Blue I Delta Joint Venture, the Joint Venture Agreement specifically contemplates that the Applicants will jointly examine the commencement or expansion of services on the following routes:
Of particular note is the fact that the routes considered above, if launched, would result in new or increased direct services between city-pairs that are not currently serviced, are serviced only by Qantas or are serviced predominantly by indirect services through Sydney. In this regard, the Applicants note that the ACCC has previously stated that direct services give rise to a public benefit in the form of increased choice and convenience arising from amongst other things, reduced travel time. T7
8.2 Greater choice and convenience for customers
Flowing from the new routes and frequencies (particularly direct services) that the Virgin Blue / Delta Joint Venture is expected to create, customers will benefit from increased choice and convenience in the form of:
a greater number of direct services on new routes and an expansion of the number of direct services on existing routes; and
" ACCC, Air New ZmIand end Air Canada Adwtisation Application - In reletbn to a Coopemtion Agmsment A91097 end AWl98,27 January 2009 at [6.68]
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Gilbert + Tobin 2 ~ ~ 2 - 1 .doc pg~e 1 35
a wider choice of destinations, direct rootings, arrival and departure times, resulting from the better allocation of capacity to routes, the greater overall capacity, new non-stop city-pairs and co-ordination of schedules (including connections).
In combination, these will provide customers with greater choice and further options on Trans- Pacific routes to optimise travel muting~ to provide overall reduced flying and transit times. It will additionally also facilitate the ability of the Applicants to quickly reaccommodate passengers in the event that flights are cancelled or delayed for operational reasons - minimising the extent of any inconvenience.
8.3 Lower fares
The introduction of new capacity by the Applicants on Trans-Pacific routes has already had a profound effect on the competitive structure and levels of competition, introducing new levels of product and price competition that did not exist under the virtual duopoly of Qantas and United Airlines. The Virgin Blue 1 Delta Joint Venture will continue to facilitate lower fares on Trans-Pacific routes as a result of new additional capacity supported by the Virgin Blue 1 Delta Joint Venture, the removal of 'double marginalisation" incentives and the facilitation of cost savings.
(a) Increased capacity + lower fares
As can be seen from the significant pricing changes that have occurred on Trans-Pacific routes since the entry of V Australia and Delta, the introduction of additional capacity has resulted in lower fares (including greater numbers of promotional fares). In this respect, it is worth noting analyst estimates that in 2008 'on a per km basis most of Qantas fares on the United States route last year were priced at a 20-30% premium to its European services."'* In enabling the Applicants to maintain capacity and introduce further capacity on Trans-Pacific routes (including more direct capacity on routes other than Sydney - Los Angeles), the Virgin Blue I Delta Joint Venture will drive lower fares (including promotional fares) than would exist in the counterfactual.
(b) Removal of "double marginalisation" incentive 9 lower fares
Section 3.4 discusses in detail the manner in which integrated alliances remove the 'double marginalisation" incentive enabling lower fares to be offered to customers. As was discussed in section 7.1, the 'double marginalisation" incentives are removed on the Trans-Pacific routes as a result of the revenue sharing agreements. In terms of the beyond codeshare routes, the 'double marginalisation" incentive is removed (unlike a standard codeshare arrangement) where the Applicants have agreed that they will price these codeshare segments in a way so as to maximise the overall revenue for the Joint ~enture.~'
(c) Cost savings lower fares
A final driver of lower fares being offered under the Virgin Blue 1 Delta Joint Venture is the cost savings that it makes available to the Applicants. The cost savings that will be available through the Virgin Blue 1 Delta Joint Venture include those derived through the currently proposed and/or potential future:
pstrktlon of PuMiutCon of Part Clalmsd)
" UBS Investment Research, 'Qantas Airways Limited: MM cyde EPS likely to now be 25c',22 June 2009 at page 7. See Exhibit B to Jdnt Venture Agreement.
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Gilbert + Tobin 2~6825-l.doc pege I s6
In addition, the Applicants note that the key cost savings to be derived from the Virgin Blue 1 Delta Joint Venture arise from the maximisation of load factors (as a result of efficient capacity planning) which enables the achievement of lower average seat costs.
The Applicants note that the ACCC has previously stated:
... in relation to cost savings benefits that when such benefits are not passed on to consumers those benefits are likely to be accorded a lower weight by the ACCC. In expressing this view the ACCC noted that the level of competition in a market will affect both the durability of the benefit and the likelihood and extent of the benefit being passed on to cons~mers".~
In this regard, the Applicants note that the level of competition on Trans-Pacific routes, particularly from Qantas and United Airlines who have voiced and demonstrated their ability and willingness to fiercely compete to maintain market share and the continued threat of entry (or rwntry) afforded by the Open Skies Agreement, will ensure that the cost savings and efliciencies generated by the Virgin Blue 1 Delta Joint Venture will be passed on to consumers through strong price and service based competition on Trans-Pacific routes.
8.4 Sustained effective price and product competiion on TransPacific routes
As was discussed in section 5.1, Qantas is currently the only operator operating a deep integrated Trans-Pacific network of multiple frequencies and routes. In contrast, the Applicants and other competitors in the market operate comparatively limited routes and frequencies. As a result, the benefits of new competition that the Applicants bring to Trans-Pacific routes is largely limited to certain routes (for example, the comparatively well-setviced Sydney to Los Angeles route).
In the absence of the Virgin Blue 1 Delta Joint Venture, as discussed in section 7.2, the Applicants will be less able to maintain routes and frequencies (particularly in the current volatile economic climate) and further, less willing to develop and maintain additional routes and frequencies. As such, the scope of price and product competition (and lower fares discussed above) will be more likely concentrated to existing or limited Trans-Pacific routes. This will mean, in the long term, that Qantas will maintain its structural advantage in terms of routes, frequencies and beyond connections such that overall levels of product and price competiion on a broad or network basis will be substantially lower. As such, the broader objectives of the Open Skies Agreement will be frustrated. This is discussed in more detail in Section 4.5.
8.5 Increased tourism
As noted above in section 4.3, a major reason for the creation of the Open Skies Agreement was the Australian Government's desire to increase tourism between the United States and Australia. This is consistent with its broader position, as expressed in the Government's National Aviation Green Paper that:
International air services provide vital connections for Australian business and tourists to the global market, generating billions of dollars for the Australian economy.. .
ACCC, Qantas and Btitish Airways Restated Joint Services Agreement Final Detenninaffon A30226 - A30227,8 February 2005,at [12.151.
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Gilbert + Tobin 2 ~ 6 8 a - l . d o c pege 1 37
... One of the major flowon benefits of the aviation industry is tourism. Aviation and the tourism indust are highly interdependent, with over 99% of inbound tourists to Australia aniving by air. X
In authorising the Qantas I British Airways Joint Setvices Agreement (JSA), the ACCC concluded that tourism was clearly of benefit to Australia, but stated that in that case that it was unclear that there were substantial tourism benefits arising from the proposed JSA arrangements.a2
The Applicants consider that the Trans-Pacific market can be distinguished from the Kangaroo Route (the subject of the Qantas 1 BA JSA authorisation) on the basis that it has been recognised that one of the key constraints on Trans-Pacific tourism growth has been lack of available seats and relatively high seat prices. In this regard, reference should be had to the Government's statements regarding the rationale of the Open Skies Agreement (discussed above) and the recent comments of the Tourism Task Force that:
Anecdotal evidence provided by U.S. travel trade operators to TTF's Project X tourism study suggests the lack of available seats on the U.S.-Australia route, and relative high pricing compared to other routes out of the USA, is making it difficult to sell Australia as a destinati~n.'~
Notwithstanding the forecast current short term decline in overall tourism levels due to the Global Financial Crisis, United States 1 Australia tourism is likely to increase in the long run over and above what would have otherwise been the case as a result of the Virgin Blue I Delta Joint Venture. The Joint Venture:
will result in lower fares stimulating demand;
- as discussed in sections 8.1 and 8.2, is likely to result in increased frequencies, routes and customer convenience (with reduced flying and transit times);
will enable sustained effective price and product competition across the Trans-Pacific routes; and
will enable the introduction and expansion of new services (including direct flights) from new United States cities opening up new "tourism generating regions" in the United States. Similarly, the maintenance and expansion of direct service to cities other than Sydney will have a positive flow on effect for tourism bringing more United States tourists to other metropolitan cities and other States including Victoria and Queensland. In this regard, the VTlC stated:
Airline seat capacity is vital to international tourism growth, both in major cities and regional areas. No matter how well Victoria is romoted, if international visitors cannot get a flight hem, they will go somewhere else. G
" Australian Government, Nationel Avietkn Pdky Green Paper: Flight Path to the Futum, December 2008 at page 98, available at re.c~ov.aulaviMnao/filea/Avi~ G m Pamr.odf [ace688ed 2 July 20091.
In that deddon the ACCC noted them was a wide range of M r s which innuenced M s m demand which were more significant than the JSA, including general purchasing power of souroe c o u ~ , the relabhrct cost of other destirWon8, the total met of v i s i i Australia (land a$ Hell as air component and the percehred quality of Australia as a destination. " Tourism & Transpod Forum, 'louhm & T m q m t Forum Response to Towards a NaUonal Aviation Poky Statement - Issues Papefatpag811,slvallabkat h ' .infra re. v. u/ atio na o National ' Uon Pol IP Res n f [acecNwed 2 July 20091. l y m V $ . ~ T ~ M ? $ u ~ &zl, &I S w k N $ M d m 2 VModan"Toufk?m, l?Fw&ty 2008 availabk at h t t~ : l . fwww.vecc i .o ra .~n~+~~omn~88+to+bene f i t+me Ibo~me+and+~r ian+ tour isml .asp [accerwed 2 July 20091.
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Gilbert + Tobin --I .do0 page 1 38
8.6 Additional employment
The Virgin Blue I Delta Joint Venture is likely to result in additional direct and indirect employment. In terms of direct employment, the growth of V Australia's operation will create additional employment opportunities both within the carrier and in its immediate sewice providers (airports, caterers etc). Traditional employment will also be created in the tourism sector and associated industries. This increased employment will occur at a national level as well as in those areas where direct services are launched or expanded. In this regard, the importance of the aviation industry to jobs growth, particularly in tourism was recognised by the Govemment in its National Aviation Green Paper :
... While the aviation industry is a significant generetor of economic activiiy and a major employer in its own right, the greater benefits of the industry are derived from the flowsn effect created through the facilitation of trade, tourism and general economic activitySm
[Rostrlctlon of Publicrrtlon of Part Clalnnd]
9 The Virgin Blue 1 Delta Joint Venture will not result in anti-competitive detriment
The Virgin Blue I Delta Joint Venture will not result in anti-competitive detriment for the following reasons:
the Applicants are new entrants on the Trans-Pacific routes. The Virgin Blue / Delta Joint Venture will assist their entry, and continued survival and growth in this market and therefore has a fundamentally pro-wmpetitiie effect on what, until recently, has been a virtual duopoly;
for the reasons described in section 5.1 the Applicants have limited incentive and ability to remove capacity from Trans-Pacific routes (either before or after commencement of the Joint Venture). Further, the Joint Venture does not give the applicants the incentive to remove capacity where, even together, the Applicants will still be relatively small in the market. Any such reduction in capacity would result in passengers simply shifting to Qantas or United Airlines and a loss of competitive positioning as it would diminish the scope of the network routes and frequencies the Applicants offer in competition to Qantas and United Airlines;
as discussed in section 2 and 7.1, the purpose of the Virgin Blue / Delta Joint Venture is to enable the Applicants to maintain existing capacity as well as to develop new routes, schedules and frequencies in order to more effectively compete against the entrenched incumbent caniers' alliances;
with their recent entry, the Applicants are without the established market advantage held by the incumbent caniers - Qantas and United Airlines. Together, by December 2009 the Applicants are predicted to have an aggregated seat capacity share for direct flights of 29% for all Trans-Pacific flights (compared to Qantas' predicted share of 5 0 % ~ and not significantly higher than that of United Airlines at 21 %). Further, on the basis of city-pair capacity shares (as set out in Figure 7 above) the Applicants either do not have a presence at all (e.g. Sydney - San Francisco) or V Australia is the only competitor to Qantas with Qantas having direct flight capacity shares in excess of 65% on those routes (e.g. Los Angeles - Brisbane);
Ausbalian Government, National Avietbn Pdicy Green Paper: FlEght Path to the Future, December 2008 at page 98, available at htt~:l~.infrast~~ture.aov.aulaviation/na~leAviatbn Green Pa~er .~df [accessed 2 July 20091. For the reasons set out above (see note under Figure 6 end Figure 7) Qantas' capedty sham are likely to be understated.
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Gilbert + Tobin 2 ~ 6 0 2 - 1 .doc pege I 39
following the commencement of the Virgin Blue 1 Delta Joint Venture, the Applicants will continue to vigorously compete with Qantas and United Airlines. This is in addition to the range of other carriers providing indirect services including Air New Zealand and Air Canada (in addition to those other carriers referred to in section 5.4). Further, Air New Zealand maintains the right and capacity to re-introduce direct services between Australia and the United States; and
- as discussed in section 6.3, there are a large number of alternative air freight I cargo providers to the Applicants including Qantas, United Airlines, UPS and FedEx (as well as those carriers that fly via Asia). Additionally, the Applicants are currently small suppliers of air freight I cargo services on Trans-Pacific routes.
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Annexure A - Virgin Blue Group
V Australia is one of Australia's newest international carriers. It is owned by Virgin Blue Holdings Limited, the ultimate holding company for the Australian domestic carrier Virgin Blue and its associated brands. V Australia has been granted unlimited capacity between Australia and the United States by the IASC.
The carrier commenced flight operations on 27 February 2009, operating the Sydney to Los Angeles route. It currently offers daily services between Sydney and Los Angeles. In April 2009, V Australia began flying on the Brisbane to Los Angeles route. It currently flies 3 times per week between Brisbane and Los Angeles, with a fourth s e ~ c e scheduled to be introduced following delivery of a fourth aircraft in September 2009. A third Trans-Pacific route between Melbourne and Los Angeles is also scheduled to begin operations in September 2009. It is intended that V Australia will fly 3 times each week between Melbourne and Los Angeles.
V Australia is currently operating a fleet of three Boeing 777300ER aircraft, with another four aircraft on order and due for staggered delivery between now and 2012. These aircraft offer 33 Business Class lie-flat beds, 40 Premium Economy club seats and 288 Economy seats configured as follows:
lnternational Business Class, a 2-3-2 configuration with a fully horizontal 6'2" flat bed. This class offers a personal work station with laptop power, USB slot and 12.1" touch screen for in-flight entertainment.
lnternational Premium Economy Class, a 2 4 2 configuration with 38" seat pitch, 20" seat width and recline of up to 9". The seats are leather and have adjustable head and footrests. This class also offers a personal work station with laptop power, USB slot and 10.6" touch screen for in-flight entertainment.
International Economy Class, a 3-3-3 configuration with 32" seat pitch, 18.8" seat width and recline of up to 6". It offers USB power and a 9" touchscreen for in-flight entertainment.
V Australia currently has arrangements with Alaska Airlines (in Los Angeles) and Malaysian Airlines (in Sydney) to provide lounge facilities to lnternational Business Class passengers and Gold Status Velocity frequent flyer members.
Launched in 2000 by Sir Richard Branson's Virgin Group, Virgin Blue is the flagship carrier of the Virgin Blue Group of carriers also comprising Pacific Blue, Polynesian Blue and V Australia.
Virgin Blue markets itself as a "New World Carrier", pitched between a full service carrier and a lowcost carrier. It expanded in Australia during Ansett's collapse and now provides an extensive Australian domestic network. Virgin Blue operates a fleet of 69 Boeing 737-700,737-800 and Embraer El90 and El70 EJet aircraft. Virgin Blue currently operates approximately 2800 flights a week to more than 25 Australian destinations.
Virgin is headquartered in Brisbane, which is also the carrier's primary hub. Its domestic flights have two classes, Premium Economy and Economy.
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Gilbert + Tobin zsm32-1 .doc pas0 1 41
Virgin Blue maintains frequent flyer agreements with Virgin Atlantic, Emirates, Hawaiian Airlines and Malaysia Airlines. It also has frequent flyer agreements with other carriers in the Virgin Blue Group. It has interline agreements with Garuda Indonesia and Air Austral.
Virgin Blue provides a members' lounge facility for domestic travellers under 'The Lounge' brand. Access is available on an all-inclusive basis via an annual membership or a casual fee for each visit. It includes facilities such as buffet food, newspapers, computers and WiFi internet access. Lounges are currently located at the Brisbane, Sydney, Melbourne, Adelaide and Canberra domestic terminals.
Pacific Blue was launched in 2004. It consists of two carriers. Pacific Blue Airlines (NZ) Limited (PBNZ) is the New Zealand-based subsidiary of the Virgin Blue Group and operates services domestically within New Zealand and on Trans-Tasman routes between Australia and New Zealand. Pacific Blue Airlines (Aust) Pty Ltd (PBA) operates services between Australia and New Zealand, Fiji, Indonesia, Vanuatu, Papua New Guinea, the Cook Islands, the Solomon Islands and Tonga as a designated Australian international carrier. PBA operates aircraft wet leased from PBNZ and Virgin Blue. PBNZ has its primary hub in Christchurch and operates a secondary hub in Auckland. Pacitic Blue currently operates a fleet of 9 Boeing 737-800 aircraft.
Pacific Blue operates a fleet of 9 Boeing 737800 aircraft. The canier offers only one class (economy) and offers food and drinks on a buy on board basis.
The Virgin Blue Group also has a joint venture with the Samoan Government: Polynesian Blue. It operates between Sydney, Brisbane, Auckland and Apia with a single Boeing 737-800. Polynesian Blue is not a participant in the Virgin Blue 1 Delta Joint Venture.
Sydney
Melbourne
Brisbane
Perth
Adelaide
Gold Coast
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Gilbert + Tobin --1 .doc m e 1 42
Denpasar, Auckland, Christchurch, Nadi, Apia, Port Vila, Nuku'olofa, Wellington
Auckland, Christchurch, Nadi
Denpasar, Auckland, Wellington, Christchurch, Nadi, Port Vila, Port Moresby, Honiara
Denpasar
Denpasar, Nadi
Auckland
Christchurch
Wellington
Auckland
Dunedin
Hamilton
Dunedin, Wellington, Auckland, Brisbane, Sydney, Melbourne
Christchurch, Sydney, Auckland
Brisbane, Gold Coast, Sydney, Melbourne, Christchurch, Wellington, Rarotonga, Nuku'olofa
Christchurch
Sydney, Brisbane
Virgin Blue Group Route Networks
Sydney (SYD) Network
Note: Includes Pacific Blue and Polynesian Blue
Brisbane (BNE) Network
NoG: Includes Paclflc Blue and Polynesian Blue
..---- .... ---...... =-.....'.-
Gilbert + Tobin m - 1 . ~ pege 149
Melbourne (MEL) Network
Note: Includes Pacific Biw
Trans-Pacific Services
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Gilbert + Tobin 28~61~s-l.doc m e 1 44
Annexure B - Delta Los Angeles Network
A D E L T A
Note: Includes Northwest opemted and Wta ccd&mm aenrlcea op6raW by Alaska Alrlinee, Horbon, American Eagle andbbmmximfrom L A X t o d a U ~ incontlnentel Unltedstete9, Alaska, Canadaand Latin America.
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Confidential Annexure C - Ovewiew of Virgin Blue 1 Delta Joint Venture
[Restriction of Publication of Part Claimed]
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[Resttlctlon of Publkatlon of Part C l a i m
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Annexure D - Summary of passenger traffic rights involving the United States route in Australia's air services agreements
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I Austria
Canada
Denmark
Finland
France
Gennany
New Zealand
Noway
Sweden
Switzerland
USA
United States as an intermediate point only. Capadty 9 5600 seats each way each week.
San Francisco and Honolulu as intermediate points. Capacity 93000 seats each way each week.
United States as an intermediate point only. Capacity 92800 seats each way each week.
United States as an intermediate point only. Capacity 92800 seats each way each week.
United States as a beyond point only. Capacity9 one frequency each way each week.
United States as both a beyond and an intermediate point. Capacity 9 25 frequencies each way each week.
Open skies with both Australia and United States and no capacity restrictions. Can enter the market without restriction in both directions.
United States as an intermediate point only. Capacity + 2800 seats each way each week.
United States as an intermediate point only. Capacity 9 2800 seats each way each week.
United States as an intermediate point only. Capacity +2800 seats each way each week.
Open Skies Agreement (as discussed in section 4.3).
Annexure E - Summary of major carriers operating Trans-Pacific Routes (excluding Hawaii) (1 991 + present)
This table summarises the periods of own-aircraft operations for major carriers on Trans-Pacific air services between 1991 and 2009. Although Air New Zealand's Trans-Pacific presence has involved a mix of direct and indirect services at times between Australia and the United States, it has been included as a result of the large number of passengers it carries on these Trans-Pacific routes (approximately 7.7% of traffic in 2008).
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Annexure F - Overview of oneworld carriers + Qantas and American Airlines
Established in Queensland in 1920, Qantas is Australia's largest domestic and intemational carrier." The Qantas Group employs approximately 36,000 b p l e and offers services across a network covering 151 destinations in 38 countties - 58 in Australia and 93 in other countries (including those covered by codeshare partners), Asia and the Pacific, the Americas, Europe and ~ f r i c a . ~ In the 2007108 financial year, the Qantas Group carried 38.6 million passengers and operated 6,720 services per week.%g It generated $16.2 billion in revenue and made pre-tax profit of $1.4 billion.''
The primary aviation businesses of the Qantas Group operate under two major brands - Qantas and ~etstar?' Qantas, QantasLink and Jetstar operate nearly 5,300" domestic flights a week serving 58 city and regional destinations in all states and mainland territories. Until recently, Qantas also operated more than 160 domestic flights a week within New Zealand. These services have now been transferred to Jetstar. Qantas and Jetstar operate more than 860 international flights each 'W - 7 . A 1- ' 7 7 - 1 . ' 'C - 8 - t
At 1 March 2009, the Qantas Group operated a total passenger fleet of 224 aircrafLS4
Qantas and QantasLink
I Airbus A38CL800 1 3 1 Boeing 747400ER ( 6 1 Boeing 747-400 124 1 1 Boeing 767300ER 1 29 1 Boeing 737-800 1 38 1 Boeing 737400 121 1 I Boeing 737300 1 5 1 Airbus A330-300 1 10 I Airbus A330-200 1 6 1 I Boeing 717-200 1 11 I Bombardier W O O 1 12 1 Bombardier Dash 8 1 21 1
Jetsta
Qantas, 'Qantas at a Glance' at page 1, available at h~://www.aantas.wm.au/infodetaiVaboutlFactFiIes.~df [accessed 2 July m. " Ibid.
Qantas, Annual Report 2008 at page 5. "ldatpage4.
@' in additkn to the Qantas and Jetstar brands, the Qantas Group operates a number of other airlinrelated businesses. These indude Qantas Engineering, Airports, Q Catering, Qantas Freight and ml ownership of listed company Jetset Travelwo~ld LM (which in turn owns the Qantas H d i i , Qantas Business Travel, Jetset, Travelworld, V h Holidays and O M Padflc brands and bwbwmes) The Qantas Group has a 45% interest in the Singapombased Ora-r lnwwtment Holdings Pte Limited, which owns and operates the value-based intra-Asia airlines Jetstar Asia and Valuair. The Qantas Group has an 18% stake in Vietnam's Padfic Airlines, which now operates under the Jetstar Padc brand. This stake is to increase to 30% over the next 3 years. The Qantas Group also holds a 46.3% Interest in Air Pacific and is a partner with Australla Post in DNO jointly controlled mttties -the domestfc air freight operator Australian Air Express and the natlonal rcad frelght bwlnecw, Star Track Express.
Qantas opetabs 2,445 flights, QantasLink operates 1,814 Rights and Jetstar o f w a h 1,028 flights. es Qantas operates Wti flights and Jetstar operates 268. w Qantas, 'Qantas at a Glance' at page 7, available at htto:llwww.aantas.~mmau/infodetaiVabout/FactFiIes.~df [accemed 2 July m1. .- . -- " Indudes wet leased A3208 from Jets* Ask.
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American Airlines is a founding member of oneworld and is the largest carrier in the world. American Airlines flies to over 250 destinations and almost 50 countries, more than 150 of which are within the United statesQ8
American Airlines' major hub is located in Dallas/Fort Worth with other large hubs located in Chicago O'Hare, Miami, San Juan and St Louis. American Airlines also has significant operations at Boston, New York JFK and LaGuardia, and RaleighlDurham. It is the leading carrier between North and South Americaag7 Of note, American Airlines has a significant presence at Los Angeles Airport (LAX) providing passengers from Qantas flights a large number of connection options. Of its operations at LAX, American Airlines notes:
American's operations at Los Angeles lnternational Airport (LAX), the most popular and centrally located airport in the Los Angeles area, are in the same facility - rather than split across multiple terminals, as is the case with other airlines - allowing for more convenient connections for customers. American is situated in the newest terminal at LAX and features a popular Admirals Club that is newer and larger than other airline lounges.
United was the biggest airline at LAX for many years but there has been a steady shift, with American now the earner with the largest market share at 14.73 percent versos United 13.68 percent, as of December 2008, according to Los Angeles World Airports. American has the leading domestic schedule and is growing internationally, especially to Latin America. By connecting at American hubs in Dallas/Fott Worth, Miami and JFK, Los Angeles travellers can fly to anywhere they want to go in Latin America, Asia and Europe. International service from LAX is a key part of American's o rations, including destinations such as Tokyo, London, Cabo San Lucas and El Salvador. P
Qantas and American Airlines began their relationship in 1989 through the world's first codeshare agreement.w American Airlines then ceased its own operations to Australia in 1992.'~~ Since that time, American Airlines has had a codeshare arrangement with Qantas - codesharing on both Qantas' Trans-Pacific and domestic Australian and New Zealand operations. Qantas additionally codeshares on American Airlines' domestic United States operations. This is in addition to the other areas of cooperation between the two carriers facilitated by participation in the oneworld alliance.
Figure F.1 is a route map of American Airlines' Los Angeles beyond network.
" Ommrorld, 'Member Airlines: American Airlines, About American Airlines' available at httD:l/www.oneworld.wm/owlmember- @irlineslarnerican-airlines [accessed 2 July 20091.
lbid. American Alrtines, 'International Network Backgrounder- For American Airlines, Internatlonal Service Continues to Be a Strength'
available at ~tt~:/lwww.aa.com/aalil8nForward.do?~=/arnmm/newsm~ntemational-ne~~.is~ [accegsed 2 July 20091. Qantas, 'Qantas at a Glance' available at httD:l~.aantas.corn.aulinfodetaiWabouffFaFies. [accessed 2 July 20091.
'" Source: BITRE.
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Figure F.l -American Airlines Los Angeles Network Source: ~nD:lhnrww.airlineroutema~6.com/USA/Amen Airlines LAX.shbnl [accessed 6 June 20091
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Annexure G - Overview of Star Alliance Carriers + United Airlines I Air New Zealand I Air Canada
United Airlines (with United Express) operates more than 3,100flights a day to more than 200 domestic and intemational destinations from its hubs in Los Angeles, San Francisco, Denver, Chicago and Washington, D.C. With air rights in the Asia-Pacific region, Europe and Latin America, United is one of the largest international carriers based in the United states.'''
Around 40% of United Airlines' mainline capacity is deployed in international marketsfo2 and United is the largest American carrier to China, measured by seat capacity.lo3
As at 1 March 2009, United operated a total passenger fleet of 396 aircraft.lo4
Boeing 737-300
Figures G.l and G.2 are route maps of United Airlines' Los Angeles and San-Francisco beyond network
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Boeing 737-500
Boeing 757-200
lo' United Airlines, 'Fact Sheet' at page 1, available at htt~://ohx.comrate- ir.net/Extemal.File?item=UGFvZWSOSUQQMzMl MXxDaG~IEPSOxfFR5cGU9Mw==&t=1 [aaessed 2 July 20091. '@ United Airlines, 'Company Informetion: Overview' available at h~://ir.united.comlDhoenix.zhtmI?~--83680B~=irol- hOmePrOfiie#~~e~ie~ [accessed 2 July 20091. lrn ibld. lM United Airlines, 'Company Infonnation: Unlted Fleet Facts' available at h~:/lir.united.cOml~hoenix.zhtml?c=8368l- mProfile#fleet [acce9sed 2 July 20091.
Note: Does not include United Express fleet which is not owned or operated by United.
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Boeing 767-300
Boeing 777-200
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52
Airbus 320-200 97
Figure 0.1 - United Airlines Lo8 Anaeles Domestic Network
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Figure 0.2 - United Airlines San Francisco Domestic Network Source: h~~:lhnrww.airlinerouterna~s.cornlUSA/Un~ed Aidines SFO.shtml [accessed 6 June 20091
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Gilbert + Tobin 2naem-1 .da
a AIR NEW ZEALANDV
Air New Zealand is the national carrier of New Zealand, with the New Zealand Government owning 75.5% of the carrier.lo5 Air New Zealand has a single hub at Auckland Airport. The carrier o erates scheduled passenger flights to 13 domestic destinations and 26 international destinations." The carrier's route network includes Australasia and the South Pacific, with long-haul services to Asia, Europe and North America. ,,.
Air New Zealand operates indirect services from Sydney, Melbourne and Brisbane to Los Angeles. San Francisco and Vancouver via Auckland. Passengers flying from Perth, Adelaide, Cairns and the Gold Coast can also connect to these Los Angeles, San Francisco and Vancouver services.
While the Star Alliance has no member flying domestically within Australia, Air New Zealand flies from Auckland to Perth, Adelaide, Cairns and the Gold Coast as well as to Sydney, Melbourne and Brisbane. This allows it to match QantasIAmerican in providing one-stop itineraries from these secondary cities to North America via Auckland (whereas Qantas provides such itineraries via Sydney, Melbourne or Brisbane).
Air New Zealand and United Airlines have been granted antitmst immunity by the United States Department of Transportation enabling them to coordinate services between United States and New Zealand. The DOT order is a grant of broad-based world-wide immunity from United States antitrust law for United and Air New Zealand. This immunity allows a very high level of operational cooperation for all UnitedIANZ alliance activities including revenue sharing, route planning, flight scheduling, purchasing, marketing sales and distribution.
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AIR CANADA @ ' .
Air Canada is Canada's largest full-service carrier and the largest provider of scheduled passenger services in the Canadian market, the Canada - United States transborder market and in the international market to and from canada.lo7 Together with Jazz, Air Canada serves over 33 million customers annually and provides direct passenger service to over 170 destinations on five continents.lm
Air Canada has an extensive global network, with hubs in four major Canadian cities (Toronto, Montreal, Vancouver and Calgary), offering scheduled passenger jet service directly to 58 Canadian cities, 55 destinations in the United States and 52 cities in Europe, the Middle East, Asia, Australia, the Caribbean, Mexico and South America.lm
Air Canada offers an indirect service from Sydney to Los Angeles and San Francisco, with one stop in Vancouver, but matches other destinations in North America with a onastop service.
lM Air New Zealend, 'Company ProRle: Sham on Issue' available at ~ t t ~ : l ~ . a i m e w e e l a n d . c o m . aulaboutus/corwratemRIdshares on issuddefau 1t.h trn [accessed 2 July 20091. '" Star Alllence, 'Star Al l i ce Membr Mine: Ak New Zealand' available at httD:llwww.starallianc8.~0mlenlmetalaidin&NZ.html [access4 2 July 20091.
lm Star Ailbnos, 'Star Alliance Member Airline: Air Canada' maibble at h t t ~ : l ~ . s t a r a l l i a n c e . ~ ~ m l e n l m e t a l a i ~ [acaassd 2 July 20091.
lo" IMd. '" Ibid.
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Annexure H - Overview of other carriers
Hawaiii Airlines is an American W d commercial mnier operating out of Hawaii. It is based in Hondulu and operates its main hub at Honolulu International Airport. Hawaiian Airlineg operates domestic flights between the Urdted States mainland and the islands of Hawaii, as well as international Kwtes to Sydney and the Manila, along with smaller Padfic nations.
Hawaiian Airlines offers an inftlred: service from Sydney to Los Bngeles. It also has c o n n m s to Oakland Sacramento, San Diego, San Francisco, San h, Las Vegas, Phoenix, Portland and Seatt leml! lo
Singapore Airtinas is the national carrier of Singapore, with its main hub at Singapore's Changi Airport. Usiry thia hub, Singapore Mines aperabes a Earge numbar of routes awering 65 dtlea in 30 countries. " It owns se,vsml subsMMes in related indu~trks, induding SilkAir (regional mnier serving South-East Asia), Tradewinds (travel packages and tours), SIA Engineering Company (aviation engineering), SATS ( ? m u m l i n g senhe$ for air carders) and SIA Cargo (international cargo tramport). l2
Singapore Airlines offers one-stop indirect flights from Australia to the United States via its hub. It flies from Sydney, Melbourne, Brisbane, Adelaide and Peith to Sin a re, and operates long-haul
81P Trans-Pacific flights from Singapore to Los Angeles and New York.
Cathay Pacific is the flag canier of Hong Kong, with its main hub at Hong Kong International Airport. It serves 115 destinations in 36 countries.'14
Cathy Pacific offers one-stop indirect flights from Australia to the United States via its hub. It flies from Sydney, Melbourne, Brisbane, Cairns, Adelaide, and Perth to Hong Kong, and operates long- haul Trans-Pacific flights from Hong Kong to Los Angeles, New York and San ~rancisco."~
'lo Hawaiian Airlines, 'Corporate Information and Fact Sheet' available at htt~:llwww.hawaiianair.~~m/AboutUs/Paaes/factsheet.as~x [accessed 2 July 20091. "' Singapore Airlines, 'Company Information: The Creation of Singapore Airlines' available at
[accessed 2 July 20091. Singapore Airlines, 'Company Information: Our Companies' available at
h t t~ :~ .~ lnaaD0rea i r .~om/8aden UKlcontentlcomoanv ~nfo/siastorv/subsidiaries.is~ [accessed 2 July 20091. 'I3 Singapore Airlines, 'Flights i Fares: Route Map: Australia and New Zealand' available at h t t D : l M . s i ~ a ~ r e a i r . ~ m / ~ a a / e n UWcontenVRiahts-fares/routema~lAustaliaNewZealandRouteMaaigp [awxssed 2 July 20091 and Singapore Airlines, 'Flights 8 Fares: Route Map: North America' available at htt~:llwww.sinaawreair.com/saalen UK/mntent~iahts-fares/routema~MorthAmericaRo~teMa~.is~ [access& 2 July 20091.
Cathay PadRc, 'Fact Sheet: Routes and Destinations' available at htt~:llwww.cathav~adfic.com/mden AU/aboutus/cxbackaround/factsheet?reLlD=bf8eab6b901OVanVCMl0000021d21c39 - [acmssed 2 July 20091. '" Cathay Pacific. 'Destinations' available at b s [accessed 2 July 20091.
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Air Pacific Limited is Fiji's international canier, based around a single hub in Nadi. It operates international and domestic services around the Pacific and to North America.
The majority owner of Air Pacific is the Fijian Government, with a 51 % stake. The other major shareholder is Qantas, which has a 46.05% interest.'" The remaining shares are held by Air New Zealand and the governments of Kiribati, Tonga, Nauru and Samoa.
Air Pacific operates indirect services from Brisbane, Melbourne and Sydney to Los Angeles. These flights have one stop, at Nadi Airport in Fiji. Air Pacific operates six flights to Los Angeles each week.'"
Air Tahiti Nui is the flag cartier of French Polynesia and is based in Papeete, Tahiti. It operates a hub from Faa'a International Airport in Papeete. It is primarily arranged as a tourism vehicle connecting Tahiti to its major markets.'" Its major shareholder is the Government of French ~olynesia.''~
Air Tahiti Nui is able to offer a one-sto indirect flight fmm Sydney to Los Angeles, since it operates flights on both these mutes." However Air Tahiti Nui offers flights to Sydney only on a seasonal basis.
I" Air Pedflc, 'Airline History: Event Timellne' available at ~tt~:lEwww.airoacif~~.~~mldefault.as~x?sid=AP AboutAiffadficB~id=AP history [accessed 2 July 20091. 'I7 Air PacHic, 'Air Padflc to increase flights between Fiji and Los Angeles'; 24 January 2008, available at
AbutAirPacificBoid=AP MediaCentre&MediaCenirelD=6b6b363l-fe2a-4e4a-
Air TahM Nul, 'Company Profile' avallaMe at httDJEwww.airtahitinui.com.au/~~m~anv/~mfi~.as~ [access& 2 July 20091. Ito IW. I" Air TahM Nul, 'Route Map' available at JIH~: /Ewww.airtahit in~i .~~m.a~~enri~~s/r~Utema~.~ [accessed 2 July 20091.
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Annexure I - Executed copies of agreements
[Restriction of Publldon of Part CkimegJ
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