Is Qantas being lured into a trans-Pacific trap?

Emirates has indicated it would be willing to extend its alliance with Qantas to the coveted trans-Pacific route, where the flying kangaroo is strong. It throws up a cacophony of considerations for Alan Joyce.

With the ink barely dry on the Australian Competition and Consumer Commission’s clearance of his alliance with Qantas, Emirates’ Tim Clark is already musing aloud about another dimension to the relationship.

Less than three weeks ago the ACCC approved, with some conditions, the alliance on routes between Australia and Europe which will see Qantas re-directing its traffic through Emirates’ hub in Dubai as part of an arrangement that will see the carriers co-ordinate capacity, pricing, product, frequent flyer programs and share revenues.

Clark, in an interview with Bloomberg published on Tuesday, indicated he would like to extend the relationship to the trans-Pacific route – but only (self-evidently) if Alan Joyce and his team liked the idea.

The trans-Pacific is, as Clarke said, "Qantas territory". It dominates that route, which historically has been highly profitable. While it has restructured its services to shift some of its focus from the west coast of the US to Dallas/Fort Worth, the main hub for its US ally American Airlines, the route and its services to Los Angeles remains a core element of its diminished international network.

That makes an alliance with Emirates on the route a more sensitive issue than the routes into Europe, where Qantas had withdrawn or was withdrawing from all destinations other than Heathrow as it sought to stem the heavy bleeding within its international business, which has lost nearly $700 million in the past two years.

It is interesting and potentially relevant that Emirates is also seeking a closer relationship with American, with which it has an informal relationship at present. American is close to emerging from bankruptcy and is also considering a proposal to merge with US Airways.

Qantas has a long-standing relationship with American and code shares to more than 50 destinations in North America and Mexico.

Emirates isn’t a member of one of the three global aviation alliances – Oneworld, Star Alliance and SkyTeam – preferring what Clark refers to as tactical partnerships that deliver specific benefits. Closer relationships with Qantas and American would deliver the carriers a form of global alliance of their own.

As Clark said to Bloomberg, an alliance with Qantas would enable passengers to fly around the world on Airbus A380s "if the timing is right and the two aircraft meet". He said he was sure Emirates could do business on the trans-Pacific with Qantas "metal" as part of a deal.

Joyce would presumably only be interested in sharing access to the trans-Pacific route and revenues from it if there were a significant net benefit. Qantas has fought fiercely to keep other carriers off the route, although United, a joint venture between Virgin and Delta and Air New Zealand do compete on it.

The global industry is, however, changing rapidly with new alliances and equity tie-ups now occurring routinely. Given the obstacles to conventional relationships, most of the major carriers (and Virgin Australia very aggressively in this market) are now pursuing elements of a virtual network strategy.

American’s routes across the Atlantic, for instance, where it has a dominant alliance with British Airways, could be threatened by Delta’s recent purchase of Singapore Airlines’ 49 per cent stake in Virgin Atlantic and the proposed cost and revenue-sharing arrangements between the carriers. Delta also has pre-existing alliances with KLM, Air France and Alitalia.

The prospect of a trans-Pacific alliance wasn’t specifically raised in the discussions about the existing relationship, which formally starts in April, and could need to undergo a separate approval process with the ACCC, although the original Qantas submission did seek approval for a global alliance with Emirates.

For Joyce, Clark’s thoughts create some multi-dimensional issues. A wider relationship with Emirates that included linking their routes into and out of the US could have some positive financial impacts but there are also longer term strategic issues to consider into binding itself even closer to one of the world’s largest and fastest-growing airlines and giving it access, directly or indirectly, to the trans-Pacific.

Those issues aren’t necessarily negative but they are complex and Joyce, as he had to in entering the alliance in the first instance, has to balance the short term imperative of stabilising his international business with a long-term strategic view of Qantas’ eventual position in the ever-evolving global industry.

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