One of the more interesting and implicitly critical observations about the alliance announced between Qantas and Emirates yesterday is that it will eventually turn Qantas into "just" a regional airline. That isn’t necessarily going to be the outcome but would it be such a bad thing if it were?
The problem that Qantas has been grappling with and which has plunged its international business into unsustainable losses as the Middle Eastern carriers emerged is that as an end-of-the-line legacy carrier it is uncompetitive and cannot be competitive.
Apart from the massive competitive advantages the hub carriers have over end-of-line carriers, and that new airlines have over legacy airlines, the Middle Eastern carriers have a fundamental advantage because of their location as well as a significantly more favourable tax regime.
Those factors and the massive structural changes to the nature of the global aviation industry they represent explain Qantas’ continuing withdrawal from what used to be a far more comprehensive international route network.
If an international presence weren’t so vital to protecting its domestic dominance of business travel and its frequent flyer program the losses of $450 million Qantas sustained in its international operations last year might well have seen it retreat to a purely domestic presence.
That isn’t, however, a viable option because with Virgin Australia having signed up a series of alliances with Qantas competitors the domestic business and the frequent flyer program would then be extremely vulnerable.
Ever since he became chief executive Alan Joyce has been wrestling with the dilemma of how to retain a meaningful international presence while re-shaping his network to create something sensible and sustainable in a very different one to that which Qantas has operated in throughout most of its storied history.
The much-touted but failed attempts last year to create a new full-service regional carrier provided an insight into his thinking.
While it is conceivable that Qantas could retain the skeleton of a global presence in its own right, connecting to the networks of its partner airlines in the Americas, and maintaining the Qantas brand on flights into Heathrow, the obvious way to re-make the Qantas international business was to re-orient it towards its own region. Asia Pacific is the fastest-growing aviation market in the globe, but is an immature market.
The partnership with Emirates does a number of things for Qantas.
It will, if the Australian Competition and Consumer Commission allows it, shore up and beef up Qantas’ domestic business and greatly expand its frequent flyer program.
It will open up a vast array of European ports and create income flows from the benefit-sharing elements of its partnership without any significant requirement for Qantas capital.
It counters and perhaps trumps the alliances Virgin Australia has struck with Singapore Airlines, Etihad, Air New Zealand and Delta. It will give Qantas and Emirates customers far more flights to far more destinations.
It also, moreover, allows Joyce to reconfigure his regional presence and in the long term this could be the undervalued element of the deal he has struck with Emirates.
Qantas’ existing schedules on the 'kangaroo route' are designed for that route rather than for travel into and within Asia. By handing passengers flying into Europe to Emirates at Dubai, Qantas will be able to create a new schedule for flights into and out of Asia that are designed for that purpose rather than build around the requirements of the kangaroo route.
Emirates, too, has a significant network within Asia which links into its Australian flights and so the partnership has the potential to create a self-reinforcing presence within the region as they feed traffic into and out of a redesigned Qantas network. The partnership will also enable Qantas to retire some of its older aircraft and reconfigure its Asian fleet for a regional network.
It is possible to envisage a 21st century Qantas network, built around its domestic strength and an enlarged frequent flyer program, with strong spokes on the trans-Tasman, trans-Pacific and Australia-to-Dubai routes and a far more comprehensive regional presence supported by the mutually-beneficial partnership with Emirates.
The deal with Emirates, if it can get past the competition authorities, unlocks the potential for that very different Qantas to emerge and for Qantas to create a different but far more sustainable and rational international business.