Delta and Virgin Blue to team up on Trans-Pacific routes

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Recent over-capacity in the US-Australia nonstop market could be addressed under a joint venture planned between the route's two newest entrants.

Delta Air Lines has formed a two-phased pact with Virgin Blue Group, which includes long-haul unit V Australia, as they aim to compete more effectively against incumbents Qantas and United Airlines. V Australia launched service on this route earlier this year; Delta joined it in July.Share between the airlines now flyingAustralia-mainland US will by year-end be Qantas 50%, United 21%, V Australia 21%, and Delta 8%, with an estimated overall surplus capacity of 30%.

Delta and the Virgin Group are launching the first phase of their pact now, placing each others' codes ondomestic flights to allow behind and beyond gateway feed. This immediately extends their respective networks into the others' country. They are also introducing reciprocal lounge access, and importantly for V Australia, frequent flyer reciprocity. Virgin insists its deal with Delta implies no weakness in its original business plan, but its lack of a major US partner constrained V Australia's ability to attract outbound US traffic. Both carriers are starting this phase of co-operation now because these moves do not require antitrust approval.

Thenext phase will need antitrust immunity because Delta and Virgin want to co-ordinate schedules, capacity, routes, and pricing and to share revenue on their trans-Pacific routes. This would allow them closer co-operation in their battle with Qantas and United for a permanent place in this market. To this end Delta and Virgin are seeking approval fromAustralian and US regulators.

Their applications stand a better chance of gaining approval than earlier requests by Qantas-Air New Zealand or, later, Air New Zealand-Air Canada that Australian regulators denied. In both those proposed deals the degree of market concentration would have ranged from 50% to 100%, depending on individual city-pairs. Predictably, they failed to persuade regulatorsthe proposals would bring enough public benefits to offset such significant anti-competitive effects.

By contrast, the combined Delta-Virgin share would only be 29% on the nonstop Pacific,above United's 21% but below the 50% of Qantas. On some city-pairs, such as Los Angeles-Brisbane, joint operations would add no concentration. And the two carriers advance a number of arguments why the public would benefit from their tie-up. As a senior Virgin Blue official explains: "We're only seeking to replicate the dominance that the incumbents already have." One airline,Singapore's Tiger Airways which has an Australian subsidiary, has already said it will lodge an objection to the link-up.

Regulatory decisions are expected in six months.

Click here for more on the changing dynamics of the Australia-US mainland market