Competition regulator issues draft determination rejecting proposed Virgin Australia-Alliance Airlines charter partnership

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Australia’s competition regulator has knocked back Virgin Australia/Virgin Australia Regional Airlines (VARA) and Alliance Airlines’ proposal to work together in the charter market on joint tendering for corporate fly-in/fly-out (FIFO) contracts, arguing the tie-up would reduce the number of players in the market.

In a draft determination published on Monday, the Australian Competition and Consumer Commission (ACCC) said the proposed charter alliance would, if approved, have left just Qantas, Cobham Aviation Services and Virgin/Alliance Airlines as major FIFO providers in Western Australia.

Further, the ACCC said this would mean just two suppliers – Qantas and Virgin/Alliance – would be competing for the majority of FIFO services.

“The charter alliance will largely eliminate competition between VARA and Alliance Airlines in providing FIFO services to corporate customers in Western Australia,” ACCC commissioner Sarah Court said in a statement.

“The ACCC considers that the likely public benefits will not outweigh the significant public detriment likely to result from VARA and Alliance Airlines coordinating their FIFO services in Western Australia.

“Therefore, the ACCC’s preliminary view is that this alliance is likely to materially reduce competition for the supply of FIFO services in Western Australia.”

Virgin and Alliance said they would provide the ACCC with additional information in an effort to convince the regulator of the benefits of their proposed alliance.

Virgin said in a statement: “We believe the proposed alliance will support competition and create substantial public benefits. We will review the ACCC’s concerns and work with them to provide additional information as necessary.”

Separately, Alliance told the Australian Securities Exchange in a regulatory filing: “Alliance and the Virgin Australia Group will review the ACCC’s concerns and provide additional support for the alliance which we believe will support competition and create substantial public benefits.”

Further, Alliance said the ACCC ruling did not have any impact on the pair’s existing areas of business, including Alliance operating a number of routes on behalf of Virgin under a wet lease arrangement.

In their application to the ACCC lodged in August, Virgin and Alliance said their proposed charter alliance would allow them to compete more effectively against the “one-stop shop” offering from Qantas.

By combining their respective strengths, VARA and Alliance would better match what Qantas was currently able to offer, including through check-in on multi-leg itineraries featuring both RPT and charter flights.

“Currently, Qantas is in a superior (and in part unique) position to provide a full suite of corporate-related services which include charter services, RPT (domestic and international) services and frequent flyer and lounge benefits, to corporate customers on the east coast and central Australia,” the application said.

“Corporate customers have given both of the applicants feedback during tender processes that Qantas is the only provider of the ‘one-stop shop’ on a national basis.

“In a situation where some customers are looking to package their national air services requirements in order to get a more competitive ‘global’ price offer from Qantas, the charter alliance will enable the applicants to match that integrated product offering and compete head to head with Qantas.

“This enhanced competitive position will increase overall competition for corporate charter customers, and particularly competition against Qantas, which is a substantial public benefit for Australian corporate customers.

“Corporate customers, particularly companies with a large FIFO workforce, view these ancillary benefits as highly desirable because the provision of a comprehensive frequent flyer program is a key employee benefit that can be used to attract a higher skilled workforce in a market where there is a shortage of suitable workers.”

The application noted VARA operated a fleet of 14 Fokker 100s and two Airbus A320s based at Perth Airport, while Alliance operated five Fokker 50s, eight Fokker 70s and 15 Fokker 100s from operating bases at Brisbane, Townsville, Cairns, Adelaide, Perth, Melbourne and Auckland.

Based on their respective fleets, Virgin could not offer a charter solution involving aircraft fewer than 100 seats, while Alliance was similarly restricted for charter clients requiring an aircraft with more than 100 seats.

“The charter alliance is a commercial response to the limitations of each of VARA and Alliance Airlines’ current charter and FIFO service capacity,” the application said.

“Through the charter alliance, the applicants will be able to offer customers a more compelling, competitively priced product than each applicant could provide separately.”

The application said the charter alliance would exclude government customers, charter brokers and ad-hoc charter customers.

The ACCC acknowledged there would be some public benefits from the alliance through operational efficiencies, the increased flexibility and optimisation of aircraft utilisation through combining their fleets, and combining VARA’s (Virgin Australia’s) national regular passenger network with Alliance Airlines national charter network.

However, it was not persuaded that these benefits would ultimately be a gain for customers.

“It is unlikely that the benefit of these efficiencies will be substantially passed through to corporate customers in Western Australia. The ACCC has therefore placed less weight on these potential public benefits,” the ACCC said.

Interested parties have until January 27 2017 to respond to the draft determination. The ACCC said it was seeking submissions “particularly from FIFO customers”.

 

Australian Aviation

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