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Virgin Blue and Delta join forces on US route -

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Virgin Blue and Delta join forces on US route

Ashley Hall reported this story on Thursday, July 9, 2009 12:51:08

PETER CAVE: Passengers flying between Australia and the United States have been enjoying lower
fares this year, as the number of carriers flying the route has doubled from two to four. The two
new entrants say they cut the fares thanks to increased competition. But now Virgin Blue and Delta
Air Lines are planning to join forces across the Pacific.

Ashley Hall explores what the new joint venture will mean for the passengers.

ASHLEY HALL: At this stage there's little detail about the joint venture proposal because the two
airlines haven't yet worked it out. Regulators don't allow competitors to share intimate
operational details. But it's clear what Virgin Blue's chief executive Brett Godfrey hopes to
achieve.

BRETT GODFREY: The objective is to find what we refer to in the industry as metal neutrality where
basically it doesn't matter which airline you fly on. The airlines get to a position, the two
airlines that are looking to form a JV get to a position where they share revenues and share risk.

ASHLEY HALL: For example Virgin's trans-Pacific carrier V Australia might operate the morning
flights on one route while Delta operates in the evening.

BRETT GODFREY: The whole idea is to try and improve from a passenger point of view and of course
the peripheral benefit for us is that we will get more traffic flying on us to compete against the
incumbents.

ASHLEY HALL: It looks at first blush like a consolidation on the trans-Pacific route but you put it
as an increase in competition. How can that be?

BRETT GODFREY: The concept of this is not to rationalise to the point where people pull off or move
away and it's just done on the one airline. The overall concept is that we're in a position through
having the least, we have about, we will have about 12 per cent of the capacity. Delta has about, a
little bit less, about 10. United has 25 and Qantas has the rest.

So we're very much the new entrants and to ensure competition is sustained for the long term we
think this is a better way to manage it.

ASHLEY HALL: But for most of the past decade the route's been the exclusive domain of Qantas and
United. That was until Virgin Blue began its new service V Australia at the end of February and
Delta Airlines commenced direct flights earlier this month. And with the increased competition
prices have come down significantly.

BRETT GODFREY: The low fares that you see today which are basically 50 nearly 60 per cent off what
they were just some 12 to 15 months ago are quite honestly unsustainable. I would suggest you get
them while you can.

ASHLEY HALL: The lower fares are also a result of a slump in demand because of the global economic
downturn so they're likely to rise again as the economy recovers, according to the independent
transport analyst Brent Mitchell.

He says the joint venture proposal is quite similar to the plan put forward by the mining giants
BHP Billiton and Rio Tinto to form a joint venture to cover their West Australian iron ore
operations.

BRENT MITCHELL: In both cases the infrastructure will be shared and in both cases the marketing
will be aggressive on both parties independently and so look I think it has a lot of similarities
and I'd expect these sort of deals to continue across a number of industries going forward. And
it's a reflection of the economic climate at the present.

ASHLEY HALL: The chairman of the Asia Pacific Centre for Aviation Peter Harbison says Delta has
been less enthusiastic about a tie-up with Virgin Blue, possibly because it's been busy absorbing
the operations of Northwest Airlines which it recently bought. Nonetheless, he sees benefits for
both carriers.

PETER HARBISON: Virgin Blue V Australia is a weaker competitor, obviously it's much smaller and has
very little feed traffic at the US end of the route. And Delta is very much an unknown. It's the
biggest carrier in the world but it's still very much an unknown in the Australian market so there
is a nice apparent synergy between the two in getting some greater market presence on the Pacific.

ASHLEY HALL: Peter Harbison says there will only be low prices on the trans-Pacific route for as
long as there's excess seating capacity.

PETER HARBISON: If someone did pull out of the market obviously the downward pressure on prices
would diminish a bit but the issue at the moment is that demand is just so slack particularly on
the long-haul routes that there's very little that would suggest that prices are going to go up if
people want to sell their seats.

PETER CAVE: Peter Harbison, the director of the Asia Pacific Centre for Aviation, ending Ashley
Hall's report.