Should Virgin Australia’s new owners look to maximise the airline’s competitive edge against Qantas and Jetstar, they could do much worse than to have the airline join the global Star Alliance group.
That’s the take of industry expert and loyalty specialist Mark Ross-Smith, CEO of Loyalty Data Co, who reasons that the benefits of partnering with the world’s largest airline alliance would far outweigh any initial and ongoing costs.
And while Virgin Australia 2.0 will adopt more of a mid-market positioning than be a full-service carrier, Ross-Smith says that “the value which a Star Alliance or SkyTeam tie-up could provide to a rebooted Virgin Australia would be a strategic move.”
“Virgin Australia could enjoy the best of both worlds with an alliance tie-up, by leveraging from Star Alliance marketing, bring new rewards options to Velocity members and playing with the big boys on the loyalty front… while the core airline business goes back to its roots and acts more like a hybrid carrier.”
Virgin Australia partners Singapore Airlines and ANA are cornerstone members of Star Alliance – as was former shareholder turned Qantas ally Air New Zealand – while US partner Delta Air Lines was a founder of SkyTeam.
Given that Australians love their frequent flyer points, and that Star Alliance has had no local presence since the collapse of Ansett Airlines in 2001, Ross-Smith suggests that Star Alliance membership could be a deciding factor for travellers when choosing between Qantas and Virgin.
The benefits of Star Alliance
Virgin’s domestic passengers would be able to continue earning Velocity points on Virgin Australia flights, or collect points in the currency of another Star Alliance member which they also belong to and regularly patronise, such as Singapore Airlines or United Airlines.
Likewise, the points of those Star Alliance siblings could be used to book reward seats on Virgin Australia flights – and once international travel returns, Velocity members could use their points to book onto flights of any other Star Alliance member.
Alliance membership also makes for consistent and reliable delivery of top-tier frequent flyer perks such as lounge access, priority check-in, security and boarding and a higher checked luggage allowance across all members.
All this, of course, comes at a cost to each member airline.
How much does it cost to join Star Alliance?
While there’s no up-front fee to join an airline alliance, membership comes with a series of unavoidable practical costs.
This includes upgrading and integrating an airline’s booking and IT systems to work with the alliance family, as well as necessary marketing and promotional expenses in adding the alliance’s logo to everything from airport signage to marketing and advertising templates.
Once they have a seat at the table, airlines contribute an annual cost based on how much flying they do, so that larger carriers pay a higher proportion than smaller carriers.
There’s also a cost in the ‘earn and burn’ proposition involving the frequent flyer points of other alliance members.
“When a Lufthansa Miles&More passenger flies with Virgin Australia there is effectively a ‘loyalty commission’ paid to Lufthansa based on the ticket flown,” Ross-Smith explains.
“Virgin would also need to provide award seat access to all alliance airlines, although Velocity members would obviously always retain priority access to award inventory.”
An added wrinkle in the Virgin+Star story could be the veto power of Star Alliance member Air New Zealand, which as noted above holds a domestic partnership with Qantas, following a well-documented falling out between the airlines under former CEOs John Borghetti and Chris Luxon.
Upsides for Virgin Australia
But while airlines understandably remain "fixated on costs, including alliance fees,” Ross-Smith says that membership would open up a raft of revenue-raising benefits.
In the post-coronavirus travel landscape this would include “increased traffic into Australia, as the 26 Star Alliance airlines would effectively act as a pseudo- marketing arm, and increased distribution channels to sell award seats, the preferred airline for the 150M+ Star Alliance loyalty program members worldwide."
Virgin Australia would also be able to realise revenue from selling award seats, primarily on its domestic flights, to partner airlines.
“With 26 other airlines selling VA’s seats, it effectively becomes a new distribution channel and one that alliance member airlines will look to tap into to accelerate the recovery.”
“Additionally, the greater utility of Velocity points for members – being able to redeem them on 26 new airlines – provides Velocity with greater leverage to increase the cost-per-point” with credit card partners such as banks, “boosting the value of the Velocity business.”
“Velocity points may become more attractive, and thus, increase points volumes with banks and providing increased cashflow for the business.”
As Australian business travellers and frequent flyers, how would Virgin Australia joining Star Alliance influence your decision to travel with Virgin or Qantas?