Virgin Australia's earnings performance on hotly contested routes between Australia and New Zealand has shown signs of an uplift as it benefits from its alliance with Air New Zealand.
Accounts recently filed with regulators across the Tasman show that Virgin's operations in New Zealand posted a $NZ31 million ($28.7 million) profit in the year to June, compared with a loss of $NZ9 million a year earlier. Revenue rose 3 per cent to $NZ274 million.
The trans-Tasman market has become dominated by two major alliances in Virgin-Air New Zealand and Qantas-Emirates.Credit: Sasha Woolley
While providing an insight into its performance on trans-Tasman routes, the bottom-line earnings in New Zealand also reflect changes to Virgin's accounting policies after two of its largest shareholders – Air New Zealand and Singapore Airlines – began equity accounting for the their stakes in the airline. It means the two airlines now record a part of the profits or losses from Virgin in their own accounts.
Excluding the accounting changes, Virgin said its New Zealand subsidiary's performance had improved on prior years, although it declined to put a figure on it.
"While the trans-Tasman remains very competitive, our performance on this market continues to improve as we work together with our alliance partner Air New Zealand," a spokeswoman said.
The trans-Tasman market has become dominated by two major alliances in Virgin-Air New Zealand and Qantas-Emirates. Between them, they carry almost 98 per cent of the passengers between the two countries.
Credit Suisse analyst Paul Turnbull said Qantas and Emirates had slowly been gaining market share from their two major rivals on the Tasman due to the Middle Eastern airline filling more seats on its planes. Emirates flies mostly A380 superjumbo aircraft between Australia and New Zealand.
Mr Turnbull said he expected the airlines to increasingly target second-tier destinations such as Queenstown, Perth and Adelaide because they offered better returns than flying to Sydney and Auckland. He described the trans-Tasman market as the "most competitive and lowest return" market in Air New Zealand's network.
The risk for Virgin, Air New Zealand and Qantas in the longer term is the possibility of another airline such as Qatar Airways extending services to trans-Tasman routes.
Mr Turnbull pointed out that the economy seats on an A380 plane would be the equivalent of adding 3.5 per cent capacity to the market.
Virgin's New Zealand subsidiary employs about 540 staff– mostly pilots, flight attendants, administration and salespeople – and operates 10 Boeing 737 aircraft on mostly trans-Tasman routes. They also operate some services to Pacific Islands.
Much of its revenue comes from operating aircraft on trans-Tasman routes for its Australian parent.
Neither Virgin nor Qantas break out the performance of their New Zealand subsidiaries when they report their group results every six months. A lower wages bill is the main benefit for the airlines of basing their trans-Tasman flying operations in New Zealand.
Qantas's New Zealand subsidiary, Jetconnect, flies 90 per cent of the Qantas-branded services between Australia and New Zealand, employing just over 600 staff and operating a fleet of eight Boeing 737-800 aircraft.
Virgin ditched domestic services in New Zealand in 2010, leaving Air New Zealand and Jetstar to battle each other on the country's main trunk routes.