Qantas frustrated in search for Asian alliance partner
China Eastern is firming as the airline's passport into the region, writes Matt O'Sullivan.
After a torrid year, Alan Joyce can finally take a break on the Gold Coast with family from Ireland. But amid trips to amusement parks, the Qantas chief executive will know that in the volatile world of aviation, such downtime is usually the calm before another storm.
Following the competition regulator's nod of approval to Qantas's alliance with Emirates, the 46-year-old Irishman will have to oversee a complex shift of his airline's hub in Singapore to Dubai, and an alignment of systems and products with its new Middle Eastern bedfellow.
With the Emirates deal almost in the bag, attention is set to turn quickly to Qantas's plans for Asia.
The region has not been a happy hunting ground for the Flying Kangaroo in recent years. Remember Qantas's ambitious plans for RedQ, the start-up premium airline to be based in Singapore and later Kuala Lumpur? Those plans have been shelved indefinitely.
Qantas will unveil more details about its Asian strategy in the coming weeks. It will centre on better timing of Qantas flights to Hong Kong and Singapore, which has been made possible by the Emirates deal.
But the pressing issue remains finding a suitable dance partner in Asia, which is vital to Qantas grabbing a bigger slice of the world's fastest-growing travel market. Emirates is under-represented in Asia compared with regional powerhouses Singapore Airlines and Cathay Pacific.
As Qantas prepares to shift its hub for European flights from Singapore to Dubai, Singapore Airlines is already rushing to boost flights on routes to Australia. By July, Virgin Australia's alliance partner will be operating 121 flights a week to Australia - up from 104 a year ago - including four daily flights to both Sydney and Melbourne.
For Qantas, the dilemma is a lack of suitable Asian bedfellows.
Virgin has stitched up a code-share alliance and equity ties with Singapore Airlines.
While Cathay Pacific is considered an ideal bride in north Asia, Qantas executives concede privately that the airlines' long history of rivalry is unlikely to allow the pair's loose ties to become more extensive. Qantas's plans to launch Jetstar Hong Kong in Cathay's backyard makes a full embrace even less likely.
It leaves China Eastern as one of the few candidates for a deeper alliance. Qantas has a code-share agreement with China's third-largest airline, and the pair are joint partners in Jetstar Hong Kong, which is awaiting regulatory approval to begin flights in the middle of next year.
Joyce has emphasised that their Hong Kong venture will help deepen the relationship with China Eastern.
At a Australia-China business function in Canberra in this month, China Eastern's Australian manager, Kathy Zhang, was bullish about the airline's growth plans for flights to Australia next year.
According to people who attended the closed gathering, she indicated that China Eastern planned to boost flights to Sydney, Melbourne and Brisbane. China Eastern is playing catch-up with rival China Southern, which has been aggressively targeting Australia over the past year.
Although easily able to fill seats with Chinese tourists, China Eastern lacks Australian bums on seats on flights out of this country. Likewise, Qantas faces the same challenge on its one flight a day to China between Sydney and Shanghai: while it can attract Australian business people, it is a bigger challenge convincing Chinese tourists to book seats.
In what has been coined the "Asian Century", Qantas is not alone in wanting to push northwards.
With economies in European and the US in a pickle, airlines around the world are rushing to try to tap untold riches in Asia, and particularly China. One of those is Air Canada, which will boost flights significantly to China next year. But Air Canada's chief executive, Calin Rovinescu, concedes that tapping a country of more than 1.3 billion people cannot be done simply by flying his airline's planes to Shanghai and Beijing, or to secondary cities in China.
"We can't access the Chinese market unless we have access through our partners to the traffic that comes from outside the places like Shanghai and Beijing," he says.
It is why airlines are treating global marketing alliances such as Star Alliance, oneworld and SkyTeam as inferior to strong bilateral relationships with other carriers in Asia.
"The real revenue opportunities come when we have targeted, focused code-share relationships, joint-venture relationships, revenue-sharing relationships, potentially profit-sharing relationships," Rovinescu says. "Asia is a huge opportunity."
Virgin is also open to finding a partner in north Asia and speculation has centred on Cathay and China Southern. The latter has expressed interest in building closer ties with an Australian airline.
In Qantas's case, Joyce and senior executives have invested considerable time in strengthening their relationships with their counterparts at China Eastern. It has the potential to be a frustrating exercise: connections can be created only to find executives move to other parts of China Inc.
Asia is also fraught with political and cultural hurdles for airlines.
That is before taking into account that the Chinese airlines' in-flight products are still not in the same league as those of Cathay and Singapore Airlines, which can command a fare premium.
"There is scope for Qantas to deepen its relationship with China Eastern over Shanghai," Macquarie Equities says. "[But] China Eastern is the smaller of the 'big three' Chinese carriers in Australian capacity terms, and has arguably an inferior product to Cathay, making a Qantas-China Eastern connection less attractive to a corporate traveller than a Cathay or Singapore connection."
Macquarie Equities also believes south-east Asia will remain a weak spot for Qantas because of a lack of a partner to connect to via Singapore's Changi Airport.
China-based executives say Qantas has to do more to build its brand in Asia, particularly in China. "You talk to the well-heeled in China and they will have no idea who Qantas is. If you don't have a brand identity, how can you expect to command a premium for your airfares?" one asks.
Before it steps up efforts to reel in an alliance partner, Qantas will release details in the coming weeks about a rejig of its network schedule into Asia. It is aimed at better timing flights to Hong Kong and Singapore so as to allow passengers to more easily catch connecting regional services, or attend business meetings.
A release of details about substantial improvements to Qantas's on-board products, including business class, is still months away.
The plan for Asia is also about better connecting Qantas flights to Jetstar's growing network. However, hopping from a Qantas flight in Singapore or Tokyo on to a connecting Jetstar flight to a regional destination will certainly not be to every passenger's liking.
"We have four Jetstar-branded airlines and a range of full-service partners in Asia. We'll be leveraging all these links as we improve our connections into key Asian hubs, particularly Hong Kong and Singapore," a Qantas spokesman says. "Our relationship with China Eastern is longstanding and our current focus is getting Jetstar Hong Kong off the ground by mid-2013."
As part of the tie-up with Emirates, Qantas will take a slice of the tickets for the Middle Eastern airline's flights from Australia to Singapore, Kuala Lumpur and Bangkok. In return, Emirates will code-share on Qantas flights to Asia, and on Jetstar services within Asia.
Qantas has estimated that the Emirates deal could increase capacity on flights from Australia to Asia by about 40 per cent, while lifting the amount of connections from Singapore by a quarter as a result of re-timing flights.
The deal also allows Qantas to redeploy under-utilised planes to Asian routes.
Without doubt, Qantas will have its hands full over the coming months. The complexity involved in shifting the hub for European flights from Singapore to Dubai is staggering.
But the need for deeper ties with an Asian dance partner will not go away.