THE DISTILLERY: Qantas swagger

Qantas Airways has broken with tradition by embracing a Middle Eastern airline as a borderline joint venture partner. In fact, the same can be said of Emirates, which doesn’t do deals like this with anyone.

Alan Joyce has done a deal that many thought wasn’t possible. But the Qantas boss also has to persuade the competition regulator that the deal is a good one for the country, or at least not a bad one.

There’s a lot to get through in this edition of The Distillery.

The Australian’s Damon Kitney explains how the alliance with Emirates could perhaps be described with the old saying, "If you can’t beat ‘em, join ‘em”.

"For years his predecessor Geoff Dixon railed against the so-called oil-rich invaders from the Middle East threatening the future of Qantas. And even as recently as May, Qantas was quietly lobbying in the corridors of Canberra against Etihad's proposed equity investment in arch-rival Virgin Australia. Yet that same month Joyce and the Qantas board had decided, after some indirect approaches from Emirates and informal chats with then head of Qantas Commercial Rob Gurney, that the time had come to engage with the enemy. He also made a courtesy call to British Airways chief executive Willie Walsh to politely inform him that this was likely the beginning of the end for their decades-old alliance. And he got to work.”

But equally so, Business Spectator’s Stephen Bartholomeusz points out that Emirates only does code-sharing deals. The union with Qantas not only amounts to a change in strategy for the Middle Easterners, but also could be primarily inspired by the Virgin-Etihad talks.

"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.”

That’s an astonishing thing to contemplate. For all the talk about how John Borghetti has outmanoeuvred his former employer since his appointment at Virgin Australia, the suggestion that his actions have inspired two airlines to ditch once fundamental strategies in part to combat his movements is perhaps the greatest compliment that’s been extended to him yet.

Regardless, this deal has to work well for Qantas. The Australian Financial Review’s Matthew Stevens explains why Alan Joyce isn’t too concerned about suggestions that Qantas will leak its valued 8.3 million frequent flyers to a service offer at Emirates that it can’t match.

"For example, Joyce reckons that anything Emirates does on the customer service front Qantas can at least match and that his customers will embrace the new depth of the airline’s one-stop European destinations. The theory here is that London is no longer an appropriate hub through which to bounce Qantas customers into Europe. And neither is Singapore. The rise and rise of the government-sponsored Gulf state airlines has generated new opportunity for one-hop travel to Europe. That is one reason why Virgin has so readily embraced an alliance with, and partial ownership by, Abu Dhabi-based aggressor Etihad. And why Qantas, on somewhat different terms, has aligned itself with Emirates. One of the more discrete subtleties here is that these deals will, to a degree, protect both our local players from the invasion of their space by airlines that work to patently different financial return metrics.”

Then there’s the question of whether this deal is good for Australia. Fairfax’s Malcolm Maiden outdoes himself with a fantastic opening that you just have to read.

"Newspaper advertisements that appear for the first time today show a dozen Qantas and Emirates planes parked tail-to-tail under a declaration that the two airlines have formed ‘the world's leading airline partnership’, but there are four crucial words at the bottom of the page: ‘Subject to regulatory approval.’… The Australian Competition and Consumer Commission head Rod Sims and his colleagues won't be asking whether the deal improves the lot of Qantas and its shareholders or the lot of Emirates. They will want to know whether it improves the lot of airline customers. The tie-in is prima facie anti-competitive, and will only get the green light from the ACCC if there are other, offsetting benefits.”

The Australian’s John Durie takes his readers through the discussion that is likely to take place at the competition regulator.

"Given Clark is risking big dollars, with A380s at $340 million a pop, he will collect the lion's share of the revenue for the joint-venture routes, which will work out more an 80-20 split than 50-50. Joyce has spent so much time politically positioning Qantas International as a high-cost carrier, one can assume the pitch to the ACCC today will run along the following lines. Emirates may be taking out a competitor, in the basket case that is Qantas International, but Qantas is a diminished force. It's a highly competitive market and this deal makes Qantas a better competitor, with its old planes being replaced by the tax-free Emirates fleet, which on the laws of economics must mean even lower fares for Australians. That's the argument but the deal faces a tough battle to win ACCC approval, given historically the two accounted for 50 per cent of the market.”

In other company news, Fairfax’s Adele Ferguson says focus is settling on Bain Capital as the as yet unnamed rival bidder for Billabong International.

The Australian Financial Review’s Chanticleer columnist Tony Boyd previews the sale of the Queensland government’s $2.7 billion stake in QR National, which some believe could commence this weekend.

Fairfax’s Elizabeth Knight points out that BHP Billiton chairman Jac Nasser and chief executive Marius Kloppers might’ve warned investors earlier this year that the $80 billion spending program was off, but they hardly created the impression that iron ore prices were headed to where they are now.

This means the ‘staggering’ of BHP’s projects is seriously in question, because a rebound in the iron ore price is hardly likely to be accompanied by a swift return of capital spend.

If nothing else, Knight delivers a great insight into the pitfalls of corporate communications. It’s a really good read.

While we’re on good reporting, The Australian’s Bryan Frith demonstrates just how long he’s been in the business at the top of his game by recounting the history of Tabcorp’s float in 1994 as a primer for the company’s legal action against the Victorian government.

Elsewhere, Fairfax’s Brian Robbins points out that smart meters have become so politically toxic that the Australian Energy Markets Commission omitted any reference to them in its 192-page report released yesterday.

And finally, The Australian’s economics correspondent Adam Creighton concedes that Gina Rinehart’s critiques of the Australian economy might be self-serving, but they’re quite true.