It has to be said that the Australian Competition and Consumer Commission’s draft decision on the proposed alliance between Qantas and Emirates, which contains one big tick and one small asterisk, isn’t a major surprise.
With Qantas International having lost the best part of $700 million in the past two years and still haemorrhaging, having shrunk its route network and facing an inexorable build up in capacity and competitors from Middle Eastern and Asian carriers on its routes into Asia and Europe, the viability of that business is in serious question if the status quo prevails. The concept of Qantas as a virtual international carrier in the future was a very real one.
With or without the alliance Singapore Airlines, Etihad, Malaysia, Cathay Pacific, Qatar and a growing number of Chinese carriers will continue to target the key routes between Australia, Asia and Europe and exploit the substantial structural cost advantages hub carriers have over an end-of-the-line carrier with legacy cost structures like Qantas.
The Middle Eastern carriers – and Singapore Airlines – have labour costs about half those of Qantas. Their operating costs per available seat kilometre are, according to the ACCC, at least 15 per cent lower and as much as 30 per cent to 40 per cent lower.
The government-owned or controlled carriers (most of its key competitors) have access to more favourable tax regimes, lower costs of capital and favourable costs of access to government-funded infrastructure that add to the advantages and efficiencies associated with operating from hub locations. Many of them are quite new, which means they operate newer and more efficient fleets and offer more attractive product.
In the circumstances, the loss by the Qantas group of about 4.5 percentage points of market share on the Kangaroo route to the UK over the past five years isn’t surprising, nor is it a surprise that other end-of-the-line carriers like British Airways and Virgin Atlantic have also lost share, with that lost share being picked up by the Middle Eastern carriers. The later arrivals from China are now ratcheting up the frequency of their flights and will inevitably have an increasing impact.
The deal with Emirates, under which they will co-operate on capacity, scheduling, pricing, product, frequent flyer programs and share revenue, offers Qantas International some hope of a future, which also shoring up its dominant domestic position against the assault by Virgin Australia that is being backed by most of its key international rivals and Singapore Airlines in particular.
It also offers Australian travellers access to better product, more flights, better schedules into Asia, better alignment of domestic and international schedules and an expanded loyalty program.
The aspiring allies were seeking a 10-year authorisation of their deal from the ACCC, which is minded to grant them only five years. That’s not a deal-breaker.
Apart from the reality that the question of an extension of the alliance can be revisited in five years’ time the logic of the rise and rise of the Middle Eastern and Chinese carriers says that, if anything, the competitive intensity on the routes between Australia and Europe and into Asia will continue to increase inexorably. The duration of the authorisation will enable the ACCC to make decision based on the reality of the alliance and its experience over that period.
The ‘’asterisk’’ in the draft determination relates to the trans-Tasman routes, where Qantas, Air New Zealand and its alliance partner Virgin Australia and Emirates are the only major players and where a Qantas alliance with Emirates would have produced a dominant player.
The ACCC will impose a minimum level of capacity that Qantas and Emirates have to fly on the routes, set at today’s levels – they will have to maintain existing capacity despite demonstrated over-capacity on the routes – and may in future be required to grow that capacity if passenger demand grows. Qantas offered a capacity floor up as a concession.
The trans-Tasman routes are of little consequence compared to the main game, which is the routes between Australia, Asia and Europe and therefore that condition doesn’t impact the appeal of the alliance to either Qantas or Emirates.
The ACCC’s draft conclusions reflect a pragmatic assessment, not just of Qantas’ position, but of the realities of the global aviation industry where there is structural change occurring, driven by the new hub carriers but which also reflects the disfigured economic fundamentals of the industry and the leveraged impact that the competition from the new carriers is having on legacy airlines as a result.
In this new era of global aviation, as Etihad’s James Hogan and Virgin Australia’s John Borghetti have realised alliances, even for the hub carriers, are critical to creating international networks with low capital intensity and unduplicated costs and capacity in an industry with high costs and which has always been plagued by excess capacity.
Finally, it looks like Qantas will have its key alliance, improving its offering and enabling it to re-focus its efforts and capacity away from the UK-oriented schedules it operates today into a still-immature and fast-growing Asian region much closer to home.
The draft decision ends, on a good note, what has been another tough year for Alan Joyce and Qantas, who know that while the alliance with Emirates isn’t in itself a solution to the issues being experienced by Qantas International it is an important part of one.
ACCC tick gives Qantas wings
The ACCC's approval of the Qantas-Emirates tie-up will allow the flying kangaroo to move away from its UK-oriented agenda and re-focus on growing much closer to home.
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