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A91575

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A91576

PUBLIC REGISTER VERSION – Restriction of Publication of Part Claimed

Proposed alliance between Virgin Australia, HNA Group, Hong Kong Airlines and HK Express Submission in support of application for authorisation

17 February 2017

Confidential – restriction of publication claimed

This submission contains information that is commercially confidential to the Applicants. This confidential information is marked as [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] in the submission.

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Gilbert + Tobin 38458900_1 Page | 1

Contents Page

Executive summary 1

1 The Applicants 4

1.1 Virgin Australia 4

1.2 HNA Group 4

1.3 Hong Kong Airlines 5

1.4 HK Express 5

2 The Alliance 6

2.1 Proposed Alliance 6

2.2 Agreements 6

2.3 Scope of the Alliance 7

2.4 Commercial rationale 9

2.5 Authorisation sought 13

2.6 Interim authorisation is also sought 14

3 International air travel between Australia and mainland China 14

3.1 Inbound tourism from mainland China is a key source of growth 15

3.2 The number of Australian travellers visiting China is increasing 17

3.3 Overview of the Australia-China market 18

4 International air travel between Australia and Hong Kong 22

4.1 Passenger travel to and from Hong Kong is forecast to grow 22

4.2 Overview of the Australia-Hong Kong market 23

5 Framework for analysis of the Alliance 26

5.1 Relevant markets 26

5.2 Counterfactual 27

6 Significant public benefits 28

6.1 New international services between Australia and Hong Kong and Australia and mainland China 28



6.2 Enhanced products and services 29

6.3 Improved loyalty program benefits 30

6.4 An increase in customer choice and an increase in competition 30

6.5 Stimulation of inbound tourism to Australia from China and Hong Kong 30

6.6 Greater ability to realise efficiencies and cost savings 31

7 No competitive detriment 31

7.1 No relevant competitive overlap between the Applicants’ services 31

7.2 The relevant markets are highly competitive and characterised by other, larger carriers 32

7.3 Alliance increases competition in domestic and international travel markets 35

8 Conclusion 36

Confidential Attachment A – Alliance Framework Agreement and other agreements 37

Attachment B – Virgin Australia 38

Attachment C – HNA Group 44

Attachment D – Hong Kong Airlines route map 50

Attachment E – HK Express route map 51

Attachment F – Direct connections offered by HNA Group from Beijing 52

Attachment G – Direct connections offered by Hong Kong Airlines and HK Express from Hong Kong 54

Attachment H – Mainland China destinations served by HNA Group 55

Attachment I – Competitors in the Australia-mainland China and Australia-Hong Kong markets 60

Attachment J – Key metrics 64



Executive summary

Authorisation sought

There are four parties to the proposed alliance:

Virgin Australia Airlines Pty Ltd, Virgin Australia International Airlines Pty Ltd, Virgin Australia Regional Airlines Pty Ltd, Virgin Australia Airlines (SE Asia) Pty Ltd and Virgin Australia Cargo Pty Ltd (together, Virgin Australia);

HNA Aviation Group Co. Ltd which includes the following airlines- Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, West Air, Fuzhou Airlines, Urumqi Air, Guangxi Beibu Gulf Airlines (GX Airlines), Yangtze River Express, Air Chang’an, Grand China Air and Air Guilin (together, HNA Group);

Hong Kong Airlines; and

HK Express,

together, the Applicants.

The Applicants seek authorisation to make, and give effect to, the Alliance Framework Agreement and associated agreements including codeshare and special prorate agreements, a reciprocal frequent flyer participation and lounge access agreement and route planning agreements (the Alliance), which they have agreed in order to implement their Alliance to cooperate in relation to the provision of international air travel services.

Under the Alliance, and subject to authorisation, the Applicants have agreed to cooperate on joint pricing and scheduling of services between Australia and mainland China and Australia and Hong Kong.

The Applicants have agreed that, subject to authorisation, Virgin Australia will commence new international services from Australia to mainland China and to Hong Kong. In particular, the Applicants propose to commence cooperation in relation to the Australia-Hong Kong services upon the grant of interim authorisation.

Due to the long lead times to attract sufficient passengers necessary in order to make new long-haul services successful, the Applicants will need to commence the marketing and sale of new services as soon as possible and therefore seek interim authorisation. Interim authorisation will also allow Virgin Australia to support services into Australia that are operated by Hong Kong Airlines and HNA Group.

Under the Alliance, the Applicants also propose to:

codeshare on each other’s networks;

offer reciprocal lounge and frequent flyer scheme access to eligible passengers; and

cooperate in relation to catering, airport handling, cargo and other associated activities.

Significant public

The Alliance delivers the following significant public benefits to Australians:

The introduction of new services through the Alliance. With the introduction of direct services between Australia and mainland China and



benefits Australia and Hong Kong, the Alliance will enable the Applicants to more effectively compete on these routes. The additional passenger feed is likely to support the introduction of new domestic services in Australia and potentially new international services between Australia and mainland China and Australia and Hong Kong.

Enhanced products and services for Australian travellers, including:

− access to Hong Kong and a large number of destinations across mainland China. Australian travellers will be able to directly access a large number of destinations within Hong Kong and mainland China on the expansive networks operated by HNA Group and Hong Kong Airlines under the Alliance. For Virgin Australia passengers that currently have access to Hong Kong and to 11 destinations in mainland China through one-stop codeshare services, this is a significant benefit and offers additional choice to those passengers; and

− improved customer experience, for example, the convenience of travelling under a single itinerary (and on most routes, with check in and through-checked baggage), resulting in saved time through improved connectivity from better coordination of the minimum connecting time (MCT) and better disruption management procedures.

Improved loyalty program benefits for Virgin Australia’s [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] Velocity Frequent Flyer and the [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] Fortune Wings members, including:

− reciprocal “earn and burn” and status recognition;

− reciprocal airport lounge access; and

− priority check in, priority boarding and extra baggage allowances.

An increase in customer choice and overall market competition. With the introduction of new and recently launched services, the Applicants will be providing a new option for travellers and will increase competition with the incumbent carriers including Qantas, China Southern, China Eastern, Air China and Cathay Pacific.

Stimulation of inbound tourism to Australia from mainland China and Hong Kong. Through Virgin Australia’s domestic network, Chinese travellers will be able to travel beyond Australia’s main international gateways and more readily travel to a number of tourist destinations in Australia such as Tropical North Queensland, Canberra, Adelaide and Hobart. Inbound tourism from China is forecast to be a key source of growth for the Australian tourism industry and the Alliance will allow the Applicants to meet this increasing demand, and also further stimulate inbound tourism by marketing and selling Virgin Australia’s services in mainland China and in Hong Kong.

Greater ability to realise efficiencies and cost savings, including cost savings from the combination of catering, ground handling and other airport operations.

The Alliance is pro-

The Alliance will increase competition in the markets for:



competitive and will result in no competitive detriment

air passenger travel between Australia and Hong Kong; and

air passenger travel between Australia and China.

The networks of Virgin Australia on the one hand, and HNA Group, Hong Kong Airlines and HK Express on the other hand, are not overlapping. Virgin Australia does not currently operate any direct services to mainland China and Hong Kong. Accordingly, there is no relevant overlap between the Applicants’ operations and, as a result, the Alliance cannot have an adverse impact on competition in any relevant market.

The new services that will be introduced by Virgin Australia under the Alliance will increase competition with Qantas and its alliance and codeshare partners, including China Eastern, China Southern and Cathay Pacific. The Qantas Group and its partners remains, overwhelmingly, the largest competitor in the relevant markets for air passenger services between Australia and Hong Kong, and Australia and China.

Interim authorisation requested

Interim authorisation is required to:

ensure the new Virgin Australia services are able to successfully commence in 2017 — as the ACCC is aware, there are long lead times associated with successfully launching new long haul services. The Applicants must therefore commence selling and marketing these services as soon as possible. The Applicants will also need to finalise the commercial arrangements for these services with each other and with third parties, including the airport authorities ahead of final authorisation; and

allow Virgin Australia to support the existing and planned services that are and will be operated by Hong Kong Airlines and HNA Group. Inbound Chinese passengers will be more attracted to these services if they can travel beyond on Virgin Australia’s domestic network. Virgin Australia will also be able to support these services – which are still relatively nascent – with Australian passengers wanting to travel to mainland China and Hong Kong.

Interim authorisation also represents no material competition risk as:

the Alliance is pro-competitive and has no adverse impact on competition as Virgin Australia is not a competitor in the relevant markets; and

there are significant public benefits that will be made available under the Alliance, including an increase in consumer choice from the introduction of the new services.

Given the urgency, and the fact that the grant of interim authorisation does not raise material competition risks, the parties seek authorisation from 20 March 2017 pending a decision on final authorisation.

Term of final authorisation

The Applicants request that the ACCC should authorise the Alliance for a period of 10 years. This submission is lodged in support of the application by Virgin Australia, HNA Group, Hong Kong Airlines and HK Express.



1 The Applicants 1.1 Virgin Australia

Virgin Australia commenced operations in Australia in August 2000 and is listed on the Australian Stock Exchange.

Virgin Australia and its subsidiaries currently operate a fleet of 149 aircraft, flying to 44 domestic destinations and 15 international destinations. Virgin Australia operates over 3,600 flights per week to Australian and international destinations through its brands, Virgin Australia, Virgin Samoa, and Tigerair Australia, and through its codeshare partners.

Virgin Australia employs over 9,000 people worldwide, and has strategic alliances with four key airline partners: Singapore Airlines, Etihad Airways, Delta Air Lines and Air New Zealand.

Through the Game Change Program, the Game On initiative, the Virgin Vision 2017 and Better Business Program strategies, Virgin Australia has transformed its business from a low cost carrier business into a contemporary airline group offering services in all key segments of the Australian aviation market (including business, leisure, charter, cargo and loyalty). Virgin Australia has also established a reputation for excellence in customer service and operational performance.

Further details on Virgin Australia are set out in Attachment B.

1.2 HNA Group

The HNA Group is a global conglomerate company with interests in aviation, tourism, investment development and management, and logistics, among others. HNA Aviation is the core entity within the HNA Group.

The HNA Group was founded in 1993 and is headquartered in Haikou, Hainan, China. It commenced operations in 1993 with Hainan Airlines’ first flight on 2 May 1993. Hainan Airlines has grown over the past twenty years and is currently China’s fourth largest airline after Air China, China Southern and China Eastern.

Over a 20 year period, the HNA Group has expanded its assets and operations to be a diverse, multi-faceted operation. It was placed 353 on the Fortune Global 500 List in 2016 with a revenue of US$29.56 billion.

HNA Group has nearly 180,000 employees worldwide.

As at October 2016, HNA Group has a fleet of over 443 aircraft serving more than 700 domestic and international routes, flying to over 200 cities. The HNA Group serves over approximately 62.2 million passengers annually.

Within HNA Aviation, the HNA Group operates and manages the following airlines: Hainan Airlines, Tianjin Airlines, Beijing Capital Airlines, Lucky Air, West Air, Fuzhou

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Airlines, Urumqi Air, Guangxi Beibu Gulf Airlines (GX Airlines), Yangtze River Express, Air Chang’an, Grand China Air and Air Guilin.

HNA Group also has ownership interests in carriers based outside mainland China including Africa World Airlines, Aigle Azur, Azul Brazilian Airlines, Comair and MyCargo Airlines.

HNA Group also owns a number of businesses that supply services to airlines, including Gategroup, an airline catering company, and Swissport Group, an airport ground handling company.

Further details on the HNA Group are included at Attachment C.

1.3 Hong Kong Airlines

Established in 2006 with its principal place of business in Hong Kong, Hong Kong Airlines is a full-service airline and is one of the largest carriers in Hong Kong.

Hong Kong Airlines operates services throughout the Asia-Pacific region. Its network currently covers over 30 cities, including the Gold Coast, Beijing, Shanghai, Taipei, Tokyo, Sapporo, Bangkok, Bali and Okinawa. Hong Kong Airlines’ route map is included at Attachment D.

Around 5.6 million passengers fly annually on Hong Kong Airlines services.

It currently has a total fleet of 34 aircraft comprising 29 passenger aircraft, comprising 11 A320s and 18 A330s, and five freight aircraft (A330Fs).

Hong Kong Airlines has codeshare relationships with a number of airlines, including Air Astana, Air India, Air Mauritius, China Eastern, Etihad Airways, EVA Air, Garuda Indonesia, Grand China Air, Hainan Airlines and Royal Brunei Airlines.

1.4 HK Express

HK Express, based at Hong Kong International Airport, was founded in 2004 and transformed to a low cost carrier in October 2013.

HK Express currently operates passenger services to over 20 destinations in Asia, including mainland China, Japan, South Korea, Thailand, Vietnam, Myanmar and Taiwan. HK Express’ route map is included at Attachment E.

It currently has a fleet of 17 A320 aircraft and has 22 additional aircraft on order.

HK Express is part of the global U-FLY Alliance, which comprises HK Express, Lucky Air, Urumqi Air, West Air and Eastar Jet.

HK Express has a loyalty program called “reward-U.” This program is revenue based, and is operated simply with one tier. Members may redeem any seats on any flights available to purchase with the option of a full or partial redemption. In addition to the



airline itself, members can earn and burn reward-U points from various retail and banking partners.

2 The Alliance 2.1 Proposed Alliance

The Applicants are seeking authorisation to establish an integrated alliance under which the Applicants will:

introduce new direct services between Australia and mainland China, and Australia and Hong Kong operated by Virgin Australia and the other Applicants;

codeshare on each other’s networks between Australia and mainland China, and Australia and Hong Kong, as well as on connections behind and beyond in domestic Australia, on trans-Tasman routes and throughout mainland China; and

cooperate in relation to route planning, sales, distribution and marketing, frequent flyer programs, lounge access, catering, airport handling, cargo and other associated activities in order to enhance efficiency and improve the overall quality of services offered to passengers.

The Alliance will lead to substantial public benefits and no material public detriment.

2.2 Agreements

On 10 February 2017, Virgin Australia, HNA Group, Hong Kong Airlines and HK Express entered into an Alliance Framework Agreement in relation to the proposed Alliance. Under the Alliance Framework Agreement the Applicants must also enter into the following other interdependent agreements:

reciprocal codeshare agreements between Virgin Australia and each of Hong Kong Airlines, Hainan Airlines, Beijing Capital Airlines and Tianjin Airlines (Codeshare Agreements);

special prorate agreements between Virgin Australia and each of Hong Kong Airlines, Hainan Airlines, Beijing Capital Airlines and Tianjin Airlines (Special Prorate Agreements);

a reciprocal frequent flyer participation and lounge access agreement between Velocity Frequent Flyer and Fortune Wings Club (FFP and Lounge Agreement);

joint route planning and economic risk sharing agreements in relation to Hong Kong and China between Virgin Australia and each of Hong Kong Airlines, and HNA Group respectively, which will set out the terms of the supply of services that the Alliance will introduce (Route Planning Agreements);

flight interruption manifest agreements;

a reciprocal staff and duty travel agreement; and

any other agreements required to give effect to the Alliance Framework Agreement

(together, the Alliance).



The Alliance Framework Agreement is subject to authorisation by the ACCC. Co-operation in relation to China under the Alliance is also subject to competition law approvals in China.

Copies of the executed Alliance Framework Agreement (which sets out in schedules the term sheets for some of the other key agreements) are set out in Confidential Attachment A.

2.3 Scope of the Alliance

The Alliance involves coordination and agreement between the Applicants in respect of the following joint activities:

Codeshare: the Applicants will codeshare on various services on each other’s networks between Australia and mainland China, and Australia and Hong Kong, and domestically, where bilateral agreements permit;

Special prorate: Virgin Australia will enter into reciprocal special prorate agreements with each of the other Applicants;

Interline: the Applicants have entered, or will enter, into reciprocal interline arrangements to support the behind and beyond networks of the long-haul services.1 This allows passengers travelling on, for example, a Hong Kong Airlines flight with an onward connection on a Virgin Australia flight to have the convenience of travelling under a single ticket for the whole journey;2

Frequent flyer and lounge: Virgin Australia will enter into reciprocal frequent flyer participation and lounge access agreements with each of the other Applicants;

Joint route planning and scheduling: the Applicants will cooperate in relation to route planning, scheduling and economic risk sharing of the new services that the Alliance will introduce; and

Pricing, sales and marketing: the Applicants will cooperate in relation to joint pricing, sales, distribution and marketing activities.

The Applicants will also cooperate to achieve other synergies contemplated in the Alliance Framework Agreement including purchasing and procurement, resource sharing and product alignment, and coordinated airport processes, catering, cargo, maintenance and ground handling.

[CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED]

Each of the key elements of the Alliance is discussed in more detail below.

(a) Reciprocal codeshare on existing networks

1 The Virgin Australia – Beijing Capital Airlines interline agreement commenced in October 2016. The interline arrangements between Virgin Australia and Hong Kong Airlines and between Virgin Australia and Hainan Airlines commenced in December 2016.

2 Note that some ports in mainland China do not allow for check through of baggage or passengers. Passengers travelling through those ports will still be required to collect their baggage and re-check in for their connecting flights. However, in the majority of cases, passengers will have through checked baggage.



Under the Alliance and subject to all regulatory approvals, the Applicants will implement reciprocal codeshare on each other’s networks with favourable prorates. Under the Codeshare Agreements:

Virgin Australia will be able to place its code (VA) on all regularly scheduled passenger services operated by Hong Kong Airlines and HNA Group airlines on journeys between Australia and mainland China and Hong Kong (including services via New Zealand3), and on routes within HNA Group airlines’ domestic networks. As a result of bilateral restrictions that prohibit code sharing between Hong Kong and mainland China, Virgin Australia will interline on connections from Hong Kong into mainland China. A list of the destinations in mainland China to which HNA Group airlines and Hong Kong Airlines operate services is set out in Attachment G;

Hong Kong Airlines and HNA Group airlines will be able to codeshare on Virgin Australia’s Australasian network (including domestic Australia and the trans-Tasman); and

each of Virgin Australia, Hong Kong Airlines and HNA Group airlines will be able to codeshare on any new direct Australia-Hong Kong and Australia-mainland China services operated by the Alliance.

The Alliance will therefore enable Virgin Australia to offer coded itineraries to a vast number of destinations across mainland China and Hong Kong, expanding Virgin Australia’s international network. The reciprocal codeshare will also provide important feeder traffic from HNA Group’s mainland China network and Hong Kong Airlines’ networks onto Virgin Australia’s domestic network, making new and existing services more viable and promoting inbound tourism to Australia.

(b) Reciprocal frequent flyer and lounge benefits

The Applicants will also implement a Frequent Flyer and Lounge Access Agreement. Eligible passengers travelling on Virgin Australia or HNA Group’s services will be able to earn4 and redeem either Velocity Frequent Flyer or Fortune Wings Club loyalty points and will also have reciprocal elite benefits and lounge access for eligible passengers (see Attachments B.5 and C.3 for further details about Virgin Australia and HNA Group’s respective loyalty programs).

(c) New international services

The Alliance will enable the Applicants to launch new international services between Australia and Hong Kong, and Australia and mainland China.

Initially, Virgin Australia will commence services between Australia and Hong Kong with A330 aircraft. Following the successful launch of these services, Virgin Australia expects to launch services between Australia and mainland China [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] with A330 aircraft.

These new services will be jointly scheduled to best connect with behind and beyond services on the Applicants’ networks in Australia, mainland China and Hong Kong.

3 Note that Hong Kong Airlines and HK Express cannot operate flights to/from points in New Zealand as an intermediate point en route to/from Australia due to restrictions in the Australia-Hong Kong air services arrangements.

4 Earn is available on services from Australia to Hong Kong and China.



2.4 Commercial rationale

The Alliance enables the Applicants to fill gaps in their existing networks by providing additional services. Currently, Virgin Australia has no direct access to China and Hong Kong, with 11 services provided from Australia via Singapore. Through the Alliance, Virgin Australia will be able to offer non-stop services between Australia and China and Australia and Hong Kong – both on its own services as well as on HNA Group and Hong Kong Airlines operated flights.

Currently, [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED].

Similarly, [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED].

The Alliance will enable passengers to connect from locations throughout Australia on Virgin Australia’s network to destinations throughout Hong Kong and mainland China through the networks of the HNA Group airlines, as well as Hong Kong Airlines network. This creation of an integrated Australia-China/Hong Kong and domestic network under the Alliance will increase passenger numbers on the Applicants’ services.

Through the Alliance, the Applicants will be able to better compete with the established carriers on the Australia-China and Australia-Hong Kong routes and the relevant behind/beyond routes. Most notably, the Applicants will be in a better position to compete with Qantas, China Eastern, Air China and China Southern on Australia-mainland China and behind/beyond routes, and Qantas, Cathay Pacific and its subsidiary Cathay Dragon on routes behind/beyond Hong Kong. The ability to jointly offer loyalty benefits through the Alliance, including access to lounges, reciprocal earn and burn of frequent flyer points and status recognition, together with an enhanced network of destinations on the code of the Applicant airlines, is crucial to this.

(a) Virgin Australia’s commercial rationale

An alliance with HNA Group, Hong Kong Airlines and HK Express would have significant strategic and commercial benefits for Virgin Australia. These benefits include:

increased penetration into the Chinese travel market (which is the fastest growing inbound Australian travel market);

access to HNA Group’s significant distribution and retail network in mainland China, which will be critical to driving inbound sales onto Virgin Australia’s Australia-mainland China services;

access to Hong Kong Airlines distribution and retail networks in Hong Kong, which – similarly – will be critical to drive inbound sales onto Virgin Australia’s Australia-Hong Kong services;

securing potential cost synergies through aircraft scale and utilisation benefits as well as benefits from using catering, ground handling, cargo and other operational benefits; and

potential cost synergies by leveraging the portfolio of HNA Group’s companies and relationships.



The Alliance will enable Virgin Australia to enter and effectively compete in the supply of services between Australia and mainland China and Australia and Hong Kong.5 Currently, Virgin Australia offers a one-stop service to China and Hong Kong, serving 11 destinations. Through the Alliance, Virgin Australia will be able to provide non-stop services from Australia to Hong Kong and a number of hubs in China, including through the addition of new services that it will operate on its aircraft, plus onward connections to a vast number of destinations throughout mainland China, including almost 50 one-stop destinations (Figure 3). The ability to offer non-stop services to mainland China and Hong Kong and onward connections within mainland China will provide Virgin Australia with the ability to better compete for passengers.

As shown in Figure 2, HNA Group and Hong Kong Airlines currently offer passengers 14 return services per week between Australia and China and Australia and Hong Kong (with additional seasonal services offered over the Christmas to Chinese New Year period). With the addition of up to two new daily services operated by Virgin Australia, the number of return services per week available from the Alliance could increase to 28.

Figure 1 HNA Group and Hong Kong Airlines – services between Australia and China and Australia and Hong Kong

5 In the future, some of the Applicants may introduce services between Australia and China or between Australia and Hong Kong that operate via New Zealand subject to restrictions in the air services arrangements.



Destinations in mainland China and Hong Kong that Virgin Australia will be able to offer under the Alliance include those shown in Figure 3 and Figure 4 below.

Figure 2 Connections from Beijing operated by HNA Group

Figure 3 Connections from Hong Kong operated by Hong Kong Airlines and HK

Express



(b) HNA Group’s commercial rationale

The two main commercial benefits for HNA Group are:

the ability to access Virgin Australia’s passenger feed, which will support its existing and planned services;

the ability to jointly market and sell Virgin Australia’s international flights between Australia and mainland China, providing additional options for Chinese tourists visiting Australia; and

improved loyalty program benefits.

Through the Alliance, HNA Group will have access to Virgin Australia’s domestic and trans-Tasman network which will enable it to provide HNA Group-branded services to inbound Chinese travellers with connections beyond the main Australian gateway destinations. This is key to supporting existing services.

HNA Group has recently expanded into Australia and New Zealand with the launch of the following services:

Beijing Capital Airlines commenced Melbourne-Qingdao-Shenyang services operating three return services per week from 29 September 2016;

Tianjin Airlines commenced Auckland-Chongqing-Tianjin services operating three return services per week from December 2016. Tianjin Airlines has also announced plans to commence three weekly Chongqing-Melbourne services in September 2017; and

Hainan Airlines entered the Australia-China market with the launch of Sydney-Changsha (two weekly A330 return services effective from September 2016) and Sydney-Xi'an (two weekly A330 return services effective from September 2016 – previously seasonal in late-2015 / early-2016). Hainan Airlines also launched Melbourne-Xi’an (two weekly A330 return services effective from November 2016) and Melbourne-Changsha (two weekly A330 return services effective from November 2016); and

Hainan Airlines also launched a new service to enter the New Zealand-China market with the launch of Auckland-Shenzhen-Xi’an services operating three weekly A330 return services effective from December 2016).

A significant benefit of the Alliance is that HNA Group may, in the future, be in a position to offer Chinese-based travellers the option of a triangular service that allows passengers to travel via New Zealand.

The Alliance will allow HNA Group to better establish its brand in Australia. With the Alliance, HNA Group will be able to attract more passengers to its Australia-China services both from within Australia and within China.



(c) Hong Kong Airlines’ commercial rationale

A significant benefit for Hong Kong Airlines will be the ability to access Virgin Australia’s passenger feed to support its existing and planned services as well as the ability to jointly market and sell Virgin Australia’s international flights between Australia and Hong Kong.

Hong Kong Airlines’ services to Australia will benefit from Virgin Australia’s passenger feed. Currently, Hong Kong Airlines offers a Hong Kong-Gold Coast service three times a week6 (which operated up to daily over the Chinese New Year Period) and daily Hong Kong-Auckland services in November 2016 (which moved to 10 times weekly in December 2016 until mid-February 2017). By being aligned with Virgin Australia, Hong Kong Airlines will give its brand a much needed boost in Australia.

Hong Kong Airlines is unable to launch flights to Australia’s major cities from Hong Kong due to the cap in the bilateral air services agreement. There is no available capacity to the major Australian cities under the current bilateral agreement (currently all utilised by Cathay Pacific) and so the only way that Hong Kong Airlines is able to expand to these cities is through a partnership with Virgin Australia. The new services that will be introduced under the Alliance by Virgin Australia will therefore be of substantial benefit to Hong Kong Airlines and its passengers. In particular, the new Australia-Hong Kong service that will be offered by Virgin Australia as a result of the Alliance will enable Hong Kong Airlines to significantly grow its presence in Australasia.

Through the Alliance, Hong Kong Airlines will have access to Virgin Australia’s trans-Tasman network for triangular services between Australia and Hong Kong. Hong Kong Airlines will be able to sell two country itineraries across New Zealand and Australia – for example, inbound to New Zealand, across the trans-Tasman and then outbound of Australia. Chinese-based travellers may, in the future, benefit from being able to travel to both countries via the Alliance’s networks.

(d) HK Express’ commercial rationale

HK Express will initially be an inactive member of the Alliance and does not intend to become an active member of the Alliance until a future point in time.

Over time, the Alliance will grow in importance for HK Express as the extent of cooperation increases.

HK Express will benefit from the ability to access Virgin Australia’s passenger feed to support its existing and planned services. It will also be able to benefit from joint marketing and sales initiatives.

2.5 Authorisation sought

The Applicants seek authorisation to make, and to give effect to, the Alliance Framework Agreement and associated agreements and arrangements contemplated by the Alliance Framework Agreement.

The Applicants submit that the ACCC should authorise the Alliance for a period of ten years.

The Applicants intend that the Alliance will operate for a long period and authorisation for at least ten years is appropriate in this context.

6 Note, these flights go via Cairns on the northbound leg to Hong Kong.



2.6 Interim authorisation is also sought

The Applicants are seeking interim authorisation to make and give effect to the Alliance, pending the outcome of the ACCC’s final determination, so that:

Virgin Australia can support the existing and new services between Australia and mainland China, and Australia and Hong Kong that are operated by Hong Kong Airlines and HNA Group airlines. Inbound Chinese passengers will be more attracted to these services if they can travel beyond on Virgin Australia’s domestic network. Virgin Australia will also be able to support these services – which are still relatively nascent – with Australian passengers wanting to travel to mainland China and Hong Kong.

the Applicants can successfully launch Virgin Australia’s proposed new services between Australia and Hong Kong/mainland China – as the ACCC is aware, the Applicants must immediately start planning and engaging in activities ahead of the launch of new long haul services. Ahead of final authorisation, the Applicants will need to:

− finalise commercial arrangements between each of the relevant Applicant airlines;

− finalise the arrangements with the relevant airport authorities;

− settle the agreed schedule for the services so that they best connect with behind and beyond services; and

− most critically, commence marketing and selling these services.

In circumstances where the Alliance will result in no public detriment, as Virgin Australia does not currently compete with the other Applicants and there is no scenario under which Virgin Australia would be an independent competitor on services between Australia and China or Australia and Hong Kong, the Alliance will instead immediately generate significant public benefits. Interim authorisation therefore presents no material competition risk.

3 International air travel between Australia and mainland China

The Alliance will provide for coordination on direct services between Australia and mainland China as well as services between Australia and Hong Kong between Virgin Australia and HNA Group and between Virgin Australia and Hong Kong Airlines, respectively. The Alliance will also provide for coordination between Virgin Australia and HNA Group in relation to connections in both domestic Australia and mainland China (including services between Hong Kong and mainland China7).

Mainland China is a key source of growth for the Australian tourism industry. In terms of inbound tourism, China is expected to be the largest source of both inbound arrivals and inbound expenditure, overtaking New Zealand as Australia’s largest international market by 2017-18.8 For Australian travellers, China is becoming an increasingly popular

7 Note that this cooperation will only be between Virgin Australia and each of HNA Group and Hong Kong Airlines, not between HNA Group and Hong Kong Airlines.

8 Tourism Research Australia, Tourism Forecasts 2016, July 2016, page 2, available at: http://www.tra.gov.au/documents/forecasts/Tourism_Forecasts_2016.pdf.

http://www.tra.gov.au/documents/forecasts/Tourism_Forecasts_2016.pdf



destination and is forecast to be one of the top five fastest growing destinations visited by Australian travellers in the next two years.9

3.1 Inbound tourism from mainland China is a key source of growth

Inbound tourism from China is a key source of growth for the Australian tourism industry and is expected to be worth more than $13 billion by 2020.10 In 2015, China was Australia’s second largest inbound market for visitor arrivals and the largest market for total spend and visitor nights. The number of Chinese visitors to Australia in a 12-month period exceeded 1 million for the first time in November 2015,11 and that number is forecast to continue to increase (see Figure 5 below). In fact, China is forecast to have the highest growth in inbound travel to Australia with the number of Chinese visitors to Australia increasing 18.5% in 2016-17 and 13.3% in 2017-18 (see Figure 6 below).

Figure 4 Visitor arrivals from China since 2004-05 and forecast growth over 10 years

Source: Tourism Research Australia


10 Minister for Tourism and International Education, Minister Assisting the Minister for Trade and Investment, Media Release, ‘Australia forges stronger tourism ties with China’, 14 April 2016, available at: http://ministers.dfat.gov.au/richardcolbeck/releases/Pages/2016/sc_mr_160414b.aspx.

11 Centre for Asia-Pacific Aviation, ‘China-Australia aviation: one million visitors & flights on 21 city-pairs from 12 Chinese cities’, 18 January 2016, available at: http://centreforaviation.com/analysis/china-australia-aviation-one-million-visitors-flights-on-21-city-pairs-from-12-chinese-cities-261773.

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http://centreforaviation.com/analysis/china-australia-aviation-one-million-visitors-flights-on-21-city-pairs-from-12-chinese-cities-261773




Figure 5 Arrivals growth by market (2016-17 and 2017-18)


In terms of all inbound markets, China’s share of total visitors to Australia in 2014-15 was 13.0% and this is forecast to increase to 16.4% in 2017-18 and to 25.7% by 2024-25.12 China is expected to become Australia’s largest source of inbound international arrivals by 2017-18, overtaking New Zealand two years earlier than previously forecast as a result of stronger than expected economic growth and the emergence of the growing middle income class, which has greater capacity to travel.13

China’s growing middle class is spread over different “tiers” of Chinese cities, which are currently in various stages of economic and social development.14 A report conducted by McKinsey & Company in 2013 suggested that by 2022, more than 80% of China’s middle class will live in small and medium-sized cities (see Figure 7 below), with 16% living in the “Tier 1” cities (Beijing, Shanghai, Guangzhou, and Shenzhen).15


13 Tourism Research Australia, Tourism Forecasts 2016, July 2016, pages 3, 11 and 15-16, available at: http://www.tra.gov.au/documents/forecasts/Tourism_Forecasts_2016.pdf.


15 “Mapping China’s middle class”, McKinsey Quarterly, June 2013, available at: http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class.

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http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class

http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class



Figure 6 Forecast share of middle class by type of city (2022)

Source: “Mapping China’s middle class”, McKinsey Quarterly

The Centre for Asia-Pacific Aviation predicts that increasing the number of Chinese cities with direct services to Australia has the largest growth prospects for the Australia-China aviation market.16 Until 2011, only 3 Chinese cities (Beijing, Guangzhou and Shanghai) had non-stop services to Australia. This increased to 6 in 2014, and to 14 by the end of 2016 (see section 4.2 below for further details about current and planned routes in the Australia-China market).

Therefore, in order to efficiently and effectively serve the growing number of inbound passengers travelling to Australia from China, it will be important to provide an increasing number of direct routes from both Tier 1 and Tier 2 Chinese cities to Australia, as well as access to an extensive network within mainland China with efficient connecting services behind and beyond the Australia-China routes.

3.2 The number of Australian travellers visiting China is increasing

The number of Australians travelling to China has been increasing over the past 10 years and is forecast to continue to grow in both the short and long-term (see Figure 8 below). Over the next 2 years, China is forecast to be one of the top five fastest growing destinations visited by Australian residents with a 5% increase in the number of Australians visiting China.17

16 Centre for Asia-Pacific Aviation, ‘China-Australia aviation: one million visitors & flights on 21 city-pairs from 12 Chinese cities’, 18 January 2016, available at: http://centreforaviation.com/analysis/china-australia-aviation-one-million-visitors-flights-on-21-city-pairs-from-12-chinese-cities-261773.







Figure 7 Short-term resident departures to China since 2004-05 and forecast growth over 10 years


3.3 Overview of the Australia-China market

There has been significant capacity growth in the Australia-China passenger air travel market over the past few years.

As shown in Figure 9 below, there has been significant growth in capacity on direct routes between Australia and China in the past 5-6 years in response to increasing demand for services. In particular, the three largest carriers servicing the market (China Southern Airlines, China Eastern Airlines and Air China) have substantially increased capacity since FY15 in response to, and in anticipation of, forecast growth in the Australia-China market.

Figure 8 Growth in capacity on direct routes between Australia and China (FY04 – FY16)

Source: BITRE

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China Eastern Airlines

China Southern Airlines

Hainan Airlines

Jetstar

Qantas Airways

Sichuan Airlines

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There are currently eight airlines servicing the Australia-China market with direct routes (see Table 1 below).

Table 1 Carriers currently servicing the Australia-China market with direct services as at December 2016

Carrier Direct routes offered

Air China Sydney-Beijing (up to 7 times per week) Sydney-Shanghai (4 times per week) Melbourne-Beijing (3-7 times per week, depending on time of year) Melbourne-Shanghai (5 times per week) Melbourne-Shenzhen (4 times per week) Sydney-Chengdu (3 times per week)

Beijing Capital Airlines

Melbourne-Qingdao-Shenyang (3 times per week)

China Eastern Airlines

Sydney-Shanghai (up to 3 times daily – codeshare with Qantas) Sydney-Kunming (3 times per week – codeshare with Qantas) Sydney-Hangzhou-Beijing (3 times per week – codeshare with Qantas) Melbourne-Shanghai (twice daily – codeshare with Qantas) Brisbane-Shanghai (daily – codeshare with Qantas) Cairns-Shanghai (seasonal service 2-4 times per week– codeshare with Qantas) Beijing-Nanjing-Sydney (3 times per week– codeshare with Qantas) Sydney-Wuhan (3 times per week from 27 January 2017, operating until 25 March 2017)

China Southern Airlines

Sydney-Guangzhou (twice daily – codeshare with Qantas) Sydney-Shenzhen (3 times per week – codeshare with Qantas) Melbourne-Guangzhou (twice daily – codeshare with Qantas) Brisbane-Guangzhou (daily – codeshare with Qantas) Perth-Guangzhou (daily – codeshare with Qantas) Adelaide-Guangzhou (3 times per week – codeshare with Qantas)

Hainan Airlines Sydney-Changsha (2 times per week) Sydney-Xi’an (2 times per week) Melbourne- Xi'an (2 times per week) Melbourne-Changsha (2 times per week)

Qantas Airways Sydney-Shanghai (up to 3 times daily – codeshare with China Eastern) Sydney-Guangzhou (twice daily – codeshare with China Southern) Sydney-Nanjing-Beijing (3 times per week through codeshare with China Eastern) Melbourne-Shanghai (twice daily – codeshare with China Eastern) Melbourne-Guangzhou (twice daily – codeshare with China Southern) Brisbane-Guangzhou (daily – codeshare with China Southern) Perth-Guangzhou (daily – codeshare with China Southern)




Sichuan Airlines Sydney-Chongqing (2 times per week) Melbourne-Chengdu (3 times per week)

Xiamen Airlines Sydney-Fuzhou (3 times per week) Sydney-Xiamen (2 times per week) Melbourne-Xiamen (2 times per week)

In addition to the carriers set out in Table 1 above, there are a plethora of carriers that fly one-stop services from Australia to China via key transit points such as Hong Kong, Singapore and Malaysia, including Singapore Airlines, Cathay Pacific, Malaysian Airlines and China Airlines, among others.

Of the carriers currently servicing the Australia-China market, in addition to the entry of Beijing Capital Airlines and Hainan Airlines, set out in section 2.4(b) above, over the past 18 months, the following carriers have either entered the market or introduced new direct services:

China Eastern Airlines launched its Brisbane-Shanghai, Sydney-Hangzhou, and Sydney-Kunming in November-December 2016;

China Southern Airlines launched Sydney-Shenzhen services in January 2016 and Adelaide-Guangzhou services in December 2016;

Air China launched Sydney- Chengdu and Melbourne-Shenzhen services in October 2016;

Jetstar entered the Australia-China market, operating Gold Coast-Wuhan services between September 2015 and September 2016; and

Xiamen Airlines entered the Australia-China market, launching Sydney-Fuzhou services in November 2015, Sydney-Xiamen services in December 2015 and Melbourne-Xiamen services in July 2016.

In addition to the new services, new entries and expansion of carriers that has occurred over the past year, it is anticipated that new services will be introduced in 2017. For example, Qantas announced it would recommence its daily Sydney-Beijing service in January 2017.18 The Applicants understand that this announcement was made in response to the proposed Alliance. Tianjin Airlines has also announced plans to launch three weekly Chongqing-Melbourne services in September 2017.

Figure 10 below shows the current and planned direct flights between China and Australia.

18 David Flynn, ‘Qantas to restart Sydney-Beijing flights’, 13 October 2016, Australian Business Traveller, available at: http://www.ausbt.com.au/qantas-to-restart-sydney-beijing-flights.

http://www.ausbt.com.au/qantas-to-restart-sydney-beijing-flights



Figure 9 Current and planned direct flights between China and Australia

As at June 2016

Expected as at June 2017

Source: Tourism Australia19

China Southern Airlines has the largest share, in terms of both capacity and passengers, in the Australia-China market at over 40%. China Eastern holds over 20% of the market and Air China has a share of passengers of approximately 16%. Figure 11 and Table 2 below set out passenger and capacity shares on direct services between Australia and China for FY16 and the past three financial years respectively.

Figure 10 Share of passengers and capacity on direct services between Australia and China (FY16)

Capacity between Australia and China

Share of passengers between Australia and China

Source: BITRE 19 See, Tourism Australia & Aviation, Tourism Australia – Katherine Droga, slide 15, http://www.tourism.australia.com/documents/Statistics/CAPA_Breakfast_KD_RM_TB_040816.pdf.

China Southern Airlines 44.0%

China Eastern Airlines 22.1%

Air China 16.7%

Qantas Airways

7.4%

Sichuan Airlines 4.8%

Xiamen Airlines 2.7%

Jetstar 1.8%

Hainan Airlines 0.5%

China Southern Airlines 44.6%

China Eastern Airlines 23.3%

Air China 16.1%

Qantas Airways

7.2%

Sichuan Airlines 4.3%

Xiamen Airlines 2.4%

Jetstar 1.6%

Hainan Airlines 0.5%



Table 2 Share of passengers and capacity on direct services between Australia and China for past three financial years

Carrier Capacity share Share of passengers

FY14 FY15 FY16 FY14 FY15 FY16

Air China 17.0% 16.2% 16.7% 17.7% 15.9% 16.1%

China Eastern Airlines 23.9% 24.3% 22.1% 24.6% 24.4% 23.3%

China Southern Airlines 44.6% 43.3% 44.0% 44.5% 44.6% 44.6%

Hainan Airlines - - 0.5% - - 0.5%

Jetstar - - 1.8% - - 1.6%

Qantas Airways 10.0% 10.0% 7.4% 9.5% 9.6% 7.2%

Sichuan Airlines 4.5% 6.2% 4.8% 3.7% 5.6% 4.3%

Xiamen Airlines - - 2.7% - - 2.4% Source: BITRE

See Attachment I for further information on the key competitors operating in the Australia-China market. See Attachment J for data on purpose of travel, passenger volume, capacity and load factors on Australia-China routes.

4 International air travel between Australia and Hong Kong

The Alliance will also provide for coordination on direct services between Australia and Hong Kong.

Hong Kong has long been a key source of inbound tourism to Australia. In particular, in 2015, Tourism Australia reported that Hong Kong was Australia’s 10th largest inbound market for visitor arrivals and visitor nights, and eighth for total visitor spend.20

Hong Kong is a popular destination for Australians as well as a hub for passengers travelling beyond to the UK and Europe. It is also a gateway destination for passengers travelling both into and out of China. Other popular transit points between Australia and China are Singapore and Malaysia.

As outlined below, Hong Kong is forecast to be a source of growth for Australian tourism both in terms of outbound and, to a greater extent, inbound tourism.

4.1 Passenger travel to and from Hong Kong is forecast to grow

Air passenger travel between Australia and Hong Kong is forecast to grow, both in terms of the number of inbound visitors and the number of Australian travellers to Hong Kong:

in terms of inbound arrivals from Hong Kong, visitor numbers are forecast to experience solid growth (see Figure 12 below), increasing 4.9% in 2016-17 and 4.2% in 2017-18 (see Figure 6 above); and

20 Tourism Australia, Hong Kong Market Profile, 2016, available at: < http://www.tourism.australia.com/documents/TASI10419_Market_Profiles_2016_Hong_Kong_final_copy.pdf>, p 1.

http://www.tourism.australia.com/documents/TASI10419_Market_Profiles_2016_Hong_Kong_final_copy.pdf



the number of Australian travellers visiting Hong Kong is also forecast to increase in both the short- and long-term, following slight decline in FY14-15 (see Figure 12 below).

Figure 11 Visitor arrivals from Hong Kong and short-term resident departures to Hong Kong since 2004-05 and forecast growth over 10 years


4.2 Overview of the Australia-Hong Kong market

Tourism Australia reports that there has been limited capacity growth in the Australia-Hong Kong passenger air travel market over the past few years due to the two main constraints – the lack of capacity available under the bilateral agreements and the infrastructure limitations at Hong Kong International Airport.21 In particular, Cathay Pacific have utilised all available capacity to the major Australian cities under the current bilateral agreement.

Figure 12 Capacity from Hong Kong to Australia, December 2006-December 2015

21 Tourism Australia, Hong Kong Market Profile, 2016, available at: < http://www.tourism.australia.com/documents/TASI10419_Market_Profiles_2016_Hong_Kong_final_copy.pdf>, p 4.

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Table 3 Carriers currently servicing the Australia-Hong Kong market with direct services as at December 2016


Cathay Pacific Sydney-Hong Kong (4 times daily) Melbourne-Hong Kong (3 times daily with one service not operating on a Sunday) Brisbane-Hong Kong (once daily except no service on Fridays) Adelaide-Hong Kong (4 times per week) Perth-Hong Kong (once daily with a second service 3 times per week) Cairns-Hong Kong (4 times per week)

Qantas Sydney-Hong Kong (twice daily, with four days 3 times daily22) Melbourne-Hong Kong (once daily) Brisbane-Hong Kong (once daily)

Hong Kong Airlines Gold Coast-Hong Kong (via Cairns) (3 times per week)

In addition to the services set out in Table 3, it is understood that the two dominant carriers – Qantas and Cathay Pacific – are seeking to increase capacity through introducing additional services and aircraft upgauging. In particular:

Qantas has announced that it wants to increase frequency/capacity between Australia and Hong Kong, but has cited slot constraints as an impediment to growth.23 Qantas upgauged three services per week on Melbourne-Hong Kong from A330 to B747 in mid-2016 and over the 2017 Chinese New Year period will operate daily services with a B747. While Qantas sought to offer daily services between Sydney and Hong Kong, it could only secure slots for services four times per week. Those services commenced in late October 2016.24

Cathay Pacific recently announced that it is upgauging the aircraft on two of its three daily Hong Kong-Melbourne services from A330 to A350 and B777 effective early 2017. The upgauge of aircraft represents a capacity increase of 15.7% to Melbourne.25 Cathay Pacific will also upgauge the non-stop Brisbane-Hong Kong service from A330 to A350, representing a capacity increase of 12% on the non-stop service. Cathay Pacific has previously noted that it would like to increase the number of frequencies between Australia and Hong Kong, but it cannot do this as it has exhausted the capacity limit available to Hong Kong carriers under the Australia-Hong Kong air services arrangements (70 weekly frequencies to Brisbane, Sydney, Melbourne and Perth – all of which are operated by Cathay Pacific). Therefore, it is instead choosing to increase capacity by upgauging.

The Australia-Hong Kong market is dominated by Qantas and Cathay Pacific who together currently have a 99% share of capacity and passengers (see Figure 14).

22 For Northern Summer 2016. See, Qantas, ‘More flights to meet demand on Sydney-Hong Kong’, 17 March 2016, available at: http://www.qantas.com/agents/dyn/qf/info/201603/0305 and Centre for Asia-Pacific Aviation and Australian Aviation, ‘Qantas lifts Sydney-Hong Kong’ to double-daily, 17 March 2016, available at: http://australianaviation.com.au/2016/03/qantas-lifts-sydney-hong-kong-to-double-daily/.

23 See, Jamie Freed, ‘Qantas seeks more growth in Hong Kong’, Australian Financial Review, 10 September 2016, 19. 24 See also, http://australianaviation.com.au/2015/09/qantas-says-slot-congestion-at-hk-limiting-growth/. 25 See, http://australianaviation.com.au/2016/09/cathay-to-bring-a350-900-777-300er-to-melbourne-in-2017/.

http://www.qantas.com/agents/dyn/qf/info/201603/0305

http://australianaviation.com.au/2016/03/qantas-lifts-sydney-hong-kong-to-double-daily/

http://australianaviation.com.au/2016/03/qantas-lifts-sydney-hong-kong-to-double-daily/

http://australianaviation.com.au/2015/09/qantas-says-slot-congestion-at-hk-limiting-growth/

http://australianaviation.com.au/2016/09/cathay-to-bring-a350-900-777-300er-to-melbourne-in-2017/



Figure 13: Share of passengers and capacity on direct services between Australia and Hong Kong (FY16)

Capacity between Australia and Hong Kong

Share of passengers between Australia and China

Source: BITRE

Table 4 below sets out passenger and capacity shares on direct services between Australia and Hong Kong for the past three financial years.

Hong Kong Airlines only entered the Australia-Hong Kong market in January 2016 with a Hong Kong-Gold Coast service (that goes via Cairns on the north-bound leg). This was initially introduced as a seasonal route but Hong Kong Airlines recently made this route a permanent route.

Virgin Atlantic previously serviced the Sydney-Hong Kong market for almost 10 years, before exiting in May 2014 because it was an unprofitable route.26 As outlined in section 2.4(c), the Alliance will facilitate Virgin Australia’s entry into the Australia-Hong Kong market and allow both Virgin Australia and Hong Kong Airlines to be more effective competitors in that market.

Table 4 Share of passengers and capacity on direct services between Australia and Hong Kong for past three financial years

Carrier Capacity share Share of passengers

FY14 FY15 FY16 FY14 FY15 FY16

Cathay Pacific 66% 73% 71% 69% 75% 73%

Qantas Airways 28% 27% 28% 27% 25% 26%

Hong Kong Airlines 1% - - 1%

Virgin Atlantic 7% - - 4% - - Source: BITRE

26 Matt O’Sullivan, ‘Virgin Atlantic axes flights between Sydney and Hong Kong’, 5 February 2014, Sydney Morning Herald (online), available at: http://www.smh.com.au/business/aviation/virgin-atlantic-axes-flights-between-sydney-and-hong-kong-20140204-3202q.html.

Cathay Pacific Airways

71%

Qantas Airways

28%

Hong Kong Airlines

1%

Cathay Pacific Airways

73%

Qantas Airways

26%

Hong Kong Airlines

1%

http://www.smh.com.au/business/aviation/virgin-atlantic-axes-flights-between-sydney-and-hong-kong-20140204-3202q.html

http://www.smh.com.au/business/aviation/virgin-atlantic-axes-flights-between-sydney-and-hong-kong-20140204-3202q.html



The daily frequencies operated between Australia and Hong Kong over 2013-2016 are set out in Table 5 below. The daily frequencies show that, in 2016, Cathay Pacific operates the overwhelming majority of frequencies (approximately 72%), Qantas operates over 25% and Hong Kong Airlines operates just 2.7%.

Table 5 Daily frequencies between Australia and Hong Kong, 2013-2016

Airline 2013 2014 2015 2016

Cathay Pacific 9.4 10.0 10.6 10.6

Qantas 3.0 3.0 3.1 3.8

Hong Kong Airlines - - - 0.4

Virgin Atlantic 1.0 0.3 - -

TOTAL 13.4 13.3 13.7 14.8 Source: Hong Kong Airlines.

The load factors between services operating between Sydney and Hong Kong and Melbourne and Hong Kong have increased over the period 2014-2016 (see Figure 15 below), suggesting that services are now run close to full capacity.

Figure 14 Load factors between Hong Kong and Sydney and Hong Kong and Melbourne

Source: Hong Kong Airlines.

See Attachment I for further information on the key competitors operating in the Australia-Hong Kong market. See Attachment J for data on purpose of travel, passenger volume, capacity and load factors on Australia-Hong Kong routes.

5 Framework for analysis of the Alliance 5.1 Relevant markets

The practical starting point for considering market definition in an authorisation context is to examine the services that will be provided by the Applicants.

Relevantly and as noted above, the Alliance will provide for coordination on services between Australia and mainland China as well as between Australia and Hong Kong.

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The Applicants will also cooperate in relation to connecting services in both domestic Australia, on trans-Tasman routes and in mainland China.

As outlined in section 3, the Australia-mainland China market is characterised by competition between a number of carriers, the majority of which are owned by the Chinese Government. The Australia-Hong Kong market – whether it is a separate market or part of a broader Australia-Greater China market – is dominated by Cathay Pacific and Qantas.

The Applicants submit that the following markets are likely to be relevant to the ACCC’s assessment of the Alliance:

the supply of international air transport services for passengers travelling between: (a) Australia and mainland China; and (b) Australia and Hong Kong; and

the supply of Australian air transport services for passengers travelling on domestic routes.

However, given that there is no direct overlap between the operations of Virgin Australia and the other Applicants (see section 7 below), whether the product markets are defined narrowly (business passengers separate from leisure passengers) or more broadly (both types of passengers together) does not alter the competitive assessment of the Alliance.

5.2 Counterfactual

The relevant counterfactual, in the absence of the Alliance, would be a less competitive outcome with substantially fewer benefits for passengers travelling between Australia and China, Australia and Hong Kong and for the Australian economy.

Absent the Alliance, Virgin Australia would be unlikely to be in a position to enter with Australia-China and Australia-Hong Kong services, as it is necessary to have a strong distribution and route network within China and Hong Kong in order to effectively compete with incumbent carriers. In particular, access to feeder traffic from HNA Group and Hong Kong Airlines, as well as the extensive sales and distribution networks, are critical to the profitability of these services. In the counterfactual, Virgin Australia would therefore likely continue to have a significant gap in its Chinese network.

Additionally, the Applicants would not be able to offer passengers an attractive joint loyalty program with the extensive aspects of reciprocal codeshare, lounge access, frequent flyer points and status benefits absent the Alliance. In the counterfactual, the Applicants would offer a significantly more limited form of codeshare and frequent flyer privileges.

The ability to jointly offer a complete Australasia-China/Hong Kong network of destinations with reciprocal frequent flyer benefits will be extremely valuable to both customers and the Alliance parties alike. Without the Alliance, the Applicants would not provide the same reciprocal benefits to eligible members of Velocity and Fortune Wings Club.

The Applicants would not, absent the Alliance, provide reciprocal access to lounges because of the operating and capital costs associated with increased lounge use.

Virgin Australia and HNA Group, Hong Kong Airlines and HK Express would not have the incentive or ability to achieve the commercial and public benefits without an integrated Alliance. It is only by aligning incentives through the Alliance that the Applicants’ have the ability to invest in enhancements to international and connecting domestic services and an attractive joint offering.



Because the Applicants would not be able to compete against incumbent carriers in terms of network reach, product offering and valuable frequent flyer and lounge benefits, the significant public benefits to customers, tourism and the Australian economy more generally (as outlined in section 6 below) would not be realised.

6 Significant public benefits

The Alliance will result in significant public benefits, namely:

new international services operated by Virgin Australia between Australia and Hong Kong, and Australia and mainland China, that would only be enabled by the Alliance;

enhanced products and services, particularly the availability of an extensive network of destinations in mainland China and Hong Kong across HNA Group’s and Hong Kong Airlines’ networks, with reciprocal frequent flyer benefits and lounge access;

promotion of Virgin Australia as a second Australian airline that operates services, directly and through its Applicant partners, to Hong Kong and mainland China in competition with Qantas and its partners, including Cathay Pacific (through the oneworld alliance) and China Eastern, to the benefit of Australian consumers;

meeting the demands of travellers from China and Hong Kong and further stimulating tourism to Australia beyond its main international gateways; and

greater ability to realise cost savings and efficiencies.

6.1 New international services between Australia and Hong Kong and Australia and mainland China

Under the Alliance, Virgin Australia will commence new services between Australia and Hong Kong, and Australia and mainland China.

Initially, Virgin Australia will commence services between Australia and Hong Kong with A330 aircraft. Following the successful launch of these services, Virgin Australia expects to launch services between Australia and mainland China [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] with A330 aircraft.

The services will provide more choice for Australians travelling between Australia and Hong Kong and Australia and mainland China, as well as for passengers travelling beyond gateways in mainland China.

In its final determination of the alliance between Virgin Blue and Etihad Airways in 2011, the ACCC concluded that the ‘new international services available under the Alliance are likely to result in a public benefit in the form of increased choice and convenience for consumers.’27

In addition to increased choice and convenience, the new services are likely to stimulate further demand growth which would be likely to lead to the introduction of new domestic

27 ACCC, Determination: Applications for authorisation lodged by Virgin Blue Airlines Pty Ltd and Others in respect of an airline alliance between the applicants, A91247 & A91248, C2010/803, 3 February 2011, 14.



services in Australia. New domestic services will have flow on benefits for Australian tourism and the Australian economy more generally.

Following the establishment of these new services, the Applicants will work together to consider the addition of further services between Australia and China and Australia and Hong Kong. [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED]

6.2 Enhanced products and services

Under the Alliance, the Applicants will provide passengers with the ability to purchase online journeys across the Applicants’ respective networks. This will lead to increased choice of journey options for passengers.

All passengers will have access to new destinations and a broader schedule of services on the Applicants’ code. The Alliance will enable online connections (and interline connections) between cities and regions on Virgin Australia’s domestic network and internationally on HNA Group’s, Hong Kong Airlines’ and HK Express’ networks, as set out in Attachments D and E.

Virgin Australia passengers that currently have access to 11 one-stop codeshare services will now have access to a vast number of destinations on the networks of the HNA Group, Hong Kong Airlines and HK Express. The direct services that Virgin Australia will operate from Australia to Hong Kong will enable passengers to travel on a one-stop service to a large number of destinations across mainland China.

For Australian passengers, this will create online journeys that were previously unavailable. For Chinese passengers, this will allow them to access online journeys on services to destinations throughout Australia, beyond the international gateways.

The ACCC in its assessments of airline alliances has consistently found that increased online connection options for consumers is a key source of public benefit under the Alliance. For instance, the ACCC has recently noted that material public benefits through enhanced products and services typically include:

the facilitation of new services and additional frequencies and seats;

increased and better online connection options;

greater loyalty program benefits; and

improved lounge access.28

In particular, online connections may provide benefits including:

time savings associated with through check in;

enhanced passenger protection handling among the Applicants during flight disruption;

improved MCT to facilitate better passenger transfer; and

28 ACCC, Determination: Application for revocation of A91267 & A91268 and the substitution of authorisations A91539 & A91540 lodged by Virgin Australia and Singapore Airlines in respect of an airline alliance, A91539 & A91540, 23 September 2016, 12.



the removal of the risk of forfeiting non-refundable fares if the first flight in their journey is delayed.

In the present circumstances, these benefits will become available to passengers travelling between Australia and either Hong Kong or China and beyond into mainland China and for passengers travelling beyond Australian gateways to regional destinations in Australia and New Zealand.

6.3 Improved loyalty program benefits

Under the Alliance, passengers will receive reciprocal frequent flyer benefits, lounge access benefits and elite member benefits. In particular:

members of Virgin Australia’s Velocity and Hong Kong Airlines’ and HNA Group’s Fortune Wings Club will be able to earn and redeem frequent flyer benefits on relevant Alliance routes;

eligible Virgin Australia passengers will be able to access Hong Kong Airlines’ lounges in Hong Kong and HNA Group’s lounges in China. Eligible HNA Group and Hong Kong Airlines passengers will be able to access Virgin Australia’s domestic lounges; and

priority check in, priority boarding and extra baggage allowances will be made available to passengers and in the future, further benefits, such as automatic priority during network disruptions, will be explored.

6.4 An increase in customer choice and an increase in competition

The Alliance enables Virgin Australia to better compete with Qantas internationally and to China and Hong Kong in particular.

It will also enable Hong Kong Airlines to better compete with Cathay Pacific, HK Express to better compete with Cathay Dragon and HNA Group airlines to better compete with China Southern, China Eastern and Air China, among others.

This direct head-to-head competition will increase customer choice and the impact of more competition on the Australia-China and Australia-Hong Kong routes will lead to substantial public benefits.

6.5 Stimulation of inbound tourism to Australia from China and Hong Kong

The Alliance will encourage increased tourism to Australia from China and from Hong Kong by providing connections between destinations throughout Australia and mainland China and Hong Kong.

Of Australia’s major inbound markets, Chinese leisure free and independent travellers (FITs) have the least dispersal between main tourism destination and regional areas in Australia. Hong Kong based travellers also tend to principally travel to Sydney, Melbourne and the Gold Coast.29

With the Alliance, these travellers will have greater opportunity to travel beyond the main tourist destinations to regional and smaller capital cities.

29 Tourism Australia, Hong Kong Market Profile, 2016, available at: http://www.tourism.australia.com/documents/TASI10419_Market_Profiles_2016_Hong_Kong_final_copy.pdf, p 3.




As noted above in section 3, travellers from mainland China will soon overtake New Zealand as the largest source of international tourists to Australia. The Alliance will allow the Applicants to meet this increasing demand and also further stimulate it by marketing and selling Virgin Australia’s services in mainland China and in Hong Kong.

6.6 Greater ability to realise efficiencies and cost savings

As with other alliances, the Alliance will enable efficiencies and cost savings through the combination of ground handling, catering and other airport services.

The Applicants have not yet had the opportunity to identify specific areas, or assess the magnitude of likely cost savings under the Alliance, but expect there to be some savings and efficiencies from joint operations.

7 No competitive detriment

The Alliance will not result in any competitive detriment in the relevant markets. Instead, the Alliance is pro-competitive as it provides the platform for Virgin Australia’s entry into these markets. In addition, the Alliance’s enhanced service offering, which includes reciprocal frequent flyer programs and lounge access, is likely to trigger a competitive response from other airlines including Qantas and its partners, particularly Cathay Pacific and China Eastern. The proposed Alliance is already triggering a competitive response, with Qantas recently announcing that it will recommence Sydney-Beijing services from January 2017.

7.1 No relevant competitive overlap between the Applicants’ services

The Applicants’ networks are entirely complementary and there is no relevant competitive overlap between their services. In particular:

Virgin Australia does not currently operate direct flights between Australia and mainland China or Australia and Hong Kong.

In terms of proposed and planned direct routes between Australia and mainland China, there will be no direct overlap as the Applicants will provide services to different gateway destinations.

In terms of proposed and planned direct routes between Australia and Hong Kong, there will be no direct overlap as the Applicants will operate from different Australian cities.

The lack of overlap is also demonstrated in Table 6 below. Table 6 demonstrates that Virgin Australia, HNA Group, Hong Kong Airlines and HK Express are neither competitors nor potential competitors on any direct route between Australia and mainland China or Australia and Hong Kong.

Table 6 Applicants’ current and proposed direct routes in Australia-China market

Operating carrier Gateway destination Routes

Virgin Australia Beijing Australia (likely Sydney, Brisbane or Melbourne)-Beijing Beijing-Australia

Hong Kong Australia (likely Sydney, Brisbane or Melbourne)-Hong Kong



Operating carrier Gateway destination Routes Hong Kong-Australia

Hainan Airlines Changsha Sydney-Changsha Changsha-Sydney Melbourne-Changsha Changsha-Melbourne

Xi’an Sydney-Xi’an Xi’an-Sydney Melbourne-Xi’an Xi’an-Melbourne

Tianjin Airlines Chongqing Melbourne-Chongqing Chongqing-Melbourne

Beijing Capital Airlines Qingdao Melbourne-Qingdao-Shenyang Shenyang-Qingdao-Melbourne

Hong Kong Airlines Hong Kong Gold Coast-Cairns-Hong Kong Hong Kong-Gold Coast

The only potential overlap between the Applicants would be in relation to a small number of indirect routes between Australia and mainland China that are operated via different midpoints.

[CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED].

HNA Group airlines and Hong Kong Airlines also provides one-stop services (either via Hong Kong or a gateway destination in mainland China) to some of the destinations in mainland China that Virgin Australia currently serves. However, the potential overlap between the Applicants on indirect routes between Australia and China is minimal and limited to a small handful of city pairs.

In any event, the Applicants would be constrained by other competitors in the Australia-mainland China market, particularly China Southern, China Eastern and Air China. While the Applicants potentially overlap on some services between Sydney and destinations in mainland China (Guangzhou, Shanghai, Chengdu, Chongqing, Shenzhen and Xiamen), all of these routes are currently served with direct flights by other competitors in the Australia-China market.

Therefore, the Alliance will not have an adverse impact on competition in any market.

7.2 The relevant markets are highly competitive and characterised by other, larger carriers

The Alliance will not result in any competitive detriment as:

the Alliance will facilitate the entry/expansion of Virgin Australia and HNA Group in the Australia-mainland China market, a market which is characterised by vigorous and growing competition from a large number of carriers; and

the Alliance will facilitate the entry/expansion of Virgin Australia and Hong Kong Airlines in the Australia-Hong Kong market, which is currently dominated by incumbents Cathay Pacific and Qantas.



(a) Australia-mainland China

The Australia-mainland China market is a dynamic and growing market that is characterised by strong competition between a large number of carriers.

The vigorous competition in the Australia-mainland China market is evident from:

growth in passenger numbers: passenger numbers in the Australia-mainland China market have experienced solid growth. The number of Chinese visitors to Australia in a 12-month period exceeded one million for the first time in 2015 and that number is forecast to continue to grow. Further details of the growth in passenger numbers in the Australia-mainland China market are included in sections 3.1 and 3.2 above.

increasing capacity: capacity has increased between Australia and mainland China over the past 5-6 years. In particular, the 3 dominant carriers in the Australia-mainland China market (China Southern Airlines, China Eastern Airlines and Air China) have all added significant capacity on these routes since FY15 (see Figure 9 above).

new entry and expansion: a number of carriers have introduced (or announced plans to introduce) new routes in the Australia-mainland China market. For example, China Southern Airlines, the dominant player in the market, launched Sydney-Shenzhen services in January 2016 and launched Adelaide-Guangzhou services in December 2016. Xiamen Airlines, Hainan Airlines and Beijing Capital Airlines have all recently entered the Australia-mainland China market, and the Alliance will facilitate the new entry of Virgin Australia. Further details of new entry and expansion of carriers in the Australia-mainland China market are set out in section 3.3 above.

decreasing average fares: the average fares for Australia-mainland China routes have decreased over the past three financial years, and in particular in FY16 following a slight increase in FY15 (see Figure 16). For example, the average fare on the Sydney-Guangzhou route has decreased from around $385 USD in FY14 to around $317 USD in FY16. The strong fare competition in the Australia-mainland China market is indicative of trends across the market, which have seen new market entry, capacity increases and corresponding decreases in fares and the stimulation of total passenger numbers.

Therefore, the Alliance will face strong competition from a number of carriers within the Australia-mainland China market.



Figure 15 Average economy fares (USD) over time for routes between Australia and mainland China

Source: PaxIS

(b) Australia-Hong Kong

As outlined in section 4.2 above, the Australia-Hong Kong market is dominated by incumbents Cathay Pacific and Qantas who together have a 99% share of capacity and passengers.

Services between Sydney and Hong Kong and Melbourne and Hong Kong are operating at close to full capacity, with load factors increasing since 2014 and exceeding 85% in 2016 (see Figure 15 in section 4.2 above). At the same time, capacity in the Australia-Hong Kong market has been relatively steady over the past ten years (see Figure 17 below), despite growth in passenger numbers (see Figure 12 in section 4.2 above). The result is that there has not been significant downward pressure on prices, with the average for routes between Australia and Hong Kong decreasing less than 10% since FY14 (see Figure 18 below).

By expanding the capacity and the services in the Australia-Hong Kong market, the Alliance will not have any adverse impacts on competition but will be pro-competitive. The Alliance will facilitate Virgin Australia’s entry and allow both Virgin Australia and Hong Kong Airlines to be more effective competitors in that market. Qantas and Cathay Pacific will likely respond to the increased competition in the market, which will further increase capacity, which will put downward competitive pressure on fares and, in turn, encourage increased passenger numbers.

$300

$320

$340

$360

$380

$400

$420

$440

$460

FY14 FY15 FY16

Sydney - BeijingSydney - ShanghaiSydney - GuangzhouMelbourne - BeijingMelbourne-ShanghaiMelbourne - GuangzhouBrisbane - Guangzhou



Figure 16 Capacity on direct routes between Australia and Hong Kong (FY07 – FY16)

Source: BITRE

Figure 17 Average economy fares (USD) over time for routes between Australia and Hong Kong

Source: PaxIS

7.3 Alliance increases competition in domestic and international travel markets

The Alliance has a pro-competitive effect in domestic and international travel markets.

As the ACCC has noted, airline alliances are likely to result in the most benefits where there are network complementarities, the incentives of the alliance partners are aligned, and a procompetitive response is promoted.30 All of these factors strongly apply to the Alliance.

The Alliance will enable the Applicants to enter and effectively compete in international air travel markets as the Applicants can provide passengers with itineraries not otherwise available. In particular, the Alliance enables Virgin Australia to introduce new services between Australia and mainland China and Australia and Hong Kong.

30 ACCC, Draft Determination in relation to Virgin Australia and Delta Airlines , 4 June 2015.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Seat

s pe

r yea

r ('0

00)

Cathay Pacific AirwaysHong Kong AirlinesQantas AirwaysVirgin Atlantic AirwaysGrand Total

$300

$320

$340

$360

$380

$400

$420

$440

FY14 FY15 FY16

Sydney - Hong Kong

Melbourne - Hong Kong

Brisbane - Hong Kong



8 Conclusion

For the reasons set out in this submission, the Applicants submit that the ACCC ought to grant authorisation for the Alliance for a period of ten years. The complementary nature of the Applicants’ services enhances the public benefits of the Alliance while making any public detriment unlikely. Accordingly, the public benefits of the Alliance significantly outweigh any potential for detriment.



Confidential Attachment A – Alliance Framework Agreement and other agreements [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED]



Attachment B – Virgin Australia

Virgin Australia commenced operations in Australia in August 2000 and is listed on the Australian Stock Exchange.31 Virgin Australia and its subsidiaries currently operate a fleet of 149 aircraft, flying to 44 domestic destinations and 15 international destinations. Virgin Australia operates approximately 3,600 flights per week to over 450 Australian and international destinations through its brands, Virgin Australia, Virgin Samoa, and Tigerair Australia, and through its codeshare partners.32 Virgin Australia currently employs over 9,000 people worldwide.

B.1 Business Strategy

Virgin Australia has transformed its business from a low cost carrier to a contemporary airline group with a strong presence in all segments of the Australian aviation market.

Game Change Program (2010-2012)

In 2010, Virgin Australia launched the Game Change Program, a business strategy aimed at transforming Virgin Australia from a low cost carrier to a premium carrier. Virgin Australia achieved the following six fundamental goals in the Game Change Program:

diversified revenue;

created a global network;

accessed growth and expansion markets;

maintained cost advantage;

upgraded product and services; and

invested in its people.

Game On (2012-2014)

In August 2012, Virgin Australia transitioned to the Game On initiative, which was scheduled to be fully completed by 30 June 2015. Virgin Australia focused on fast-tracking the Game Change Program and the Game On initiative and, in August 2014, announced the successful completion of both initiatives.

The Game On initiative was designed to capitalise on the competitive advantages achieved under the Game Change Program by focusing on the following key strategic pillars:

implementing a business efficiency program;

building a transformational loyalty business;

increasing access to global markets;

further enhancing the guest experience through in-flight innovation and on-the-ground service; and

31 Virgin Australia’s international airlines are held by Virgin Australia International Holdings Pty Ltd, which is owned by VAH

shareholders and comprehensively serviced and funded by VAH. 32 As at 30 June 2016.



enhancing Virgin Australia's people and service excellence.

Virgin Vision 2017 (current)

Under Virgin Vision 2017, Virgin Australia's focus is to become Australia's favourite airline group. Virgin Vision 2017 aims to maximise Virgin Australia's potential by extracting value from the business, consolidating the benefits from the Game Change Program and Game On initiative, setting a new standard in customer experience to assure stable future revenue streams and enabling Virgin Australia to deliver sustainable profitability.

Virgin Vision 2017 will focus on the following six key areas:

Capitalise on business growth opportunities -

− Velocity Frequent Flyer: Virgin Australia intends to grow membership to more than seven million members by end of 2017, diversify Velocity's partner mix, increase partner numbers and strengthen member engagement.

− Charter: Virgin Australia plans to significantly increase the revenue from Virgin Australia's charter business by the financial year ending 30 June 2017.

− Freight: Virgin Australia has launched a freight division, Virgin Australia Cargo, which is expected to significantly increase revenue attributable to the freight business.

− Tigerair Australia: Virgin Australia will continue the Tigerair Australia transformation program by further improving customer satisfaction, driving incremental revenue growth, delivering cost synergies and developing an efficient operating platform and network footprint to achieve profitability by the financial year ending 30 June 2017.

Drive yield enhancement - Virgin Australia seeks to increase corporate and government domestic revenue to 30% of domestic revenue base by 30 June 2017 and increase interline and codeshare revenue through strengthening and expanding existing alliance partnerships.

$1 billion cost program - Virgin Australia plans to expand the business efficiency program introduced under the Game Change Program to target by 30 June 2017 AU$1 billion in cumulative productivity gains since the program's initiation through enhanced procurement, improved productivity and streamlined operations.

Optimise the balance sheet - Virgin Australia aims to optimise and maintain the balance sheet to further improve the liquidity and gearing position of Virgin Australia. The recent Capital Structure Review focused on this objective.

New standard in customer experience - Virgin Australia will continue to place a strong focus on product and service to set a new standard in customer experience.

Develop people to their full potential - Virgin Australia seeks to remain the employer of choice in the industry and Australia.

Better Business Program - As part of its Capital Structure Review in 2016 Virgin Australia announced its Better Business Program. The Better Business Program is expected to drive efficiency and productivity across all parts of the business. Through this program, Virgin Australia’s fleet simplification program will continue with the planned removal of some ATR aircraft, all Embraer 190 aircraft and Tigerair-branded A320 aircraft over the next three years. As a result of the Better Business Program the Group is targeting net free cash flow savings, increasing to $300 million per annum (annualised run rate) by the end of the 2019 financial year.



B.2 Virgin Australia’s Operations

Virgin Australia is a domestic and international passenger airline with an extensive domestic and international short and long haul network serviced through its own aircraft and those of its network alliance partners.

Table 7 sets outs Virgin Australia’s key operating statistics for the past three financial years.

Table 7 Virgin Australia operating statistics

Detail FY16 FY15 FY14

Passengers carried (millions) 23.7 22.3 20.0

Available seat kilometres (billions) 47.0 46.0 42.2

Revenue passenger kilometres (billions) 37.3 35.8 33.1

Revenue Load factor (%) 79.4 77.8 78.4

Virgin Australia branded domestic operations service all major Australian cities and main regional ports for both corporate and leisure travel. Virgin Australia brand currently operates approximately 3,000 domestic scheduled flights and approximately 160 charter flights per week, connecting all major Australian airports. Virgin Australia maintains a focus on expanding its presence in regional Australia through the launch of new services, increased flight frequency and ongoing network optimisation. Virgin Australia has established a track record for effectively entering into new markets, with ten new domestic markets between 30 June 2011 and 30 June 2014, including seven new regional ports. Virgin Australia’s domestic route map is set out below.

Figure 18 Virgin Australia’s domestic route map (current as of December 2016)

Virgin Australia flies to 13 international short haul destinations on its own aircraft departing from and arriving at airports within Southeast Asia, the Pacific and New Zealand, including Fiji, Auckland, Wellington and Denpasar. Virgin Australia’s international long haul services consist of 14 flights per week to Los Angeles and three flights per week to Abu Dhabi. In addition to the routes directly flown



by its own aircraft, Virgin Australia’s international short haul and international long haul network is strengthened by its strategic alliances and partnerships, which enable its customers to access over 450 destinations worldwide, including interline destinations.

B.3 Other strategic alliances and partnerships

Airline Description

Delta Air Lines

The Delta Air Lines alliance was launched in late 2011, having received ACCC authorisation in June 2010 for a period of five and a half years and indefinite approval from the US Department of Transport and from the New Zealand Ministry of Transport. The Alliance links Virgin Australia’s network with that of Delta, enabling the two airlines to offer more frequencies on the trans-Pacific with connections behind and beyond in Australasia and North America. In August 2015, the ACCC reauthorised the Alliance for a further 5 years until 7 September 2020.

Etihad Airways

The Etihad Airways alliance was launched in October 2010, and received ACCC authorisation for five years in February 2011. The alliance was recently re-authorised by the ACCC in December 2015 for an additional 5 years (until 30 December 2020). The alliance has made available a wide network of 38 international codeshare destinations throughout Europe, the Middle East, Pakistan, and Africa, connecting onto 46 destinations in Australasia.

Singapore Airlines

The Singapore Airlines alliance was launched in January 2012, having received ACCC authorisation for five years in December 2011. Virgin Australia and Singapore Airlines have recently sought re-authorisation of this international alliance for an additional 10 years. The Alliance links Virgin Australia’s network with that of Singapore Airlines, making available a wide network of 75 international codeshare destinations throughout Asia, Europe and South Africa, connecting onto 49 destinations in Australasia.

Air New Zealand

The Air New Zealand alliance was launched in July 2011 and has driven strong growth in passenger numbers on Virgin Australia’s trans-Tasman services. It enables Virgin Australia to offer increased choice of flight times for trans-Tasman travel. Virgin Australia has worked closely with Air New Zealand to optimise schedules for flights across the Tasman and offer reciprocal benefits to customers. In September 2013, the ACCC and the New Zealand Minister of Transport granted conditional authorisation for Virgin Australia and Air New Zealand to continue their Australasian Airline Alliance Agreement and associated agreements until 31 October 2018.

Other complementary international codeshare relationships including the Virgin Group

Virgin Australia’s four strategic alliances (outlined above) are complemented by key partnerships with other airlines that provide for additional international leisure and business destinations, including codeshare relationships with Hawaiian Airlines, South African Airways and Virgin America.



B.4 Fleet overview

As at 30 June 2016, Virgin Australia and its subsidiaries operated a fleet of 149 aircraft, including Tigerair Australia.

Table 8 sets out the current composition of Virgin Australia’s aircraft fleet.

Table 8 Virgin Australia fleet as at 30 June 2016

Aircraft Number in fleet

B737-800 & 70033 (Virgin Australia and Tigerair) 81

E190 13

ATR-72 14

A330-200 6

B777-300ER 5

F100 14

A320 (Charter and Tigerair) 16

Total Group Fleet 149

B.5 Loyalty program: Velocity

Velocity was originally launched in 2005 and was re-launched in August 2011 as part of the Game Change Program. It now offers global coverage, a range of new partners and unique benefits for members, including status benefits for Virgin Australia’s most frequent travellers. Since its re-launch, Velocity membership has increased significantly and currently has approximately [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] members. Velocity has been linked with the frequent flyer programs of its strategic Alliance partners, giving members the opportunity to earn and redeem points on all strategic alliance partner and Virgin Group flights around the world and reciprocal status benefit recognition. Points can be also earned and redeemed with a range of non-airline partners. Virgin Australia’s airline partners are critical to Virgin Australia’s success and offering a competitive international network. Approximately one quarter of all Velocity Point redemptions (air and non-air) are on Virgin Australia’s international partners. Velocity has the widest retail offering of any loyalty program in Australia and was recognised in three categories at the 2016 Freddie Awards: Program of the Year, Best Customer Service and Best Redemption Ability.

On 22 October 2014, Virgin Australia sold a 35% minority interest in Velocity to Affinity Equity Partners for gross proceeds of AUD $336 million (The Velocity Transaction). The Velocity Transaction valued the Velocity business at an enterprise value of AUD $960 million. One of the key reasons for forming the joint venture was to assist Virgin Australia in achieving one of its key strategic goals in the Virgin Vision 2017 strategy, by driving accelerated growth in the Velocity business.

B.6 Tigerair Australia

Since acquiring 100% of Tigerair Australia in 2013, Virgin Australia has secured a presence in the budget leisure market to complement the premium and leisure position of its core business. Tigerair

33 Includes one B737-800 aircraft utilised for charter operations.



Australia and Virgin Australia maintain total brand separation. Since completion of the acquisition, Virgin Australia has committed to work closely with Tigerair Australia to deliver improved financial performance and expedite its transformation program. The transformation program aims to achieve profitability by the 2017 financial year by further improving customer satisfaction, driving incremental revenue growth, delivering cost synergies and developing an efficient operating platform and network footprint.



Attachment C – HNA Group

The HNA Group was founded in 1993 and has become a global conglomerate company with interests in aviation, tourism, investment development and management, and logistics, among others. HNA Aviation is the core entity within the HNA Group. As at October 2016, HNA Group has a fleet of 443 aircraft serving more than 700 domestic and international routes, flying to over 200 cities. The HNA Group serves approximately 62.2 million passengers annually.

C.1 Overview of the HNA Group airlines

Within HNA Aviation, the HNA Group operates and manages the following airlines: Hainan Airlines (including Grand China Air), Tianjin Airlines, Beijing Capital Airlines, Lucky Air, West Air, Fuzhou Airlines, Urumqi Air, Guangxi Beibu Gulf Airlines (GX Airlines), Yangtze River Express, Air Chang’an, and Air Guilin. An overview of these airlines is set out in Table 9 below.

Table 9 Overview of the HNA Group airlines

Airline Description Fleet size Number of destinations

Annual Passengers

Hubs Codeshare partners

Hainan Airlines was established in 1993 and is one of the largest airlines in China. Hainan Airlines is a full service carrier and serves an extensive domestic and international network to destinations across Asia, Europe and North America. Hainan Airlines operates a mixed fleet of narrow and wide-bodied aircraft. In 2001 Grand China Airlines and Shanxi Airlines merged their operations with Hainan Airlines.

170 (53 on order)

Total: 92 China: 67

31 million Haikou, Beijing and Xi’an

Aigle Azur, airberlin, American Airlines, Brussels Airlines, Etihad Airways, EVA Air, Grand China Air, Guangxi Beibu Golf Airlines, Korean Air, S7 Airlines, Tianjin Airlines, Uni Airways

Tianjin Airlines was established in 2009 and is a regional airline based in Tianjin. Tianjin Airlines operates scheduled passenger and cargo services within China and to Hong Kong and Mongolia. Tianjin plans to

86 (26 on order)

Total: 127 China: 109

11.13 million Tianjin, Haikou and Xi’an

Hainan Airlines, Guangxi Beibu Gulf Airlines, Fuzhou Air .

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwielZG-r-rOAhWFoJQKHRxZCcwQjRwIBw&url=https://en.wikipedia.org/wiki/File:Hainan_Airlines_Logo.svg&bvm=bv.131286987,d.dGo&psig=AFQjCNEoEkuysyAaN6HYdTcDqgyFAM8DOA&ust=1472688810672351

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi69qbmterOAhWFW5QKHYnWA4QQjRwIBw&url=https://en.wikipedia.org/wiki/File:Tianjin_Airlines.png&bvm=bv.131286987,d.dGo&psig=AFQjCNFDANCeyNBbeeQiGvG_zj2UXOyi4g&ust=1472690497502777




Annual Passengers


commence services to New Zealand from December 2016.

Beijing Capital Airlines’ predecessor, Deer Air, was founded in 1998 and in 2010 the carrier was co-invested by HNA Group and Beijing Tourism Group and renamed Beijing Capital Airlines Co. Ltd. in 2010. Beijing Capital Airlines is a low cost carrier (LCC) and provides both domestic and international schedules and charter services. Beijing Capital Airlines operates a fleet of narrow-bodied Airbus aircraft. Beijing Capital Airlines plans to commence Melbourne – Qingdao services in September 2016.

64 Total: 69 China: 57

3.7 million Beijing Hainan Airlines

Lucky Air was founded in 2004 and commenced operations in February 2006. Lucky Air transformed into a LCC in March 2016. It operates domestic and international services throughout Asia with a narrow-bodied fleet. Lucky Air plans to commence services to San Francisco in 2017.

37 (4 on order)

Total: 84 China: 72

6.83 million

Kumming, Lijiang, Chengdu and Zhengzhou

Global alliance: U-FLY Alliance

West Air was established in 2005 and commenced operations in June 2007. It is a LCC and operates domestic scheduled services from its base at Chongqing Jiangbei International Airport.

25 (2 on order)

Total: 43 China: 42

7.1 million

Chongqing Global alliance: U-FLY Alliance

Fuzhou Airlines was established in 2014 and is a full service carrier based at Fuzhou Airport that operates domestic services throughout mainland China. Fuzhou Airlines

9 Total: 21 (all within China)

1.09 million Fuzhou and Harbin

Hainan Airlines

http://intl.jdair.net/global/home

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwieqvHEtOrOAhXDk5QKHT4SAYEQjRwIBw&url=https://en.wikipedia.org/wiki/Lucky_Air&bvm=bv.131286987,d.dGo&psig=AFQjCNEe5KIwbUXUiKUJiZRC1jQNbWiB3w&ust=1472690157516695

http://www.uflyalliance.com/airline-details?page=4

http://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjEsfCzo-rOAhULopQKHat8BLAQjRwIBw&url=http://centreforaviation.com/profiles/airlines/fuzhou-airlines-fu&bvm=bv.131286987,d.dGo&psig=AFQjCNGJUGorTpCZTwZqIsd6Ikjk1Lwg-Q&ust=1472685566824910




Annual Passengers


operates a fleet of Boeing 737 aircraft.

Urumqi Air was founded in 2014 and is a Chinese LCC based at Urumqi Diwopu Airport, providing both domestic and regional services. Urumqi Air is a JV between Hainan Airlines (70%) and Urumqi Urban Construction Investment (30%). Urumqi Air operates a fleet of Boeing 737 aircraft.


0.86 million Urumqi Global alliance: U-FLY Alliance

Guangxi Beibu Gulf Airlines is a Chinese carrier based at Nanning Airport that commenced operation in February 2015. The carrier currently provides domestic services and plans to commence international services to Hong Kong, Macau and Taiwan in the future. Guangxi Beibu Gulf Airlines is a JV between Tianjin Airlines (70%) and the Guangxi Beibu Gulf Investment Group (30%). The carrier expects to expand its fleet to 16 aircraft within 2016.


0.56 million Nanning Hainan Airlines, Tianjin Airlines

Yangtze River Airlines, formerly Yangtze River Express, was founded in 2003 as an all-cargo airline. It expanded its business scope in July 2015 to include passenger transportation and launched its first passenger service in December 2015.

5 (plus 18 freighters)

Total: 16 (all within China)

13,000

Shanghai and Shenzhen

Hainan Airlines

Air Changan was established in 1993 by Shaanxi Province Government. It was acquired by HNA Group in 2000 and merged with Shanxi Airlines and China Xinhua Airlines to form Grand China Air. From 2002,


None Xi’an None

http://www.uflyalliance.com/airline-details?page=3

http://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi_1sGbpurOAhXDEpQKHXSLB34QjRwIBw&url=http://centreforaviation.com/profiles/airlines/guangxi-beibu-gulf-airlines-gx&bvm=bv.131286987,d.dGo&psig=AFQjCNEegrD9D4-XFFx_Jih5HpdrlfA-og&ust=1472686320131538

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj_t-etvurOAhVInpQKHau4B5oQjRwIBw&url=https://www.planespotters.net/airline/Yangtze-River-Express&psig=AFQjCNEeLDHQWNchMt4uE48dHzeAUtUjQA&ust=1472692800321693

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiZ6NLuuOrOAhUBjJQKHRP4CawQjRwIBw&url=https://en.wikipedia.org/wiki/Air_Chang'an&bvm=bv.131286987,d.dGo&psig=AFQjCNGITMekj1naGGTKsp10oRki6hVVGw&ust=1472691328503209




Annual Passengers


Changan Airlines operated under the Hainan Airlines code. HNA Group relaunched Air Changan as an independent carrier in April 2016 and services commenced in October 2016.

Air Guilin was established in June 2016 as a JV between Guilin Tourism Development Co (60%) and Guilin Aviation Tourism Group (40%). Air Guilin is a full-service carrier and operates domestic and freight services.


None Guilin None

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjWvf6ivOrOAhWCmJQKHSgYBFAQjRwIBw&url=https://en.wikipedia.org/wiki/Air_Guilin&bvm=bv.131286987,d.dGo&psig=AFQjCNFaQzGMpx11GnL9VswEMFAtonVe2g&ust=1472692244165692



C.2 Fleet overview

As at October 2016, HNA operated a passenger fleet of 443 aircraft, as set out in Table 10 below.

Table 10 HNA Group's fleet as at October 2016

Airline Aircraft Number in fleet

Hainan Airlines Boeing 787-9 6

Boeing 787-8 10

Boeing 767 3

Boeing 737 129

Airbus A330-200 8

Airbus A330-300 14

Tianjin Airlines Embraer 145 18 Embraer 190 44 Airbus A320 23 Airbus A330 1

Beijing Capital Airlines Airbus A319 18 Airbus A320 34 Airbus A321 10 Airbus A330 2

West Air Airbus A319 4 Airbus A320 21

Lucky Air Boeing B737 28 Airbus A320 6 Airbus A319 3

Urumqi Air Boeing B737 9 Fuzhou Air Boeing B737 9

Guangxi Beibu Gulf Airlines Embraer 190 10

Airbus A320 2

Yangtze River Express Boeing 737 5 Boeing 737 (freighter) 15

Boeing 747 (freighter) 3

Air Changan Boeing 737 5 Air Guilin Airbus A319 3 Total 443



C.3 Loyalty program: Fortune Wings Club

The Fortune Wings Club was established in 1999 and is the global frequent flyer program for HNA Group and Hong Kong Airlines. The Fortune Wings Club currently has approximately [CONFIDENTIAL– RESTRICTION OF PUBLICATION CLAIMED] members.

The Fortune Wings Club offers a tiered membership structure with five tiered levels: Platinum, Gold, Silver, Select Card and Fortune Wings Card. The elite tiers are Platinum, Gold and Silver. The requirements for each tier are set out in Table 11 below.

Table 11 Fortune Wings Club – tiers and requirements

Tier Requirements

Platinum 100,000 points and 80 qualifying flight sectors

Gold 50,000 points and 40 qualifying flight sectors

Silver 30,000 points and 20 qualifying flight sectors

Select card 5000 points and 4 qualifying flight sectors

Fortune Wings card N/A Members of the Fortune Wings Club can earn and use points on Fortune Wing Clubs member airlines and partner flights, as well as commercial partners of the program. The Fortune Wings Club airline partners and commercial partners are outlined in Table 12 below.

Table 12 Fortune Wings Club commercial partners

Type of partner Partners

Airline Airberlin (points accrual and points redemption) Etihad Airways (points accrual and points redemption) Alaska Airlines (points accrual, points redemption and reciprocal benefits for elite members)

Banks Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, China Citic Bank, SPD Bank, BEA, Industrial Bank Co Ltd, Agricultural Bank of China

Hotels HNA Hotels & Resorts, Shangri-La Hotels and Resorts, Intercontinental Hotels Group, Hilton HHonors, Starwood Preferred Guest, Holiday Inn, Best Western

Travel and rental car Avis, Hertz, ctrip.com, HRS.cn, mangocity.com, Dollar Rent a Car

OTA Booking.com, Rocketmiles, agoda.com, Kaligo

Life China Mobile, China Unicom, Ciming Checkup, myTianHui.com

Points platform Points Loyalty Wallet

Hainan Airlines has 6 lounges for Fortune Wings Club loyalty members and high value guests at the following airports in China: Haikou, Beijing, Guangzhou, Xi’an, Taiyuan and Urumqi.



Attachment D – Hong Kong Airlines route map



Attachment E – HK Express route map



Attachment F – Direct connections offered by HNA Group from Beijing

Destination Airline(s) servicing the destination

Anqing (AQG) Hainan Airlines

Baotou (BAV) Hainan Airlines, Beijing Capital Airlines

Changchun (CGQ) Hainan Airlines

Changsha (CSX) Hainan Airlines

Changzhi (CIH) Hainan Airlines

Chengdu (CTU) Hainan Airlines

Chongqing (CKG) Hainan Airlines

Dalian (DLC) Hainan Airlines

Dongying (DOY) Hainan Airlines

Erenhot / Erlianhaote (ERL) Beijing Capital Airlines

Fuzhou (FOC) Hainan Airlines, Fuzhou Airlines

Guangzhou (CAN) Hainan Airlines

Guilin (KWL) Grand China Air

Guiyang (KWE) Hainan Airlines

Haikou (HAK) Hainan Airlines

Hailar (HLD) Grand China Air

Hangzhou (HGH) Hainan Airlines, Beijing Capital Airlines

Harbin (HRB) Grand China Air

Hohhot (HET) Hainan Airlines, Beijing Capital Airlines

Jiamusi (JMU) Hainan Airlines

Jixi Shi (JXA) Beijing Capital Airlines

Kunming (KMG) Hainan Airlines, Lucky Air

Lanzhou (LHW) Hainan Airlines

Lijiang (LJG) Beijing Capital Airlines

Manzhouli (NZH) Hainan Airlines, Beijing Capital Airlines

Meizhou (MXZ) Beijing Capital Airlines

Nanchang (KHN) Hainan Airlines

Nanning (NNG) Hainan Airlines

Sanya (SYX) Hainan Airlines, Beijing Capital Airlines

Shanghai (SHA) Hainan Airlines

Shanghai (PVG) Hainan Airlines

Shenzhen (SZX) Hainan Airlines




Tengchong (TCZ) Lucky Air

Urumqi (URC) Hainan Airlines

Weifang (WEF) Hainan Airlines

Wenzhou (WNZ) Hainan Airlines

Wuhai (WUA) Hainan Airlines

Wuhan (WUH) Hainan Airlines

Xiamen (XMN) Hainan Airlines, Beijing Capital Airlines

Xi’an (XIY) Hainan Airlines

Yan’an (ENY) Hainan Airlines

Yichang (YIH) Hainan Airlines, Beijing Capital Airlines

Yinchuan (INC) Grand China Air

Yulin (UYN) Hainan Airlines



Attachment G – Direct connections offered by Hong Kong Airlines from Hong Kong


Beijing (PEK) Hong Kong Airlines

Changchun (CSQ) Hong Kong Airlines

Chengdu (CTU) Hong Kong Airlines

Chongqing (CKG) Hong Kong Airlines

Fuzhou (FOC) Hong Kong Airlines

Guiyang (KWE) Hong Kong Airlines

Haikou (HAK) Hong Kong Airlines

Hangzhou (HGH) Hong Kong Airlines

Nanchang (KHN) Hong Kong Airlines

Nanjing (NKG) Hong Kong Airlines

Sanya (SYX) Hong Kong Airlines

Shanghai Pudong (PVG) Hong Kong Airlines

Shanghai Hongqiao(SHA) Hong Kong Airlines

Tianjin (TSN) Hong Kong Airlines

Xuzhou (XUZ) Hong Kong Airlines

Zunyi Xinzhou (ZYI) Hong Kong Airlines



Attachment H – Mainland China destinations served by HNA Group


Aksu (AKU) Hainan Airlines, Tianjin Airlines, Urumqi Air

Altay (AAT) Tianjin Airlines

An Shun (AVA) Tianjin Airlines

Anqing (AQG) Hainan Airlines, Tianjin Airlines, Lucky Air

Baise (AEB) Hainan Airlines

Baotou (BAV) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines

Bayannaoer (RLK) Tianjin Airlines

Beihai (BHY) Tianjin Airlines

Beijing (PEK) Hainan Airlines, Beijing Capital Airlines, Grand China Air, Fuzhou Airlines, Lucky Air

Bijie (BFJ) Guangxi Beibu Gulf Airlines

Bo’ao (BAR) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, West Air

Bole (BPL) Tianjin Airlines

Changchun (CSQ) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines

Changde (CGD) Tianjin Airlines, Guangxi Beibu Gulf Airlines

Changsha (CSX) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air, Urumqi Air

Changzhi (CIH) Hainan Airlines, Tianjin Airlines

Chaoyang (CHG) Tianjin Airlines

Chengdu (CTU) Hainan Airlines, Beijing Capital Airlines, Lucky Air, Urumqi Air

Chifeng (CIF) Tianjin Airlines

Chongqing (CKG) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, , Lucky Air, Fuzhou Airlines, West Air, Urumqi Air

Dali City (DLU) Beijing Capital Airlines

Dalian (DLC) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Guangxi Beibu Gulf Airlines, West Air

Daqing (DQA) Tianjin Airlines

Daxian (DAX) Beijing Capital Airlines

Datong (DAT) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air

Dongying (DOY) Hainan Airlines, Tianjin Airlines

Dunhuang (DNH) Tianjin Airlines

Fuyang (FUG) Tianjin Airlines

Fuzhou (FOC) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, West Air

Ganzhou (KOW) Lucky Air, Guangxi Beibu Gulf Airlines




Guangzhou (CAN) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, West Air

Guilin (KWL) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Chang An Airlines, Grand China Air, Fuzhou Airlines, West Air

Guiyang (KWE) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Chang An Airlines, Fuzhou Airlines, West Air

Haikou (HAK) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Chang An Airlines, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air, Urumqi Air

Hami (HMI) Tianjin Airlines

Hanzhong (HZG) Beijing Capital Airlines

Hangzhou (HGH) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air

Harbin (HRB) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Grand China Air, Fuzhou Airlines, West Air

Hailar (HLD) Beijing Capital Airlines, Tianjin Airlines, Grand China Air, Fuzhou Airlines

Hefei (HFE) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Guangxi Beibu Gulf Airlines, West Air, Urumqi Air

Hohhot (HET) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Chang An Airlines, Guangxi Beibu Gulf Airlines, West Air

Huaihua (HJJ) Tianjin Airlines

Huangshan (TXN) Beijing Capital Airlines, Tianjin Airlines, Guangxi Beibu Gulf Airlines

Ji’an Jinggangshan (JGS)

Tianjin Airlines

Jiamusi (JMU) Hainan Airlines, Tianjin Airlines

Jinan (TNA) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, West Air

Jinchang (JIC) Tianjin Airlines

Jining (JNG) Tianjin Airlines, Guangxi Beibu Gulf Airlines

Jinjiang (JJN) Guangxi Beibu Gulf Airlines, West Air

Jinzhou (JNZ) Hainan Airlines, Beijing Capital Airlines

Jiuzhaigou (JZH) West Air

Jixi Shi (JXA) Beijing Capital Airlines

Kanas (KJI) Tianjin Airlines

Kashi (KHG) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Urumqi Air

Korla (KRL) Tianjin Airlines, West Air

Kunming (KMG) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, West Air

Kuqa (KCA) Tianjin Airlines

Lanzhou (LHW) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air,



Destination Airline(s) servicing the destination Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air, Urumqi Air

Lianyungang (LYG) Guangxi Beibu Gulf Airlines, Urumqi Air

Lijiang (LJG) Beijing Capital Airlines, Lucky Air, West Air

Linfen (LFQ) Tianjin Airlines

Linyi (LYI) Beijing Capital Airlines, Tianjin Airlines, Fuzhou Airlines, Guangxi Beibu Gulf Airlines

Liupanshui (LPF) Hainan Airlines, Tianjin Airlines

Liuzhou (LZH) Tianjin Airlines

Longyan (LCX) Hainan Airlines

Luguhu (NLH) Lucky Air

Luliang (LLV) Tianjin Airlines

Luzhou (LZO) Tianjin Airlines, Guangxi Beibu Gulf Airlines

Manzhouli (NZH) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines

Meizhou (MXZ) Tianjin Airlines, Beijing Capital Airline

Mianyang (MIG) Lucky Air, Guangxi Beibu Gulf Airlines, Urumqi Air

Mudanjiang (MDG) Tianjin Airlines, Grand China Air

Nalati (NLT) Tianjin Airlines

Nanchang (KHN) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, , Guangxi Beibu Gulf Airlines, West Air

Nanjing (NKG) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, West Air

Nanning (NNG) Hainan Airlines, Beijing Capital Airlines, Lucky Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air

Nantong (NTG) Fuzhou Airlines, Guangxi Beibu Gulf Airlines

Ningbo (NGB) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, HK Express, Lucky Air, West Air

Ordos (DSN) Tianjin Airlines

Qingdao (TAO) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air

Qingyang (IQN) Hainan Airlines, Tianjin Airlines

Qinhuangdao (SHP) Hainan Airlines

Quanzhou (JIN) Hainan Airlines

Rizhao (RIZ) Tianjin Airlines

Sanya (SYX) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Guangxi Beibu Gulf Airlines, West Air

Shanghai Pudong (PVG)

Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, West Air

Shanghai Hongqiao (SHA)

Hainan Airlines, Tianjin Airlines, Lucky Air




Shantou (SWA) Tianjin Airlines, Guangxi Beibu Gulf Airlines, West Air

Shenyang (SHE) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Guangxi Beibu Gulf Airlines

Shenzhen (SJW) Hainan Airlines, Lucky Air, West Air

Shijiazhuang (SJW) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, West Air

Shiyan (WDS) Hainan Airlines, Tianjin Airlines

Simao (SYM) Lucky Air

Song Pan (JZH) Hainan Airlines

Tacheng (TCG) Tianjin Airlines

Taiyuan (TYN) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air

Tangshan (TVS) Hainan Airlines, Beijing Capital Airlines

Tengchong (TCZ) Lucky Air

Tianjin (TSN) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air

Tongliao (TGO) Tianjin Airlines

Tongren (TEN) Tianjin Airlines

Turpan (TLQ) Tianjin Airlines

Urumqi (URC) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, West Air, Urumqi Air

Wanxian (WXN) Beijing Capital Airlines, West Air

Weifang (WEF) Hainan Airlines

Weihai (WEH) Tianjin Airlines

Wenshan (WHN) West Air

Wenzhou (WNZ) Hainan Airlines, Tianjin Airlines, West Air

Wu Hai (WUA) Hainan Airlines, Tianjin Airlines

Wuhan (WUH) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, West Air, Urumqi Air

Wulanhaote (HLH) Tianjin Airlines

Xiamen (XMN) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, West Air

Xi’an (XIY) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Chang An Airlines, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air, Urumqi Air

Xiangfan (XFN) Beijing Capital Airlines

Xilinhot (XIL) Tianjin Airlines

Xining (XNN) Hainan Airlines, Chang An Airlines

Xishuangbanna (JHG) Beijing Capital Airlines, Lucky Air, West Air




Xuzhou (XUZ) Hainan Airlines, Beijing Capital Airlines, Lucky Air, Guangxi Beibu Gulf Airlines

Yan’an (ENY) Hainan Airlines

Yanchen (YNZ) Beijing Capital Airlines

Yangzhou (YTY) Tianjin Airlines

Yantai (YNT) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Fuzhou Airlines

Yibin (YBP) Lucky Air

Yichang (YIH) Hainan Airlines, Beijing Capital Airlines, Lucky Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines

Yichun (LDS) Beijing Capital Airlines, Lucky Air

Yinchuan (INC) Hainan Airlines, Tianjin Airlines, Lucky Air, Grand China Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines

Yining (YIN) Tianjin Airlines, Urumqi Air

Yiwu (YIW) Hainan Airlines, Tianjin Airlines, Guangxi Beibu Gulf Airlines

Yongzhou (LLF) Guangxi Beibu Gulf Airlines

Yulin (UYN) Hainan Airlines, Tianjin Airlines, Guangxi Beibu Gulf Airlines

Zhangjiajie (DYG) Beijing Capital Airlines

Zhangye (YZY) Tianjin Airlines

Zhanjiang (ZHA) Beijing Capital Airlines, Tianjin Airlines

Zhaotong (ZAT) Lucky Air

Zhengzhou (CGO) Hainan Airlines, Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Fuzhou Airlines, Guangxi Beibu Gulf Airlines, West Air, Urumqi Air

Zhoushan (HSN) Fuzhou Airlines

Zhuhai (ZUH) Hainan Airlines, Tianjin Airlines, Chang An Airlines, Guangxi Beibu Gulf Airlines, West Air

Zunyi Xinzhou (ZYI) Beijing Capital Airlines, Tianjin Airlines, Guangxi Beibu Gulf Airlines



Attachment I – Competitors in the Australia-mainland China and Australia-Hong Kong markets

There are a number of carriers who operate services between Australia and mainland China, and Australia and Hong Kong, including those outlined below.

I.1 Air China

Air China was established in 1988 as the Air China International Corporation and was re-branded as Air China Limited in 2004 and was publicly listed on the Hong Kong and London stock exchanges. Air China is China’s only national flag carrier and a member carrier of the world’s largest airline network – Star Alliance. Air China is based in Beijing and has hubs in Southwest China, Zhejiang, Chongqing, Tianjin, Shanghai, Hubei, Guizhou, Tibet and Wenzhou as well as a South China Base and an East China Base.

As at 30 June 2016, Air China has a fleet of 603 passenger aircraft and freighters of mainly Boeing and Airbus families, with an average age of 6.26 years. It operates 377 routes, including 98 international routes, 16 regional routes and 263 domestic routes. It serves 173 cities in 39 countries and regions, including 61 international cities, 4 regional cities and 108 domestic cities. Air China offers direct flights to Beijing and Shanghai from Sydney and Melbourne.

Further information is available on the Air China website: https://www.airchina.com.au/AU/GB/Home

I.2 Cathay Pacific

Cathay Pacific was founded in 1946 and is based at Hong Kong International Airport. Cathay Pacific has a fleet of 146 aircraft, with 85 on firm order for delivery up to 2024. It serves 175 destinations across 44 countries and territories. Cathay Pacific is a member of the oneworld global alliance.

Cathay Pacific operates services between Hong Kong and Sydney (4 times daily), Melbourne (3 times daily), Brisbane (daily), Perth (up to 10 times per week), Adelaide (4 times per week) and Cairns (4 times per week). Cathay Pacific offers connections to the following destinations in mainland China through its wholly owned subsidiary Cathay Dragon (previously Dragonair): Beijing, Changsha, Chengdu, Chongqing, Fuzhou, Guangzhou, Guilin, Haikou, Hangzhou, Kunming, Nanjing, Ningbo, Qingdao, Sanya, Shanghai, Wenzhou, Wuhan, Xi’an, Xiamen and Zhengzhou.

Further information is available on the Cathay Pacific website: http://www.cathaypacific.com/cx/en_AU.html

https://www.airchina.com.au/AU/GB/Home

http://www.cathaypacific.com/cx/en_AU.html



I.3 China Southern Airlines

China Southern Airlines is the largest airline in China in terms of fleet, network and passenger capacity. It is based in Guangzhou, with additional hubs in Beijing, Urumqi and Chongqing. China Southern Airlines is a member of the SkyTeam global alliance.

Currently China Southern Airlines has a fleet of more than 700 passenger and cargo aircraft, including Boeing 787, 777, 747, 757 and 737 and Airbus A380, A330, A321, A320, and A319. It operates 2000 daily flights to 208 destinations in 40 countries and regions across the world, including direct flights between Guangzhou and Brisbane, Melbourne, Perth and Sydney and between Shenzhen and Sydney. In 2015, China Southern Airlines transported 110 million passengers, ranking the carrier first in Asia and the third in the world.

Further information is available on the China Southern Airlines website: http://www.csair.com/au/en/

I.4 China Eastern Airlines

China Eastern Airlines Corporation Limited is based in Shanghai and is one of the three major airlines in mainland China.

China Eastern Airlines is based in Shanghai operating a fleet of 430 long- and short-haul aircraft with and average aircraft age of less than seven years. The airline offers flights to 1000 cities in 187 countries including direct flights from Shanghai to Sydney, Melbourne and Brisbane. China Eastern Airlines is an integrated alliance partner of Qantas.

Further information is available on the China Eastern website: http://au.ceair.com/

I.5 Qantas Airways

Qantas is an Australian domestic and international carrier that was incorporated in 1920. The primary aviation business of the Qantas Group operates under two major brands – Qantas and Jetstar – providing international, domestic and regional services. Qantas has alliances with Emirates, China Eastern and American Airlines and is a member of the oneworld global alliance, along with Cathay Pacific

As at 30 June 2016, the Qantas Group34 operated a fleet of 303 aircraft with an average age of 8.6 years. In FY16, Qantas operated over 4,500 domestic flights and over 570 international flights per week.

34 This includes Jetstar’s fleet.

http://www.csair.com/au/en/

http://au.ceair.com/

http://www.qantas.com/



Through its alliance with China Eastern, and its codeshare relationship with China Southern, Qantas provides direct services to Guangzhou from Sydney, Melbourne, Brisbane and Perth as well as direct services between Shanghai and Sydney and Melbourne.

Qantas also flies to Hong Kong from Sydney (twice daily), Melbourne (once daily) and Brisbane (once daily).

Further information is available on the Qantas website: http://www.qantas.com/travel/airlines/home/au/en

I.6 Jetstar

Launched in 2004, the Jetstar Group is a group of carriers providing lower cost flights across Australia, New Zealand and the Asia Pacific region. The group consists of Jetstar Airways (wholly owned by the Qantas Group), Jetstar Asia Airways (based in Singapore), Jetstar Pacific Airways (based in Vietnam) and Jetstar Japan. In the year ending June 2015, the group carried over 29 million customers.

Jetstar operates a fleet of 123 aircraft including Boeing 787 and Airbus A321 and 320. It operates over 4,000 flights per week to more than 75 destinations in 18 countries, including direct flights between the Gold Coast and Wuhan.

Further information is available on the Jetstar website: http://www.jetstar.com/au/en/home

I.7 Malaysia Airlines

Based in Kuala Lumpur, Malaysia Airlines is the flag carrier of Malaysia and a member of the oneworld global alliance.

Malaysia Airlines offers direct flights from Adelaide, Darwin, Melbourne, Perth and Sydney to Kuala Lumpur with connections onwards to destinations throughout Asia. Malaysia Airlines flies to the following destinations in China: Beijing, Fuzhou (through codeshare with Xiamen Airlines), Guangzhou, Shanghai and Xiamen (through codeshare with Xiamen Airlines).

Further information is available on the Malaysia Airlines website: http://www.malaysiaairlines.com/au/en.html

I.8 Sichuan Airlines

Sichuan Airlines was founded in 1986 and is based in Chengdu, Sichuan. It has a fleet of 109 aircraft, with a further 4 aircraft on order. Sichuan Airlines flies from Chongqing to Sydney, and Chengdu to Melbourne.

Further information is available on the Sichuan Airlines website: http://www.88888888.cn/Global/

http://www.qantas.com/travel/airlines/home/au/en

http://www.jetstar.com/au/en/home

http://www.malaysiaairlines.com/au/en.html

http://www.88888888.cn/Global/

http://www.malaysiaairlines.com/au/en.html



I.9 Singapore Airlines

Singapore Airlines was founded in 1972 and is the flag carrier of Singapore. It is based at Singapore Changi Airport. Singapore Airlines is a member of the Star Alliance global airline alliance.

Singapore Airlines operates a fleet of 103 wide-body Airbus and Boeing aircraft with an average age of 7 years and 5 months. As at 31 March 2016, Singapore Airlines had 101 aircraft on firm order, including 5 Airbus A380s, 66 Airbus A350s and 30 Boeing 787s.

Singapore Airlines flies to 60 destinations across 33 countries. In the Australia-China market Singapore Airlines provides services to Singapore from Sydney (5 times daily), Melbourne (4 times daily), Perth (4 times daily), Brisbane (3 times daily, up to 4 times daily three days per week) Canberra (4 times per week) and Adelaide (daily) with onwards connections to China (Beijing, Guangzhou and Shanghai).

Singapore Airlines’ subsidiary SilkAir operates regional flights to secondary cities around Asia, including the following cities in China: Changsha, Chengdu, Chongqing, Hangzhou, Kunming, Shenzhen, Xiamen and Wuhan.

Further information is available on the Singapore Airlines website: http://www.singaporeair.com/en_UK/au/home

I.10 Xiamen Airlines

Xiamen Airlines was established in 1984 and is the People’s Republic of China’s first privately owned airline. It is based in Xiamen and has six branches in Fuzhou, Hangzhou, Tianjin, Nanchang, Beijing and Hunan and an operation base in Quanzhou. Xiamen Airlines is a member of the SkyTeam global alliance.

China Southern Airlines has a 51% interest in Xiamen Air.

Xiamen Airlines operates an all-Boeing fleet of 123 aircraft with an average age of 5.6 years as at September 2015. It offers more than 220 domestic routes, and almost 50 international and regional routes, and flies more than 3,200 flights each week. This includes services between Sydney and Fuzhou and between Sydney and Xiamen.

Further information is available on the Xiamen Airlines website: http://www.xiamenair.com/en-au/home/index

http://www.singaporeair.com/en_UK/au/home

http://www.xiamenair.com/en-au/home/index

http://www.xiamenair.com/en-au/home/index

https://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi1963axtTOAhVG8mMKHW4YC28QjRwIBw&url=https://en.wikipedia.org/wiki/File:Singapore_Airlines_Logo.svg&psig=AFQjCNFg1hQRgBs9nuRqkj54VsW4drItuA&ust=1471939106149653



Attachment J – Key metrics

J.1 Purpose of travel between Australia and China (Source: DIBP)

Holiday Visiting friends and relatives

Business Education Employment Other Total

FY12 40% 22% 17% 14% 3% 5% 100%

FY13 43% 22% 15% 13% 2% 5% 100%

FY14 44% 24% 13% 12% 2% 4% 100%

FY15 44% 24% 12% 12% 3% 4% 100%

FY16 49% 22% 10% 13% 3% 3% 100%

J.2 Purpose of travel between Australia and Hong Kong (Source: DIBP)

Holiday Visiting friends and relatives

Business Education Employment Other Total

FY12 46% 25% 17% 5% 3% 3% 100%

FY13 47% 25% 16% 5% 3% 4% 100%

FY14 47% 26% 16% 5% 3% 3% 100%

FY15 45% 27% 15% 5% 4% 4% 100%

FY16 49% 25% 15% 5% 3% 3% 100%

J.3 Passenger, capacity and load factors (Source: BITRE)

Please see enclosed spreadsheet showing passengers, capacity and load factors for international services from Australia.

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