Blue sky forecast for Qantas tie-up

Australian Competition and Consumer Commission chairman Rod Sims says the Qantas-Emirates tie-in will generate "material but not substantial" public benefits, but that's the view from a consumer perspective.

The benefit for Qantas itself should be both material and substantial. As long as customers who sample Emirates don't migrate there forever, it should push Qantas' international airline business back into the black and keep it there.

The ACCC didn't buy Qantas' argument that the alliance with Emirates was life or death for the flying kangaroo brand overseas. Qantas' claim that Qantas International was in "terminal decline" and unable to compete effectively or operate profitably was neither accepted nor relied on in the decision to authorise the alliance for five years, Sims said.

The scope of Qantas' international network would be much the same in future with or without the Emirates deal, he added: as Singapore Airlines had observed in one of its submissions to the regulator on the deal, Emirates was obviously not the only option that Qantas examined as it looked for ways to secure its international future.

Still, the five-year authorisation of the alliance is a watershed moment for Alan Joyce and the company he leads. Qantas spent $376 million in 2011-12 rationalising its long-haul operation. It aims to be booking savings of $300 million a year from 2014 onwards, and Qantas International is already healthier. Its loss of $91 million in the December 2012 half compared with $262 million in the December 2011 half, and a whopping $450 million loss in the year to June 2012.

Now, Qantas also has an alliance with Emirates that is a capital-light way to fix weaknesses in the offer it has been making to passengers travelling to and from Europe and Asia. Qantas was offering five destinations in Europe. It is offering 33 European destinations in the alliance that takes to the air on Sunday, and is offering more than 60 new, one-stop destinations overall. It is offering 40 per cent more capacity into Singapore and 10 per cent more capacity into Hong Kong, hubs that are being replaced on European flights by Emirates' home hub, Dubai.

Flights into Asia are dovetailing with Emirates flights in the region, and are leaving Australia and arriving in Asia at more convenient times now that they are no longer a hostage to European scheduling. The two airlines have integrated their frequent flyer programs, and will profit-share on trunk routes, taking commissions on flights they book for each other on other routes.

Catering and aircraft cleaning operations were excluded from the alliance after it became apparent that the ACCC would have concerns, and the ACCC has imposed only one condition - that Qantas and Emirates do not cut back capacity on trans-Tasman routes between Australia and New Zealand, where they account for about two-thirds of total capacity.

Given the potential upside in the alliance that was easy to agree to. It is not difficult to come up with earnings gains of well over $100 million a year for Qantas once the alliance is bedded down.

Qantas and Emirates got clearance from the ACCC in January to begin preparing for the alliance and marketing seats, and the booking numbers have been encouraging.

When Qantas announced its December-half profit on February 21, Joyce said that in the second week of ticket sales for the alliance Qantas sold four times the number of seats to Barcelona than the same week a year earlier, 13 times as many seats to Munich, 14 times as many seats to Copenhagen and 17 times as many to Milan.

Demand is understood to have stayed strong since then, and two British airport destinations brought to Qantas by the alliance, Manchester and London's Gatwick, are now slotted in behind Qantas' traditional British destination, Heathrow, as the second and third most popular European destinations.

Qantas' domestic airline is also getting a boost from booking by Emirates of its passengers onto domestic Qantas flights. In the past month, Emirates has booked more than 5000 domestic sectors. Qantas' old alliance partner British Airways booked 1600 domestic sectors in all of last year.

The lift in profit and profitability that Qantas gets out of the alliance depends on how well the deal is executed (the signs so far are good), on the competitive response in Europe and Asia from competing carriers, and on the highly rated Emirates not turning out to be such an attractive partner that it wins over Qantas passengers long-term.

Qantas should do more business on more flights with Emirates at its side, however, and do so without buying more expensive airborne metal: Joyce's unchanged target for Qantas to be back in the black by 2015 is beginning to conservative.

mmaiden@fairfaxmedia.com.au