Toll acquisition brings change to Virgin Australia

A change in air cargo providers has occurred since the Toll acquisition by Japan Post. Virgin Australia had had an exclusive contract with Toll for some time now but the tide has shifted towards Qantas, which has now landed a five year contract with Toll. Effective July 1, Qantas will carry express parcels and freight throughout Australia via its Qantas/Jetstar network on behalf of Toll.

Qantas’ good fortune has been further extended with a renewal of its contract with Australia Post for an additional five years. In addition, thanks to its long-standing relationship with TNT, it could also likely benefit further once the FedEx and TNT acquisition is approved.

What’s Virgin Australia’s reaction to this loss of a major customer? Effective July 1, Virgin Australia Cargo will be launched. This will allow the airline to actively compete in the domestic and short-haul international cargo market for the first time.

An exciting time for sure but also a daunting one; the market is experiencing growth and as a result, increasing competition. Ti estimates the Australian express market for 2013 (latest estimate) to be worth AU$2,342.35m, a 5.09% increase over 2012. Domestic comprises the largest share of the market at over 80% and it experienced a 4.9% gain. Meanwhile, the remainder of the express market is International which noted a 6.1% increase.

Virgin Australia will have a steep hill to climb but the company acknowledges and almost embraces the challenge. While the Toll contract is estimated at AU$100m, Virgin Australia expects to grow its new cargo division of AU$150m to AU$200m in annual revenue by 2017.

In addition, it stated that cargo sales on its fleet of five Boeing 777s which fly to Los Angeles and Abu Dhabi will continue to be managed by Virgin Atlantic. According to an executive for Virgin Australia, “We don’t intend to take on the major players in the global freight market with five 777 aircraft so the outsourcing model we think is still the best model and we are very happy with the Virgin Atlantic partnership.”

Furthermore, Virgin Australia Cargo is also introducing a new IT system which, according to the company, will help it optimize cargo capacity as well as provide tracking and customized reporting for customers.

For the time being there are no plans to add dedicated freighter aircraft to the airline’s fleet, particularly as the current passenger aircraft are underutilized from a cargo perspective and the new division has not signed a major cargo deal yet.

Even though Qantas seems to have jumped into the lead for domestic express services, Virgin Australia Cargo is hungry and will be aggressive as it looks to take back volume from Qantas, as well as gain volume in the APAC regional market.