Game changer?

The history of Qantas and Emirates has not been blessed with positivity. When the Dubai-based airline entered the Australian market in the late 90s it did so with a codeshare agreement with Qantas. However, within two years the relationship was becoming an uncomfortable fit as Emirates began to claim a growing share of the Australian market. Since parting ways, Emirates has been blamed for stealing market share supported by what have been widely headlined as “unfair advantages”, no less so in Australia where it has taken a significant market share of what was once the domain of Qantas.

New world order

Both airlines, however, recognise the environment in which they’re now operating has changed irreversibly during the last 20 years. In that time Qantas and BA proved that agreements such as the JSA can deliver tangible benefits through cross-selling and cost rationalisation, as well as improved operational capability through the pooling of engineering resources. Indeed, perversely the termination of the JSA is a sign of it having been a success, for now Qantas is embarking on a similar arrangement this time with Emirates, an airline that has more potency in the new world order of airlines.

This single decision to operate via Dubai is significant in many ways. Not only does it send a clear message that traditional thinking no longer applies to the way Qantas structures its international network, but it gives the airline some respite in Europe while it shores up its Asian network in the face of a continuing incoming tide of competition from Singapore Airlines and Chinese carriers.

From April 2013 the two airlines plan to operate a combined 98 services a week between Australian ports and Dubai. But there is a massive imbalance between the two carriers: based on its double-daily schedule to London, Qantas will operate only 14 of those 98 services and if the airline hopes to expose its product to Emirates customers it will find itself challenged to do so, not only with the sheer imbalance between the number of Emirates and Qantas services, but also as a result of connection timings between Dubai and the 33 European destinations Emirates will fly Qantas passengers to and from, in which the connections to Australia favour Emirates. This is something Qantas will need to address in the near term if it is to optimise uplift on its own aircraft, and indeed not to lose passengers to rival Asian airlines who will continue to provide efficient connections through their respective hubs to European capitals.

Nothwithstanding this, the Dubai hub does stand to present much greater convenience getting to Europe as a result of the integrated terminal transfers and one-stop connections rather than the two that have been traditionally been required. Sydney to Madrid flying time will be reduced by two hours and Athens by up to six hours.

Of course, the new partnership does not immediately mean that Qantas will be flying in its own right to European destinations (and indeed is pulling out of Frankfurt), although the Australian carrier will have the same exposure it did with British Airways under an extensive codeshare agreement. It will, however, have the added benefit from far better exposure in North Africa and the Middle East, where Tourism Australia and other inbound authorities have cautiously welcomed the initiative as a vehicle to promote higher visitation.

Rico Merkert, Senior Lecturer in Aviation Management and Logistics at the University of Sydney Business School, said the deal was not unexpected. “I am sure it will potentially make sense, given Qantas’s current fleet strategy and the proposed one-stop hub-to-hub service into Europe via Dubai,” he said.

“Commentators see it as a ‘significant breakthrough for Qantas’ and the ‘missing piece in the earnings bridge’. However, in my view it remains to be seen what ‘an extensive commercial relationship’ between Qantas and Emirates exactly means and whether that joint venture or integrated network will get approval from the ACCC (the Australian Competition and Consumer Commission). I also wonder what the deal will do to Qantas’s relationship with IAG and more importantly to its position and relationships within oneworld, such as American for the Australia-USA routes.

Markert said: “What is less clear is Emirates’ intentions with their substantial orders for widebody aircraft other than getting access to the Australian domestic market (where we see declining yields) and improving their load factors and yields from Dubai.

“Last but not least, I am curious to see what will happen in Singapore. In my view, Singapore, and Asia in general, has been an attractive stop-over for many years and these days a welcome alternative to the less premium Virgin/Etihad route via the Middle East. It will be interesting to see what Qantas/Emirates will be able to offer that will justify charging a premium compared to the time/route-wise similar Virgin/Etihad product. In short, the deal sounds like a good opportunity for Qantas, but as is so often, the devil with these sorts of airline deals lies in the details.”

Competitive position

Qantas needs to maintain – and protect – its international services to help seamlessly feed its viable domestic network. It also needs to fly internationally, in a sense, to block total market share dominance by Asian and Middle Eastern carriers, which would diminish Qantas to simply a domestic and trans-Tasman airline.

The new deal will give Qantas potent – albeit indirect – access to the European market where it has had a patchy and sporadic presence during the last two decades, having withdrawn progressively from Amsterdam, Athens, Manchester, Paris, Rome and now Frankfurt. Its JSA-borne codeshare agreement with British Airways in the European region has been well marketed, and it will be key to Qantas’s future success in that market that the arrangements with Emirates are at least as successful.

Will Horton of the Centre for Aviation explained the Emirates-Qantas partnership will see Qantas be more able to efficiently access dozens of cities it would never be able to do so on its own or not without scores of partners, the complexity of which would be prohibitive.
“This could over the long-term boost Qantas’s market share statistics if additional services are added from Australia, but statistics that are often cited only measure the carrier that flew the passenger and not the carrier that sold the ticket. So a passenger on a Qantas-coded, Emirates-operated flight will be counted as an Emirates passenger. Qantas will grow into a stronger position, but statistics may not reflect that in the short-term,” he added.

But the Emirates-Qantas partnership is also significant for its competitive position against other alliances, notably that between Etihad and Virgin. These airlines, of course, were the first to explore the Middle East hubbing potential for through-flying between Europe and Australia. Horton says Qantas has been at a disadvantage since Virgin partnered with Etihad.

“The Etihad-Virgin alliance is impacted from a competitive perspective, but some of the critical benefits to Virgin is the influence on corporate contracts. Over the past two years there has been a lot of movement in corporate contracts and that change could subside, meaning the Emirates-Qantas deal is of less significance to corporates than if it was formed two years ago. This is certainly to Virgin’s advantage: if Etihad-Virgin came after Emirates-Qantas, Virgin would have had a more difficult time making the impressive gains it has,” Horton explained. The two partnerships deliver a near-equal number of destinations in Europe.

“The Emirates partnership, however, is still not a silver bullet for Qantas. Virgin has a deep partnership with Singapore Airlines that provides greater seamless access across Asia than Qantas can. Asia will be the next spot Qantas will have to develop with partners – and no doubt Virgin will try to stay one step ahead.”

Singapore Airlines will continue to be a strong competitor in the market, both in terms of direct services to Asia and its hub services to Europe. Qantas currently operates around 28,000 seats a week to Europe while Singapore Airlines has 48,000, accounting for around 25 per cent of its revenue. The Qantas-Emirates partnership will deliver in excess of 50,000: not a significant buffer beyond that already operated by Singapore Airlines, but well beyond that flown by Qantas in its own right at present.

The strength of Singapore Airlines in that market, in which it is strategically better positioned, means it will remain a potent competitor for Qantas. If the Australian carrier aims to wrest back some of this growing market, a push into Singapore and its other main Asian destination – Hong Kong, will be vital.

The new deal with Emirates effectively secures the European market for Qantas, if indirectly. That will allow Qantas to focus its efforts in Asia, and the announcement of the Emirates agreement signaled Alan Joyce’s intention to do just that, citing demand from business and corporate customers for improved access.

“By moving our hub for European services to Dubai, we will be able to restructure the Asian network,” Joyce said. “Our Asian services will no longer be a subsidiary of the Kangaroo Route. Up until now our flying has been predicated on the best connecting times to Europe. So instead of convenient daytime services, we have late night arrivals into Singapore. This means that business customers can’t make same day connections into the many Asian cities which are developing fast,” Joyce has explained.

While Qantas invests in Singapore with new lounge facilities and looks to securing additional capacity in the face of the home-carrier’s intrinsic dominance, doing the same in Hong Kong will open up opportunities in the buoyant China market.

Traffic between Australia and China has increased significantly during the last 12 months, particularly by China Southern, which has experienced 28 pe rcent growth since the beginning of 2012, and China Eastern 27 per cent. During the same period Qantas grew its Shanghai traffic by a paltry 1.7 percent. Hong Kong will be vital to Qantas’s success in China if it seeks to address the potential of the market. Its history in China has, like its direct services to Europe, been sporadic. It introduced direct flights to Beijing in 2006, but later withdrew from the capital three years later in favour of Shanghai.

Some of Emirates’ Asia services will connect with Qantas, offering alternative thus connection points between the two new partners beyond that to be established in Dubai.

None of this obviates the need for Qantas to focus directly on Asia, whether through the expansion of Jetstar or the formation of new alliances, possibly with Malaysian, the latter creating another linkage point needed to counter the might of Singapore Airlines. How such an arrangement would fit with Emirates may now be more complex than was contemplated before the Dubai partnership, especially in terms of Europe-bound on-carriage from Kuala Lumpur: it may have to be limited to intra-Asia flying. Still, a viable and sustainable Qantas position in Asia should be seen as a necessarily separate strategy from Europe-centric aspirations.

Trans-Tasman is another area where the Emirates-Qantas relationship will reap competitive dividends, with the ability for the two airlines to codeshare on each others’ flights creating a severe capacity and product dent in the Air New Zealand and Virgin Australia’s partnership.

According to data provided by the Centre for Aviation, the combined, weekly capacity offered by Air New Zealand and Virgin Australia under their revenue sharing arrangement is more than 40,000 seats. This is against the current capacity of less than 25,000 operated by Qantas and Jetstar. Even with the addition of Emirates’ 11,270 seats weekly and including oneworld partner LAN’s 1,584 seats, Qantas-related capacity will still be less than that of Air New Zealand and Virgin Australia. Nonetheless, adding Emirates to the trans-Tasman equation will right an imbalance that has caused commercial distress on what was once a lucrative route.

More broadly, how the new agreement fits into existing alliance arrangements for Qantas is yet to be seen beyond the announced termination of codeshares with Cathay Pacific and Air France. Qantas’s founding membership of oneworld will no doubt remain, but the Emirates-Qantas tie-up will not directly affect other partnerships within oneworld, indeed it could boost them by improving seamless round-the-world products. Emirates is, in this respect, entirely complementary to the existing Qantas network in which LAN, American Airlines, South African and a myriad of other codeshare partners play an important role. But it could be argued that Qantas is more complementary to the Emirates network, where the Dubai carrier stands to benefit materially from direct access to the successes of the Qantas domestic market and its 8.6 million-strong frequent flyer program.

Bigger picture

Looking beyond the partnership, a number of collateral elements to the partnership will help confirm Qantas’s place in the international market.

Qantas says there will be no change to fleet composition beyond existing deliveries, but the 787-9 is being touted as an entry vehicle back to direct European flights. Although the delivery of Qantas 787-9s will now begin in 2016, the opportunities the aircraft brings to Qantas on thinner routes around Europe would seem to be playing a material part in medium term fleet deployment plans. In explaining the longer term value of the Emirates partnership initiative, Alan Joyce said the new aircraft would be “a springboard for us to actually start growing more services back into Europe”.

Joyce added: “…as the 787s come in, I can see this only creating opportunities for us to grow. We don’t see this ending in Dubai, we see this ending in a lot more destinations in Europe.”

Supporting the view of the of the 787’s suitability to the European market, Emirates CEO, Tim Clark, stated European carriers are ignoring the revenue value of Australia: one key reason Emirates has taken such a keen interest and been so successful in the market.

“I think there’s growth potential for Qantas to re-enter the international scene in a way that it did in the past, but this time with more fuel economic, modern, 21st century aircraft that will match the demand that’s coming out of Australia to multiple points. This isn’t just about Emirates growing its business into Australia, it’s about Qantas growing its metal over Dubai into points in Europe and re-entering those cities that it served many, many years ago,” Clark explained.

An interesting question arises, however, as to whether the 787s would operate the full length of the Europe-Australia route or could be based in Europe flying as far as Dubai under a separate, Qantas-branded company. This could allow Qantas and Emirates to consolidate in Dubai onto larger capacity aircraft for Australia-bound flights.

However the 787 deployment occurs, if one sees the partnership with Emirates as a staging point towards the direct operation of European services by Qantas within four years, the new deal is fundamentally good news for Qantas international operations.

It does not diminish flying and, importantly, the partnership supports increased Qantas flying in Asia in the immediate term.

Without the ability to shore up the ailing international business, the flying kangaroo would be limited to flying within the immediate confines of its home base: a mere vestige of itself and without any means of protecting the flow of business to its domestic operation.

Protecting the international business will do two other important things: on delivery of the 787s it will provide a spring-board into Europe and other markets where Qantas has been absent or vacillating in its presence; and in the current context, provide some medium to long term hope of settling the industrial relations environment that has been centred on what is seen to be a diminishing international operation.