12-Sep-2012 9:40 AM

With further details, Emirates-Qantas partnership will have global reach; Qantas adjusts partners

Analysis

While the seismic Emirates-Qantas partnership was announced as covering northern Africa, Europe, the Middle East, New Zealand and Southeast Asia - by all means a large portion of the world - Emirates and Qantas are laying the seeds for the partnership to possibly cover the entire world. In the short term, Emirates could finally tap into leisure demand from the Pacific Islands, largely out of reach from Dubai, via Jetstar and Qantas services. In the medium term, Qantas could partner on Emirates' services to South Africa if Australian regulators prohibit Qantas and South African Airways from working together.

Back in the short term, Qantas has further detailed the alliance's impact on its current grouping of partners. Emirates and Qantas, as Air New Zealand and Virgin Australia did in their alliance, have pledged to maintain current trans-Tasman capacity levels and say they are considering launching new routes to Auckland from Adelaide and Perth. Further network changes could be in the pipeline for the carriers as they seek interim authorisation of their partnership in order to effectively participate at the upcoming IATA slots conference.

Summary

The Emirates-Qantas partnership covers a large portion of the world, including northern Africa, Europe, the Middle East, New Zealand, and Southeast Asia.
Qantas and Emirates are considering launching new routes to Auckland from Adelaide and Perth, and are also seeking to expand their partnership to cover the entire world.
The partnership will have an impact on Qantas' current partners, including terminating codeshares with British Airways, Air France, Cathay Pacific, Kenya Airways, and Iberia.
Emirates and Qantas are seeking global approval for their partnership, which could potentially include services to South Africa, South America, and North America.
The partnership may also involve Qantas' LCC subsidiary Jetstar, expanding its access to the Australian domestic market and the South Pacific.
Emirates and Qantas have committed to not reducing capacity on trans-Tasman routes and are considering new routes such as Adelaide-Auckland and Perth-Auckland.

Qantas further discloses impact on partners

The Emirates-Qantas arrangement extends beyond a mere freesale codeshare to a "partnership" but with the two carriers avoiding the phrase "joint-venture". Likewise, "revenue sharing" and "metal neutrality" are not discussed, but the carriers reference the opaque statements of having a "benefits-sharing model" and a mantra of "treat each other's customers as your own".

As part of its initial announcement on 06-Sep-2012 of its partnership with Emirates, Qantas said its joint-service agreement with British Airways, codeshare with SkyTeam's Air France to Paris and codeshare with fellow oneworld carrier Cathay Pacific to Rome would terminate pending approval of the Emirates-Qantas partnership. Its codeshare with Finnair to Helsinki, which Emirates does not serve, unlike Paris and Rome, will remain in place for now.

In a 07-Sep-2012 application, made public on 10-Sep-2012, to Australia's competition regulator, the Australian Competition and Consumer Commission (ACCC), Qantas has further clarified the partnership's impact on partners. Qantas' codeshare with SkyTeam's Kenya Airways will end. Qantas coded on Kenya's flights from Bangkok to Nairobi while Kenya coded on Qantas' flights from Bangkok to Sydney.

Qantas will also discontinue placing its code on services operated by oneworld's Iberia, which like British Airways has IAG as its parent company but was not part of the British Airways-Qantas JSA. Iberia, however, will continue for now to place its code on Qantas services. Qantas is still open to British Airways codesharing on Qantas services from Bangkok, Hong Kong and Singapore to Australia (but without any price or capacity coordination). Qantas expects to continue codesharing on BA to points not served by Emirates.

Emirates and Qantas ask for global approval for partnership

While the partnership does not currently plan to touch South Africa, South America or North America, where Qantas has deep relationships with South African Airways, LAN and American Airlines respectively, Emirates and Qantas are seeking approval to potentially enact their partnership globally. (Some air traffic rights adjustments will be needed.) They give the justification that global permission will "preserve maximum flexibility in a rapidly changing international environment".

Emirates' Dubai hub has no geographic advantages to link Australia with South Africa, South America or North America, services between which would be longer and circuitous compared to other routings. But given the limited capacity from Australia to South Africa and South America, and to a lesser extent North America, Emirates does capture traffic between these regions.

The carriers state Emirates carries 1% of all passengers travelling between Australia and North America, small but notable given circuitous flows: Sydney to New York via Dubai is 48% longer in distance than via Los Angeles. Perth to New York via Dubai is 4% longer than via Sydney and Los Angeles while Perth to Los Angeles is 46% longer via Dubai than Sydney.

Flows are higher on more restricted (and thus high-yielding) markets, with Emirates having a 6.4% share of Australia-South Africa traffic and a 7.7% share of Australia-South America traffic despite the more circuitous flows. Sydney to Johannesburg via Dubai is 67% longer than Qantas' direct service. Perth to Johannesburg via Dubai is 85% longer than South African Airways' direct service. Fares for direct services in these markets can be expensive with limited frequency and onward destinations.

Emirates and Qantas argue to the ACCC that with flows to these regions being small, the partnership if approved would not be a competitive disadvantage. Australia is increasingly likely to not continue to permit the Qantas-SAA codeshare, forcing Qantas to look for a new partner in the very limited region.

A cancellation of the Qantas-SAA codeshare could impact Qantas' ability to interline on SAA's regional flights from Johannesburg. With greater Emirates coverage around Africa, combined with the high nature of intra-Africa airfares, expanding the Emirates-Qantas partnership could be logical. For more northern points in southern Africa - Harare, Luanda and Lusaka for example - the circuity of travelling via Dubai instead of direct to Johannesburg is less.

Qantas southern Africa interline network with South African Airways: Sep-2012

Australia-South America services have some of the highest circuity except when departing from Perth and going to northeastern points in South America. But Emirates' 7.7% share of traffic reflects the limited capacity in the market and Emirates' ability to inexpensively price seats if conditions are right.

Only Aerolineas Argentinas, LAN and Qantas fly directly (LAN via Auckland) between Australia and South America. Air New Zealand has spoken of entering the market but is currently stymied by lack of a suitable partner and appropriate aircraft. Qantas' service to Santiago is highly dependent on onward connections from LAN. LAN, as part of its merger with TAM to create LATAM, has to make a long-term alliance decision. Joining Star is unlikely and given LAN's success on Santiago-Sydney services, reflective of feed from Qantas, it is difficult to see movement that would usher in Emirates in the medium term.

Emirates-Qantas partnership may include Jetstar and its Pacific services

The Emirates-Qantas partnership could be expanded to cover Qantas' LCC subsidiary Jetstar. Jetstar also operates in the Australian domestic market that Emirates seeks greater access to. Jetstar has invested in the IT of Navitaire's New Skies to enable partnerships; it currently has a few codeshares, including with Qantas, as well as other commercial arrangements, such as with Air France-KLM.

Also interesting to Emirates is Jetstar's access to New Zealand as well as the South Pacific, which currently comprises Fiji (Noumea is operated by Qantas). Fiji and Noumea are largely out of the reach of Emirates from Dubai without considering payload penalties or one-stop services. The partnership, Emirates and Qantas wrote in a submission to the ACCC, "may also include interlining and, at a later stage, codesharing on Jetstar-branded services where appropriate".

Emirates and Qantas will not decrease New Zealand capacity; consider new services

While European connectivity is the big ticket item in the partnership, coordination will extend to New Zealand. For the week 10-Sep-2012 to 16-Sep-2012 Emirates and Qantas comprise approximately 36% of capacity between Australia and New Zealand while including Jetstar brings the total share to 46%. Emirates and Qantas project that across a year their share will be 40% while Air New Zealand and Virgin Australia will comprise 57% (the remaining is held by China Airlines and LAN).

Australia-New Zealand capacity (seats) by carrier: 10-Sep-2012 to 16-Sep-2012

Rank	Airline		Total seats
1	NZ	Air New Zealand	27,897
2	QF	Qantas Airways	16,800
3	DJ	Virgin Australia	12,144
4	EK	Emirates	11,270
5	JQ	Jetstar Airways	8052
6	LA	Lan Airlines	1584
7	CI	China Airlines	933

Emirates and Qantas have followed in the footsteps of the ANZ-Virgin alliance in offering a capacity commitment on the trans-Tasman to not reduce total seats (except by 2%) unless there is a marked change in profitability or a force majeur event (ANZ and Virgin received approval to decrease Christchurch capacity following the Feb-2011 earthquake there). The base year for the calculation is 01-Jul-2011 to 30-Jun-2012.

Emirates and Qantas Group trans-Tasman base year seat capacity: 01-Jul-2011 to 30-Jun-2012

Carrier	Seats
Qantas	1,871,410
Emirates	1,132,300
Jetstar	799,233
Total	3,802,943

Emirates and Qantas have flagged the possibility of opening new routes, including Adelaide-Auckland and Perth-Auckland. Both routes are currently only served by Air New Zealand, which after its partnership with Virgin Australia announced plans to up-gauge Perth-Auckland capacity by replacing Boeing 767-300s with 777-200s.

On existing routes, ACCC authorisation will enable the two to better coordinate services; their Melbourne-Auckland services depart within 10 minutes of each other. New trans-Tasman services could be coordinated to ensure connectivity with Emirates' planned or operational services to Dubai from Adelaide, Brisbane, Melbourne, Perth and Sydney. Qantas will currently only fly to Dubai from Melbourne and Sydney.

Emirates and Qantas say the partnership may expedite Emirates' plan for additional non-stop Dubai-Brisbane capacity (there is currently one direct daily flight and one flight via Singapore). They also flag that Emirates may up-gauge a Perth service from a 777-200LR to 777-300ER, but further up-gauges (other services are operated by 777-300ERs) will only be possible with the A380, which currently faces infrastructure challenges at Perth airport.

Carriers seek interim authorisation to enable IATA slots conference discussion

While full regulatory approval (Emirates and Qantas are asking for 10 years whereas Etihad and Virgin asked for five) of the Emirates-Qantas partnership is not expected for some months, the carriers are requesting limited interim authorisation to enable them to begin coordinating and sharing information without placing any plans into effect. A particular concern, stated at least, is having limited authorisation so the two can enter into arrangements for slot allocation at IATA's Nov-2012 conference.

While details are not forthcoming, there are opportunities to better align European services to facilitate convenient connections from Dubai to Australia. Local reports have prematurely demurred non-ideal mid/late morning European arrival times, such as a 9:40 Paris CDG arrival time on Emirates compared to Air France's 6:10 arrival time from Singapore, which Qantas codeshares on.

There may also be opportunity to secure slots for additional Dubai-European services that will mesh with the Emirates-Qantas partnership. In the long term, Qantas CEO Alan Joyce has said, Qantas will have additional services from Dubai into continental Europe. Its current two services into London Heathrow will be maintained but its service to Frankfurt, losing AUD50 million (USD52 million) a year, will be cancelled irrespective of approval for the Emirates-Qantas partnership.

Qantas paints dire picture of international operation but rosy arrangement with Emirates

There is of course a political nature to regulatory applications in that the applicants want to construct a scenario that is best suited to their needs. Qantas' international network problems are significant and well-documented, but the carrier chose very dire language, which may be accurate but also represents the first time Qantas has used such extreme descriptions.

Qantas says its international division is in "terminal decline" and that if the Emirates-Qantas partnership is not approved Qantas will likely reduce its London Heathrow services from two to one (prior to Apr-2012 it had four) and would "retreat to a 'virtual network' rather than an operating one." Qantas also said "it is no longer possible for Qantas International to sustainably 'go it alone' as an international network carrier", but Qantas for some years and through partnerships with American Airlines and British Airways has realised that its presence alone is not enough to construct traffic flows. Qantas has a notable virtual network around Asia, codesharing on services including from Asiana, EVA and Vietnam Airlines.

Following the partnership announcement, Mr Joyce said Qantas had located AUD300 million (USD311 million) of savings from its international network. This is in the lower middle range of saving initiatives already identified and is unclear if the AUD50 million (USD52 million) from exiting Frankfurt is included.

Network realignment will occur in Singapore and Hong Kong as part of Qantas' long-running initiative to have better flight times to key Asian cities; currently services are designed to facilitate European, not Asian, connections. Removing A380 services from Singapore to shift them to Dubai has necessitated a network re-think. Qantas expects to reduce Brisbane-Singapore services from 747-400s to A330s (as part of a plan to retire three 747-400s; the additional frames come from the Frankfurt route), but other details remain vague, although the A380 will continue to operate four weekly services between Sydney and Hong Kong, Qantas notes.

With limited room in the widebody fleet, internationally-configured A330s will likely need to be taken out of the domestic market to replace the A380s currently serving Singapore as part of onward journeys to Europe. (This will have implications for Qantas' domestic battle with Virgin Australia in which widebody services are preferred.) Flights to Bangkok, Jakarta, Manila, Shanghai and Tokyo Narita remain unchanged.

Mr Joyce says Qantas International is still on track to breakeven in FY2015, which commences in Jul-2014.

Qantas International change benefit timeline: FY2012 to FY2014

Qantas gives examples that because of the Emirates partnership doing away with backtracking, as occurred at London Heathrow, fares from Australia could see significant decreases. It flags that through zonal re-classification services to Athens, Istanbul, Larnaca, Casablanca, St Petersburg and Tunis could "potentially" be reduced by up to AUD330 (USD342). The partnership may also deliver lower domestic fares to Emirates passengers.

Emirates-Qantas: a global partnership - that could be a new global alliance?

It is still early days for the ramifications of the Emirates-Qantas partnership, but a long-term possibility if the shifting of alliances from the global marketing initiatives of oneworld, SkyTeam and Star to a series of alliances anchored around a Middle Eastern network carrier where benefits, as in the Emirates-Qantas or Etihad-Virgin Australia arrangements, are deeper than the mere codeshares that exist in global marketing alliances.

That reflects the increasing need to be smarter as well as the network benefits from geographically strategic partners. For Qantas the partnership will further help its loss-making international division, and for Emirates this may be its deepest partnership yet, but it could very well whet its appetite for more. With Etihad already having nearly 40 partners, it is time for Qatar Airways to make the next major move.