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Qantas-Cathay codeshare favours protectionism over growth
April 12th 2019
Virgin Australia contends the proposed codeshare would inhibit air service agreement expansion. Read More »
Three months since proposing a codeshare to regulators, Qantas and Cathay Pacific are not improving their justification while anti-competitive concerns mount. Most recently, Virgin Australia said the codeshare would dis-incentivise Cathay and Qantas to support market liberalisation. Expanding traffic rights would enable Hong Kong Airlines to serve Australia’s primary cities.
“The benefits of robust competition from three or more carriers, in terms of lower airfares and increased service options, are more valuable than the claimed benefits of Qantas’ proposal,” Virgin wrote in a follow-up submission to Australia’s International Air Services Commission. “The public benefits claimed by Qantas in its application are marginal.”
The Australia-Hong Kong air service agreement has been constrained for many years and has at times been a bitter stalemate. Cathay has used up Hong Kong entitlements while Australia under-utilises its allocation. Australia is open to granting Hong Kong more traffic rights but in exchange for beyond-Hong Kong rights since Australia does not need more local traffic rights. Air traffic rights were not included in the Australia-Hong Kong free trade agreement signed on 26 March 2019.
Qantas and Cathay propose to codeshare on overlapping flights from Brisbane, Melbourne and Sydney to Hong Kong. Codeshare sales would only be permitted when sold with a connection from domestic Australia, beyond Hong Kong or both.
Qantas claims that restricting codeshare sales to connecting flights would preserve competition on point-to-point markets, which comprise the majority of passengers. Yet Virgin argues Qantas has over-stated public benefits while the codeshare would deliver the benefits of coordination.
This was a concern from watchdog Australian Competition & Consumer Commission. The ACCC noted Qantas’ firm statement that the codeshare would not involve coordination. But the ACCC said the codeshare could provide an opportunity for Cathay and Qantas “to make independent decisions that would not involve collusion but may nevertheless reduce the intensity of competition between them.”
The ACCC added: “The fact there is a contract that prohibits explicit coordination does not fully address this possibility.”
Qantas has provided only a drip-feed of information and contradictory public benefits, initially claiming the codeshare would help with connections to India but then including North American cities as beneficiaries. This has made Virgin reckon the real purpose of the codeshare is for Qantas and Cathay to use their combined might to apply unjust competitive pressure to their small rival. Virgin and joint-venture partner Hong Kong Airlines (HKA) broke the Cathay-Qantas duopoly. Qantas and Cathay fly 92% of the market.
HKA exited services from Cairns and the Gold Coast. HKA was confined to secondary Australian cities since Cathay utilises all of Hong Kong’s allocations to primary Australian cities. HKA exited the secondary cities due to its own strategic direction and being able to have a JV with Virgin, which can use Australian traffic rights to fly to Hong Kong from the primary cities of Melbourne and Sydney.
The proposed codeshare would give Cathay access to Qantas’ Australia-Hong Kong inventory. Qantas is more dependent on local traffic whereas Cathay can sell Australia with connections from its worldwide network.
Cathay gaining access to codeshare flights would give it new inventory to sell, reducing the need for Cathay to support expanding or liberalising traffic rights with Australia. While Cathay would receive more traffic rights to primary cities, HKA could receive its first traffic rights to primary cities.
Consumers would unequivocally benefit from more flights and new entrants, but Virgin infers it is in Cathay’s competitive interest to stop market growth rather than allow HKA to expand.
“The proposed code share would give Cathay Pacific access to additional frequencies,” Virgin wrote. “This obviates the need for it to secure additional capacity under the Australia-Hong Kong air services arrangements.”
Without bilateral expansion, “it will not be possible for other Hong Kong carriers to commence services to Australia’s major international gateways in competition with Cathay Pacific,” Virgin wrote. “Cathay Pacific would stand to receive the most significant commercial benefit from approval of Qantas’ application.”
