NEW ZEALAND: Air New Zealand and United Form Joint Venture

United Airlines and Star Alliance partner Air New Zealand are forming a joint venture (JV) for routes between the United States and New Zealand. The revenue sharing agreement will cover three nonstop routes between the US and New Zealand and begin on June 1 of this year, when United launches nonstop service from San Francisco to Auckland. However, United and Air New Zealand must still receive governmental approval from both nations.

The new JV will dominate the US – New Zealand market
When it launches, the new JV will dominate the market between the US and New Zealand, which we estimate to number ~888 passengers per day each way (PDEW), 84% of which is centered on Auckland (730 PDEW), the only New Zealand city with nonstop service to the US. In turn, more than 50% of Auckland’s PDEWs are centered on 3 US metro areas: Los Angeles (by itself a third of the origin and destination [O&D] traffic), San Francisco, and Honolulu.

Air New Zealand serves each of these three cities nonstop from Auckland, with two daily flights to Los Angeles on the Boeing 777-300ER (plus an oddball weekly flight from Raratonga in the Cook Islands on Saturdays with the Boeing 767-300ER), five flights per week to Honolulu on the Boeing 787-9, and daily flights to San Francisco with a mix of 777-300ER (6x weekly) and Boeing 777-200ER equipment (1x weekly) alongside United’s planned daily Boeing 787-8. Air New Zealand also serves United hub Houston nonstop from Auckland with five flights per week using the 777-200ER.

With the exception of American’s new daily Los Angeles – Auckland 787-8 service and Air New Zealand’s five weekly 777-200ER flights to Vancouver (not covered by the JV) that’s the entirety of the nonstop service between the US and New Zealand. And that raises the very real question of whether the DOT should even approve this alliance at all. While the US and New Zealand do technically have Open Skies, the combined carrier would control more than 80% of capacity in the market, creating a virtual monopoly. Air fares between the United States and New Zealand are certainly not cheap and an untied United might be a useful constraint on Air New Zealand’s market power; a constraint lost with a JV.

Moreover, it’s unclear if there will be any further competition outside of this JV (Air New Zealand could certainly add more routes and is rumored to be interested in serving Chicago O’Hare). American doesn’t have any viable gateways besides Los Angeles, and its daily flight is essentially a replacement for the legacy Qantas flight between Los Angeles and Auckland. Over in SkyTeam, Delta’s only viable gateway, Seattle, is a tiny O&D market to Auckland (20 PDEW after nonstop stimulation) so that would rely on Delta building a 350-400 daily departure hub before it could generate enough feed (something that’s at least 4-5 years away due to airfield constraints, let alone economic and strategic ones). All in all, this deal should and will get a hard look from the DOT as it will constrain consumer choice.

Agreement competes with American/Qantas and Delta/Virgin
At the same time, if the DOT follows the precedent it has set in other JV cases in Open Skies markets, the United – Air New Zealand tie up will become the third such partnership in the South Pacific. American and Qantas are certainly the dominant players in the region, and are waiting on New Zealand government approval to extend their JV to include Australia’s eastern neighbor. Virgin America and Delta have a JV that isn’t tied to any particular alliance, but their alliance basically covers 3 daily flights from Australia to Los Angeles and has been stagnant for years. That alliance will probably stay in a holding pattern until Delta launches Seattle – Sydney (far from a certainty).

By default then, the United-Air New Zealand JV will become the second strongest in the South Pacific from day 1, especially if the airlines can convince the DOT to allow them to include Australia (adding in United’s Australian services and Air New Zealand’s massive trans-Tasman portfolio to the service mix). If they can pull that off, then this JV could very well accede to pole position in the region, with nonstop service to 3 of the 4 largest destinations in the region (only missing Brisbane) and top-notch connectivity.