Just the ticket for Qantas

In a partnership that will allow a restructured network, more customer-oriented business and reconfigured fleet, Alan Joyce has delivered what could be a defining moment in the airline's history.

Alan Joyce described it as a "step-change" and a new era for the global aviation industry. Had the partnership Qantas unveiled today been with anyone but Emirates that could have been dismissed as hyperbole.

The arrangement, which is far deeper than a code-share and more akin to a joint venture than a conventional joint services agreement (like the 17-year association with British Airways that is about to be dumped) is, however, a radical one for both Qantas and Emirates.

Emirates is famously independent. It does code share deals, not alliances. The fact that it has been prepared, even eager, to form a partnership with Qantas signals that it sees powerful mutual benefit in the relationship.

At face value Qantas needed Emirates more than Emirates needed Qantas. Qantas’ shrunken international business has been bleeding badly, losing $450 million last year. Its product was losing competitiveness but it has been unable to justify investing more in a loss-making business.

With Virgin Australia’s John Borghetti striking alliances with a range of Qantas’ key competitors – Etihad, Singapore Airlines, Delta and Air New Zealand – the implosion of its international business was threatening its dominant and highly profitable domestic franchise. The Qantas stranglehold on corporate customers is buttressed by its international business and its frequent flyer program.

Interestingly, those Virgin alliances and the Etihad relationship in particular may have been a factor in driving Qantas and Emirates, which has a fierce rivalry with Etihad, together. Australia is Emirates’ third-largest market and it would have been disconcerted by the coalition of anti-Qantas forces Virgin has put together and the key role Etihad is playing in Virgin’s strategy.

For both Qantas and Emirates the partnership is something of a game-changer but one that reflects the changing global aviation landscape.

The Qantas/BA alliance on the Kangaroo route was a product of a different era, when the route to Europe went via Singapore or Hong Kong and the UK was a natural gateway for Australians into Europe. Today the Middle East – Dubai and Abu Dhabi – provides that gateway and it is the Middle Eastern hub carriers that are increasingly dominant in the industry.

The growth in China’s aviation market and the emergence of China’s international carriers, however, means that dominance can’t be taken for granted.

Emirates, with a meaningful domestic market, would be acutely aware that the future of aviation is increasingly going to be within Asia and that it needs to strengthen its position and protect its share of the Australian market while it can.

The deal the two carriers have done is a 10-year deal that involves benefit-sharing – regardless of the badging of the aircraft there will be sharing of margin on their trunk routes and commissions for volumes fed into the rest of their networks. They will, assuming the competition regulators approve the arrangements, have jointly managed pricing, sales and scheduling and will co-ordinate their share support functions.

Their loyalty programs and lounges will be accessible to both customer bases and Qantas will get exclusive access to Emirates’ new A380 terminal in Dubai.

With access to Emirates’ extensive network of routes into Europe and elsewhere via Dubai Qantas can withdraw from its loss-making Frankfurt route and retire a few more ageing planes.

Perhaps of greater consequence is that Qantas’ existing regional route network and scheduling was built around the demands of the Kangaroo route rather than seamless connectivity within the region.

The partnership with Emirates will enable it to restructure that network and its schedules to create a bigger and more customer-oriented regional business and enable Qantas to reconfigure its fleet for the different purpose.

It is unlikely that Qantas passengers are going to complain about the partnership. Apart from the sheer scale and reach of the Emirates network it has best-in-class product. The ability to earn and burn Qantas frequent flyer points from Emirates flights is likely to be a significantly positive factor for both the loyalty program and the loyalty of the Qantas business customer base.

The partnership, a restructuring of its international network and continuing large-scale cost-cutting are all components of a multi-pronged attempt by Joyce to stabilise the international business and improve it sufficiently to be able to justify the investment required to give it more competitive product.

While the Emirates deal means that Qantas International will never be what it once was, that was the case anyway. As a point-to-point carrier Qantas, and other legacy carriers, have been increasingly unable to compete with the new hub carriers, and particularly the Middle Eastern carriers with their low costs bases and brand new fleets.

If he can protect his domestic base, develop a stronger regional presence and retain some presence of key international routes while clipping the ticket on passengers flowing through Dubai, Joyce’s efforts in securing the best conceivable partner airline on what appear at face value to be quite equitable terms could in time be seen as a decisive moment in Qantas’ history.

This is a relationship that has been an inconclusive discussion point between Qantas and Emirates for the best part of a decade. Regulators willing, Joyce has delivered it.

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