In recent years, two of the three U.S. legacy carriers have had joint venture partners in the Oceania region to complement their own service. United Airlines (NASDAQ: UAL) has partnered with Air New Zealand for service between the U.S. and Australia/New Zealand, while Delta Air Lines (NYSE: DAL) teamed up with Virgin Australia. That has left only American Airlines (NASDAQ: AAL) without a partner on the other side of the Pacific.
For several years, American has been trying to rectify that situation by forming a joint venture with Australian market leader Qantas (NASDAQOTH: QUBSF). However, the carriers' desire to coordinate schedules and pricing ran into regulatory obstacles for a while. The U.S. Department of Transportation (DOT) finally gave its official blessing to the joint venture last week.
American Airlines' joint venture with Qantas was finally approved last Friday. Image source: American Airlines.
Why airlines like international joint ventures
A few international joint ventures with antitrust immunity existed prior to the Great Recession, but American Airlines, Delta Air Lines, and United Airlines have aggressively pursued new ones over the past decade. Cynics might say that the airlines have sought antitrust immunity with foreign carriers to reduce competition in the market and support prices.
To some extent, that's probably true. However, the joint ventures have other important benefits for airlines -- and for consumers. Most notably, by coordinating schedules, two airlines based in different countries can offer smoother connections at their respective hubs, stimulating connecting traffic. That can potentially enable new routes that wouldn't be viable otherwise.
The joint ventures between Delta, United, and (going forward) American and their partners in the South Pacific are unusual in that there are relatively few flights from the U.S. to Australia and New Zealand, due to the enormous distances involved. But the American Airlines-Qantas joint venture could be a game changer, because Qantas is by far the largest airline in its region.
American Airlines and Qantas are planning for lots of growth
As part of their application for antitrust immunity, American Airlines and Qantas said that they would add up to three new routes within two years if their joint venture was approved. Indeed, soon after the joint venture received tentative approval last month, Qantas announced plans to fly from Brisbane to San Francisco and Chicago by April 2020. The proposed San Francisco flights are set to operate three times a week. Meanwhile, the Chicago route -- which will become the fourth-longest nonstop flight in the world -- will operate four times a week.
Qantas plans to start two new routes to the U.S. next spring. Image source: Qantas.
The joint venture would have a relatively small benefit for the San Francisco route, as American Airlines doesn't operate many flights there. However, American Airlines' hub in Chicago will be critical to supplying connecting traffic to fill Qantas' flights from the Windy City to Brisbane.
The third potential new route hasn't been announced yet. Since the first two new routes will be operated by Qantas, it's a good bet that the third will be on American Airlines planes.
The most logical new route possibilities would be Dallas/Fort Worth-Auckland or Dallas/Fort Worth-Brisbane, taking advantage of American Airlines' largest hub. In terms of both range and capacity, American's 787-9 Dreamliners should be suitable for either route. Qantas and its low-cost affiliate Jetstar can provide connections to numerous other destinations in Australia and New Zealand from either Auckland or Brisbane.
Looking further ahead, Qantas expects to order ultra-long-range jets later this year that will be capable of nonstop flights from Sydney to New York. Qantas hopes to launch this route (along with others connecting Sydney and Melbourne to London) as soon as 2022. Nonstop Sydney-New York flights would mainly serve local traffic between the two cities, but American Airlines would also be able to supply some connecting traffic in New York.
Will the joint venture be anticompetitive?
The biggest concern for travelers is whether the American Airlines-Qantas joint venture could drive up prices for flights between the U.S. and Australia in particular.
This concern was a big reason why it took so long for the two carriers to get their joint venture approved. Whereas the Delta-Virgin Australia and United-Air New Zealand joint ventures each carry less than 20% of the passenger traffic between the U.S. and Australia, Qantas alone had 46% market share as of last year. American Airlines is a relatively small player in the market, though, with just one daily flight to Australia and 5% market share.
Due to the carriers' growth plans, the joint venture's market share for travel between the U.S. and Australia is likely to rise well beyond 50% in the coming years. That said, American Airlines and Qantas argue that their joint venture will actually lead to lower fares, as the airlines will be able to access seats on each other's networks at better prices than under the current codeshare arrangement.
As a result, regulators think the benefits of the joint venture will outweigh the potential harms. The DOT isn't taking chances, though. American Airlines and Qantas will have to do a "self-assessment" of the joint venture's impact on competition in 2026, which the DOT will review. If regulators find that competition is suffering, they will be able to take action to ensure that the American Airlines-Qantas joint venture lives up to its promises.
Adam Levine-Weinberg owns shares of Delta Air Lines and is long January 2020 $20 calls on American Airlines Group. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com