Virgin Blue has two weeks in which to save its “vital” trans-Pacific joint venture with Delta Airlines from US disapproval, and said this morning “it’s not over yet”.

But if it is over, expect Singapore Airlines to revive its Australia-America ambitions and really shake up the trans-Pacific market.

The overnight serving of a fortnight’s notice by the US Department of Transportation of its preliminary decision to reject the Virgin Blue-Delta tie-up saw a sharp reversal of recent gains in the Virgin Blue share price in morning trading.

In brief statements to the ASX and from spokespersons, Virgin Blue said it believed there were strong consumer benefits from the proposed trans-Pacific deal, and was working hard with Delta to provide the DoT with the information it requires under the show-cause notice it gave the two carriers.

The DoT docket released in the US last night is highly critical of the Virgin Blue and Delta submissions for a joint venture, expressing doubts that it would deliver any substantial benefits to consumers over and above those created by fierce discounting since both carriers entered the US-Australia markets, right in the thick of the global financial crisis.

If Virgin Blue and Delta fail to convince the DoT to change its mind, it is likely Virgin Blue will consider the alternatives of a broader arrangement with Air New Zealand than its pending proposal to form a trans-Tasman alliance, or failing that, exit the US market where it has lost significant amounts of money since starting flights at the end of February 2009.

Sources in the US told Crikey early this morning they did not believe Delta would remain in the Australia-US market indefinitely without an effective alliance to counter Qantas (which is the code share proxy for American Airlines for US consumers) or to counter the reinvigorated United Airlines, which is a consequence of its merger with Continental Airlines.

With the Virgin Blue-Delta deal under imminent threat, the outlook is for continued fare slashing, and route losses, on the trans-Pacific routes, to the short-term benefit of travellers and more pain for Qantas and Virgin Blue shareholders.

Qantas didn’t oppose the Virgin Blue-Delta deal for one very good reason. If Virgin Blue is forced off these routes, the Australian government would be obliged to approve the entry of Singapore Airlines, which it excluded in 2007 pending an opportunity for the newer Australian flag carrier to establish a competitive presence against Qantas on the routes to Los Angeles.

The long-delayed entry of Singapore Airlines on the non-stop Australia-US routes, where it already has in-principle American approvals, would be devastatingly bad news not only for Qantas, but United and Delta.