Things in the Sky

I had been meaning for awhile to write about the latest on the proposed immunized alliance between Delta and Virgin Blue, V Australia, and Pacific Blue, but I got stuck into schoolwork. The re-branding that Virgin just accomplished and the expansion of the existing codeshare agreement, however, got me thinking about it again.

Last year, the DOT tentatively denied the application for anti-trust immunity. You can read the entire ruling here, but this line sums it up pretty well:

There is little evidence at this point to conclude that the proposed alliance will benefit consumers to the degree necessary to justify a grant of antitrust immunity.

Since then, Virgin and Delta have been working to help make this deal work. There have been a couple of interesting DOT filings of late that outline their progress.

One issue mentioned in an October filing from the carriers was that while “the V Australia and Delta systems are already fully compatible” there was a “compatibility issue is with Virgin Blue’s short haul networkreservation system, which is hosted by Navitaire.” The carriers reported, however, that they had “devised a manual work-around solution, which they arecurrently using to support the limited beyond codesharing that has been implemented.”

More progress on this front was made a couple of weeks ago, as Delta reported to the DOT that Virgin Blue had completed a systems upgrade on April 17. Because of the change, “compatible systems and procedures are now in place to support automated codesharing acrossthe Delta/Virgin Blue Group networks under the proposed joint venture, including the display of DL* code on flights operated by Virgin Blue and Pacific Blue,” according to Delta.

Another interesting filing that had cropped up of late was the public version of the capacity commitment between Delta and Virgin. We had known for awhile about this agreement. In a January filing, the carriers said they had committed to not “reduce nonstop service between the U.S. and Australia below their respective historicalservice baselines as a result of the Department’s approval of and grant of antitrust immunity.”

The public version of the agreement has further details. Will Horton has a pretty in-depth look at the details over at his Wings Down Under blog, but I’ll provide the highlights here.

Both airlines plan to maintain historical levels of service. On Delta’s side that means seven departures from the United States during the peak season and six during other times. For V Australia it will be 14 departures during the peak season and 11 in off-peak times. Each carrier will operate a peak schedule for at least six months of the year.

The airlines do say, however, that they might have to reduce service in the case of extreme factors beyond their control. They specifically mention the price of WTI crude going over $120, a drop in the AUD:USD exchange rate below 0.8:1, a drop in the Dow below 9,000 or the ASX below 4,000, and events like natural disasters and terror attacks. If the carriers end up reducing service due to external factors, they will “seek prior approval from DOT to continue the effectiveness of antitrust immunity absent the capacity commitment.”

Interesting stuff – let’s see if the DOT likes what it sees.

Interesting news came out of the DOT yesterday, when the regulatory agency announced it is proposing to deny the application of Virgin Blue and Delta for a joint venture covering transpacific flights.

The move might seem a bit odd at face value, especially after the DOT has granted anti-trust immunity over the Atlantic for the big three alliances, with oneworld’s approval (finally) in July.

So the question is – why deny the agreement? The DOT cited a few big reasons. From the news release:

In reaching its tentative decision, the Department noted that Delta and its partners have only recently entered the U.S.-Australia market, have not shown developed plans to operate as commercial partners, and have limited their cooperation to a handful of routes, thereby limiting the public benefits their alliance might produce. The Department also said that Delta and the Virgin Blue Group had failed to show that their alliance would have positive effects for consumers, such as lower fares or increased capacity.

That quote explains it all. Though I do have a couple of thoughts on the points brought up.

One item mentioned by the DOT is that the relationship between Delta and Virgin is still very new – the partnership was originally announced last July and codesharing only began in January – and as a result the DOT says “there is not enough” information to judge whether the partnership will be a win for travelers. Compare this to the ATI agreements approve over the Atlantic – those partnerships started forming about ten years ago.

But two quotes in the proposed decision really stood out to me:

…the conditions in the U.S.-Australia market are in an extraordinary state of flux. Since the applicants entered the market independently, prices and capacity have changed dramatically. In these circumstances, the applicants have not shown that immunized cooperation would yield substantially more public benefits than a continuation of the current competition between them.

The weight of the evidence suggests that the primary effect of a grant of antitrust immunity at this time would be to improve the market share of Delta and V Australia…

The argument of Delta and Virgin is that their joint venture will create a stronger competitor against United and Qantas – but apparently the DOT isn’t buying it.

So where do we go from here? The decision isn’t final, and there are now 14 days for comments. So it will be interesting to see what Delta and Virgin argue.

And thinking longer-term – do Delta and Virgin keep codesharing if the deal doesn’t happen? Is it sustainable to have four competitors flying between LA and Sydney? Where exactly does Virgin America fit in as one of Blue’s American partners?

Meanwhile, Ben Sandilands has some interesting thoughts on where Singapore fits in for all of this.

Anyway – just my initial thoughts on the move. Apologies again for the odd posting times this week — expect things to return to normal next week.