VZCZCXRO7070
RR RUEHPT
DE RUEHBY #0511/01 1520646
ZNY CCCCC ZZH
R 010646Z JUN 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 1559
INFO RUEHOT/AMEMBASSY OTTAWA 2336
RUEHWL/AMEMBASSY WELLINGTON 5802
RUEHGP/AMEMBASSY SINGAPORE 1739
RUEHBJ/AMEMBASSY BEIJING 9487
RUEHKO/AMEMBASSY TOKYO 3556
RUEHDN/AMCONSUL SYDNEY 4606
RUEHBN/AMCONSUL MELBOURNE 6381
RUEHPT/AMCONSUL PERTH 4645
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 CANBERRA 000511 
 
SIPDIS 
 
STATE FOR EEB/TRA, EAP/ANP 
 
E.O. 12958: DECL: 06/01/2014 
TAGS: EAIR ECON AS
SUBJECT: GFC, H1N1, AND OPEN SKIES, OH MY! A LOOK AT 
AUSTRALIA,S TOP TWO AIRLINES 
 
Classified By: Acting Econ Couns W Albright, reasons 1.4 b, d 
 
¶1. (SBU) Summary.  The Australian civil aviation industry has 
not escaped the economic slowdown brought on by the 
intensified global financial crisis.  Qantas remains the 
heavyweight in the Australian aviation arena, but its share 
of the domestic market is slipping and is now down to around 
60%.  Top rival Virgin Blue recently released figures showing 
continued domestic traffic growth into early 2009.  Both 
Qantas and Virgin Blue both claim to be coping reasonably 
well with the economic slowdown.  Both have reduced capacity 
on some routes, and are looking at reducing labor forces for 
the short term.  With V Australia's entry, increased 
competition has made the Australia-California routes "a 
bloodbath." Qantas and Virgin Blue see the potential entry of 
Delta into the trans-Pacific market very differently.  H1N1 
influenza remains a wild card for Australian aviation.  End 
summary. 
 
STATE OF QANTAS 
 
¶2. (SBU) Econoff met with Qantas government affairs manger 
Jane McKeon to discuss how Qantas was managing with the 
effects of Open Skies, the economic downturn, and H1N1 
influenza's emergence.  First, some numbers.  Qantas' most 
recent half-year profits before taxes were down 68% to A$288 
million (roughly US$230 million at current exchange rates) - 
down, but still profitable.  For the full year, they are 
projecting profits of A$100-200 million, well down from the 
original estimates of A$500 million.  Qantas has already shed 
around 1750 jobs.  McKeon said that soon Qantas would let go 
around 500 employees, mostly managers.  In addition, there 
are around 1250 line positions marked for reduction.  To a 
significant extent, Qantas is achieving this thru attrition, 
and by asking employees to take extended leave they have 
accrued or to work half-time; most of those people will not 
be fired.  Qantas has cancelled dozens of less-profitable 
domestic routes, and has consolidated the number of flights 
on some segments.  It is deferring capital expenditure, and 
retiring older and less efficient aircraft.  McKeon said 
Boeing's delay on delivering 787s was a blessing in disguise; 
Qantas has deferred some other deliveries until conditions 
improve. 
 
¶3. (SBU) Domestically, McKeon said the down market was 
holding up well, with a shift in traffic from Qantas to 
low-cost subsidiary Jetstar.  Qantas has been running 
promotions to sell seats, and redemptions of frequent flyer 
miles are up significantly.  However, Qantas' international 
business is hurting.  Premium cabin class revenues are down 
as much as 40% on some routes, and across Qantas, 
international network are down 20%.  McKeon acknowledged that 
Virgin Blue's US service (under the name V Australia) was 
hurting Qantas - but the global financial crisis is hurting 
worse. 
 
¶4. (SBU) Beyond June, Qantas is taking a wait-and-see 
attitude, but still intends to advance their strategic 
priorities, which include continuing their two-brand (Qantas 
and low-cost subsidiary JetStar) strategy, emphasizing 
product enhancement, and improving fleet efficiency.  McKeon 
said she hoped GOA predictions of a return to growth in late 
2009 would hold true, and indicated Qantas were cautiously 
optimistic.  But, she added, H1N1 influenza remains an 
Qoptimistic.  But, she added, H1N1 influenza remains an 
unpredictable factor.  To date, she said Qantas had seen no 
impact on their operations internationally or domestically 
from the outbreak.  But now that H1N1 appears to be 
establishing itself in Australia (over 300 cases confirmed as 
of June 1, but no deaths), they are watching the developments 
closely.  McKeon thought as long as the flu remained mild, 
the impact on travel would not be unbearable. 
 
VIRGIN BLUE COPING 
 
¶5. (SBU) Virgin Blue's government affairs general manager 
Tony Wheelens told econoff that so far Virgin Blue is coping 
with the downturn fairly well.  Traffic started to drop in 
October 2008, and Virgin Blue began to reduce capacity on 
some domestic routes.  Rather than leave these aircraft idle, 
Virgin Blue accelerated existing plans to launch new services 
to Indonesia, Papua New Guinea, and the Solomons, and have 
 
CANBERRA 00000511  002 OF 003 
 
 
expanded operations to New Zealand and Fiji.  Wheelens said 
Virgin Blue was trying to avoid laying off people, and pilots 
were doing job shares and taking long service leave. 
Wheelens noted the tremendous challenge Virgin Blue had faced 
in hiring qualified people during the recent boom economy and 
said they didn't want to make short-sighted decisions that 
would leave them scrambling when the recovery began.  In 
April, Virgin Blue decided to make some cuts, cutting 400 
jobs (mostly through attrition), and standing down some older 
aircraft. 
 
¶6. (SBU) Wheelens observed wryly that February 2009 was not 
the best time to launch new services from Australia to the 
United States, and the potential threat from H1N1 is still a 
possible complicating factor.  Virgin Blue subsidiary V 
Australia began Sydney to Los Angeles services in February, 
Richard Branson coming to Sydney for a characteristically 
splashy celebrity-studded launch party.  Since then, they 
have begun Brisbane-LA flights, and still plan to start 
Melbourne-LA flights in September or October.  Competition 
across the Pacific among Qantas (and partner American 
Airlines), United (and partner Air New Zealand) and V 
Australia was "a bloodbath" in Wheelens' words.  There are 
very attractive fares between Australia/New Zealand and the 
US right now, and Wheelens said that Australia-California 
fares were down 40% (a number echoed by the GOA,s Stephen 
Borthwick).  V Australia was off to a good start, per 
Wheelens - 60% load factors, although yields were "ordinary' 
(that is, not great) on the Pacific routes - a problem all 
carriers around the world are facing, he added. 
 
THE DELTA FACTOR 
 
¶7. (SBU) Although they have not contacted Embassy Canberra, 
Delta Airlines executives have been quoted in the Australian 
media as saying they will be coming to Australia starting in 
July and will be a "disaster" for Qantas. Qantas' McKeon said 
Delta's head of operations for Australia had been in country 
recently; apparently he at the moment plans to cover 
Australian business from Manila, a long flight from Sydney. 
Department of Infrastructure and Transport General Manager 
for Aviation Markets Stephen Borthwick told econoff June 1 
that he had signed off on the international airline  licenses 
for Delta and Northwest (NW because it will be codesharing 
into Australia on Delta flights) last week, the final step in 
regulatory requirements for Delta.  He said the GOA looked 
forward to Delta entering the Australia-California market. 
 
¶8. (C) Virgin Blue's Wheelens said they had been in talks 
with Delta about codesharing and other commercial 
cooperation.  Wheelens thought V Australia and Delta 
individually would be "vulnerable" to the 
Qantas American/United Air New Zealand duopoly, especially 
when considering the trans-Pacific market in 
US/Canada/Australia/New Zealand terms rather than just 
US-Australia.  He noted the need for antitrust approval from 
the US DOJ and the Australian Competition and Consumer 
Commission (either AT immunity or something limited only to 
codesharing), but thought that would probably be granted 
given the dominant positions of United and Qantas/AA on the 
routes already.  If forced to compete individually, Wheelens 
said he feared Delta and V Australia could fail, letting the 
Qsaid he feared Delta and V Australia could fail, letting the 
market revert to Qantas and United.  In that instance, 
Wheelens (a former GOA civair official) opined, the GOA would 
probably allow Air Singapore and Emirates access to the 
Australia-US market - but the preference was to bolster 
Australian aviation, and Virgin Blue. 
 
FAA ISSUES 
 
¶8. (SBU) Wheelens raised one FAA issue - the ETOPS capability 
of the Boeing 777.  Wheelens noted that an FAA recognition 
that the 777's ETOPS capability of 240 minutes is better than 
the current FAA limit of 180 minutes would be a big help for 
Virgin Blue.  A decision to recognize the 240 minutes would 
save Virgin Blue money and allow them to carry more 
passengers on the Perth-Johannesburg segment by using 
Mauritius vice Diego Garcia, shortening the flight 
considerably. 
 
¶9. (SBU) Qantas' McKeon expressed concern about the FAA 
 
CANBERRA 00000511  003 OF 003 
 
 
Reauthorization Bill before Congress.  Specifically, she was 
concerned about the issue of having all antitrust immunity 
for alliances expire in three years and be subject to review. 
 The provision that would disallow the spraying of 
disinfectants on aircraft on flights to or from the US would 
be a real problem for Qantas, because the Australian 
Quarantine and Inspection Service requires it.  Provisions to 
introduce drug and alcohol testing into foreign repair 
stations would on one level not hurt Qantas - they are 
already doing it - but could be an issue for them with their 
labor force.  And finally, McKeon said Qantas was concerned 
about the proposed compensation for delayed bags, noting that 
the draft legislation doesn't distinguish between a bag 
delivered by the airline to the airport promptly and then 
delayed on the ground or a bag delayed by the airlines' own 
problems - either way, the airline would pay. 
 
CLUNE