News Backgrounder
HAPPY 'FAMILIES'
It was said to be the key behind a "seismic" deal between two former enemies
October 1st 2012
With last month’s strategic shift by Qantas Airways to forge a 10-year alliance with Gulf giant, Emirates Airline, done and dusted along with its decision to ditch all flights to Europe through Asia, chief executive Alan Joyce has begun the hard sell to convince competition regulators to approve the deal. Read More »
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| A few months ago they were deadly rivals. Today, Emirates Airline president, Tim Clark (left) and Qantas Airways CEO, Alan Joyce, have struck a ground-breaking deal and are the happiest of families |
If it is not, he warned, there would be dire consequences for the Australian icon.
Everyone knew the deal was on the cards, but no one expected the complex negotiations between the two major airlines to morph into reality so quickly. Ironically, because the Flying Kangaroo has spent most of the past decade slinging abuse at its Dubai-based former rival, the key to success was simple: Qantas chief, Alan Joyce, Emirates president, Tim Clark, and their respective senior executives got on like a house on fire.
At top secret meetings in the past six months, the two parties beat out an agreement that Clark has described as “seismic” to the airline industry. In May, they met at the exclusive, Emirates-owned Wongan Valley Resort in the Blue Mountains northwest of Sydney. The negotiations were tagged the “Darwin Project” because the first meeting took place in the resort’s 1832 homestead, a site once visited by Charles Darwin.
In June, Qantas and Emirates chiefs held a clandestine meeting during the International Air Transport Association (IATA) annual meeting in Beijing. With the world’s airline top brass gathering at the China World Hotel, Joyce and Clark decamped to the nearby Hyatt for their talks.
A month later, Joyce boarded an Emirates aircraft for the first time to fly to Dubai for further meetings.
By last month, Clark was ready to fly to Sydney to sign the wide-ranging deal. Given that regulatory approval is granted, the two airlines will coordinate pricing, sales and scheduling, code-share extensively and align their frequent flyer schemes.
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| Qantas Airways: new deal means all European flights will pass through Dubai rather than Singapore |
As a result, Qantas will end its revenue-sharing agreement with British Airways. From next April, the airline will cease all its flights to Europe through the traditional Singapore hub - it operates only to London and Frankfurt - and switch to Dubai.
From there Qantas’ services will be able to connect with Emirates flights to more than 30 European destinations. The two airlines will operate 98 weekly flights between Australia and Europe.
Qantas will still fly to London – but not Frankfurt – through Dubai. Joyce has indicated when the carrier begins taking delivery of its B787 Dreamliners in 2016 a number of the planes will be used to add more European destinations through the Gulf.
A major benefit for Emirates in the new order is that it will gain access to Qantas’ extensive domestic network.
“Neither airline will take equity in the other,” said Clark. “By combining forces, both airlines will benefit from cost-savings and enhanced economic efficiencies, including economies of scale and joint purchasing, which will contribute to optimising the operating performance of each organization.” He described the commercial relationship between the two carriers as “a first in aviation history”.
Joyce believes the deal will help Qantas’ international arm, which lost $450 million in its latest financial year ended June 30, return to profit by 2015.
But first he has to sell it to the competition watchdog. And he is talking tough.
In a submission lodged with the Australian Competition and Consumer Commission (ACCC), he warned if approval wasn’t granted Qantas would be forced to stop flying to Europe.
“In the absence of the authorisation, it is likely in the medium to long-term Qantas would retreat to a ‘virtual network’ rather than an operating network. Under such a scenario, Australians would lose the benefit of Qantas operating a strong locally-based international network airline. That is not in the national interest,” said Joyce.
Within a week of sealing the ground-breaking agreement, Joyce and some of his senior executives were meeting with aviation officials in Singapore to reassure them Qantas will remain a major player at Singapore Changi International Airport.
While its Singapore to Europe services would stop, he told them Qantas planned to increase services through Singapore by as much as 25%.
Its budget arm, Jetstar Asia, is based in Singapore and last month announced it is adding 70,000 extra seats to its monthly schedule from October 28, boosting capacity on services from Singapore to Kuala Lumpur, Bangkok, Phuket and Yangon.
Changi officials and Singapore Airlines (SIA) hardly raised an eyebrow when the Emirates deal was announced. A spokesman for the Changi Airport Group said Qantas was planning to step up connections between Australia and Singapore. “We understand that Qantas faces challenges in its international business and needs to restructure its network,” he added.
Said an SIA spokesman: “Speaking in general terms, competition is not new and we have competitors on every route that we serve. We compete by offering the highest quality products and services across an extensive network.”
Only time will tell whether the carriers’ newly negotiated “love fest” will ultimately result in turning around the fortunes of Qantas’ international operations, but analysts generally welcomed the move.
They agreed it was a much needed development. In August, Qantas posted its first annual group loss in 17 years, a deficit of $255 million.
Tony Webber, who was the Qantas Group chief economist from 2004 until last year, said the alliance with Emirates “will unambiguously improve its bottom line”. But he said the “if you can’t beat ‘em, join ‘em” strategy is an admission that Qantas can’t compete with Emirates on price or costs, product and the network footprint in Europe.
Webber said the most pressing question was whether it would lead to the airline achieving more consistently its return on invested aircraft capital. “Time will tell, but it is doubtful,” he said.
“The carrier is dogged by persistent excess supply or capacity, which results in yield and margin compression in an environment of growing unit costs.”
He pointed out the alliance would have no impact on the Pacific (U.S.) route. It would also have little impact on competition and the supply of seats on most of Qantas’ Asian routes, its South African route and smaller routes such as the Pacific islands.
“While Qantas will put a bandage on its international wound, the blood is still likely to seep through. But at least it has made a start in the right direction,” said Webber.
