The way is cleared for a Qantas comeback

After trying to patch up structural inefficiencies for years, Qantas now has the pieces in place to return its international division to profitability.

The Australian Competition and Consumer Commission’s authorisation of the Qantas alliance with Emirates today was completely anticipated to the point where the two airlines had already organised their inaugural flight to Dubai this weekend. That doesn’t detract from its significance.

From the moment the ACCC published its interim authorisation in January it was apparent the deal would get a conditional go-ahead, a view buttressed by public commentary from the ACCC chairman, Rod Sims, that the key test of the alliance would be whether or not it produced net public benefit. The commission concluded that it would.

The authorisation is conditional only on the carriers maintaining their existing capacity on the trans-Tasman route, which they dominate, although there is provision for them to seek variations to that commitment if there is a material change in market conditions – the ACCC won’t force them to maintain a loss-making capacity.

The authorisation of the deal formally marks a very significant moment in Qantas’ history. Before it struck the alliance with Emirates there was a major question-mark over the shape and indeed future of Qantas’ international business, which had been shrinking rapidly under the weight of losses that had been approaching $500 million a year.

Despite some nostalgia among its unions and the odd politician, the international airspace in which Qantas has been operating has changed fundamentally. It isn’t recognisable from what it was even five years ago, let alone a decade ago, because of the dramatic growth of the Middle Eastern and Asian carriers on routes on which Qantas once had a substantial presence.

That low-cost modern capacity operating out of natural hubs on the routes to Europe had hacked into Qantas’ market shares and, indeed, continues to erode it. Qantas International was on its way to irrelevance, perhaps oblivion, if it didn’t take dramatic steps to reduce its cost base and rethink its international strategy.

The deal with Emirates – the joint venturing of those routes with one of the best and fastest-growing of the new breed of international carriers – has enabled Alan Joyce and his team to do precisely that. Even before the alliance flies its first joint-ventured plane the response from customers, in terms of forward bookings, has been a resounding validation of the strategy.

The deal allows Qantas to leverage off Emirates’ Dubai hub to open up a wide array of European ports. As importantly, it enables it to redeploy its own metal into Asia in pursuit of a new dimension to its international strategy that makes more sense within the new international aviation order.

Qantas International’s Simon Hickey last month unveiled the new schedules into Asia, which involves much greater frequencies of flights into and out of the region, region-specific schedules and substantial increases to capacity on the routes to Singapore and Hong Kong.

In what has been a good week for Joyce, the ACCC has also authorised coordination between the four Jetstar joint ventures in the region – Jetstar Asia in Singapore, Jetstar Pacific in Vietnam, Jetstar Japan and Jetstar Hong Kong. Logically, those joint ventures will eventually be loosely tied into the Qantas-Emirates alliance, providing feeder volumes to the full-service brands to create, in conjunction with Emirates' own network, a deep and broad service across the region.

The alliance with Emirates is for an initial 10-year period, although the ACCC authorisation only covers the first five years, meaning the allies will have to return to the commission at the end of that period for an extension of the authorisation.

By then both the partners and the ACCC will have a clearer picture of how beneficial the relationship and the reorientation of the Qantas network away from its limited connections to Europe towards Asia and the Middle East has been for the public and the carriers.

The conditionality of the authorisation doesn’t appear to faze the carriers. While they are committed to maintaining existing capacity on the route they can rethink the way that capacity is deployed to shift from competing and duplicating services to profitably cooperating and, by redeploying any overlapping capacity, actually improving their trans-Tasman offering.

Similarly, the alliance will open up additional routes and capacity into Asia by adding Emirates’ capacity to Qantas’ new schedules.

The clearance of the alliance is a watershed moment for Qantas and Joyce, creating clarity for its international strategy where previously there was none other than cutting costs and routes to reduce the losses. Now they just have to execute it.

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