05-Oct-2016 6:15 PM

British Airways-Qatar Airways form Europe's first Gulf airline JV, showing some oneworld flexibility

Analysis

British Airways and Qatar Airways are to commence a revenue-sharing joint venture from 30-Oct-2016. Even before Qatar Airways took 20% of the equity of BA parent group IAG, the JV was expected - and perhaps due earlier. The agreement includes the UK, continental Europe, Asia, Middle East and Africa - essentially all regions but the Americas. Some specifics and regulatory matters are to be worked through, and Iberia is excluded but presumably will be added.

oneworld has always been a flexible congregation of bilateral relationships, but nowhere has this been better exemplified than with Qatar Airways' membership of oneworld and eg Qantas' deep partnership with Emirates. The BA-QR JV is the first between a European airline and a Gulf airline. Compared to AF-KLM and Lufthansa, BA/IAG have been more open towards Gulf airlines, a result of management but also pragmatism: BA's hub at London Heathrow is capacity constrained and BA typically carries a majority of O&D passengers.

Summary

British Airways and Qatar Airways are set to commence a revenue-sharing joint venture from 30-Oct-2016, covering the UK, continental Europe, Asia, Middle East, and Africa.
This is the first joint venture between a European airline and a Gulf airline, and it is expected to strengthen the oneworld alliance.
The agreement will allow both airlines to codeshare on all nonstop flights between the UK and Doha, as well as on connecting services to destinations in the specified regions.
The joint venture will provide customers with better links to over 70 destinations across the combined network of both airlines.
The partnership will benefit British Airways by expanding its reach in Asia Pacific, Middle East, and Africa, where it currently has fewer destinations compared to Qatar Airways.
The joint venture may cause discomfort within the oneworld alliance, as other members may feel that it could be at their expense and that Qatar's position within the alliance is becoming too strong.

AF-KLM and Lufthansa have a high proportion of connecting passengers, which bring them into greater overlap with Gulf airlines. BA has to forgo opportunities but these now fold in via Qatar, which also brings more destinations, frequencies, and routing options.

BA and Qatar are more easily complementary than AF-KLM or Lufthansa could be with a Gulf airline, so this is not exactly a cookie-cutter relationship for IAG's lagging peers. While the JV appears constructive for IAG/BA and Qatar Airways, it may further loosen bonds within the oneworld alliance.

BA and Qatar to codeshare on all UK-Qatar nonstops & connecting services

British Airways (BA) and Qatar Airways (QR) say that the new joint venture - or "joint business agreement" in the preferred language of IAG - will provide customers with better links to more than 70 destinations across their combined network. The destinations have not yet been detailed, but the statement refers to the two airlines' combined network in the UK, continental Europe, Asia, Middle East and Africa.

The two airlines will codeshare on all nonstop flights between the UK and Doha and on connecting services to destinations in the regions indicated above. Until now BA has only served Doha via a Bahrain stopover, but it will launch a direct daily 777 service from London Heathrow at the end of Oct-2016. QR operates a six times daily service between the two hubs, also serving Manchester 16 times weekly, and operates to Birmingham and Edinburgh with daily flights.

Not surprisingly, neither North America nor Latin America is included in the new agreement. Both regions are already covered by JVs between IAG's BA and Iberia and their partners in the respective regions (the IAG/LATAM JV awaits regulatory approval).

The statement does not make it clear how far the revenue-sharing aspect of the agreement will reach: whether it will cover all codeshare routes, or only the hub-to-hub routes, or some other subset of the combined network.

New agreement goes further than existing BA/Qatar partnership

Nevertheless, it is clear that the new BA/QR JV goes further than the existing commercial cooperation between the two airlines, both in its scope and in the nature of the cooperation. The new JV will cover more routes than the existing codesharing agreement between the two, and the commercial partnership will be deepened to include revenue sharing.

Under this type of JV arrangement BA and QR will coordinate their schedules and prices on the relevant routes, and revenue sharing provides them each with an incentive to cooperate on selling each other's capacity.

Under the current BA-Qatar Airways codeshare agreement the QR code is carried to seven destinations from London Heathrow and one from Manchester. These are all in North Western Europe (see table below).

Four of the eight destinations to which BA currently carries the QR code are in the UK, and there is one destination in each of Germany, Ireland, the Netherlands and Denmark. In addition, the QR code is carried on BA franchise business jet services from Oslo to Aalborg and Aarhus in Denmark, operated by Evergreen Helicopters.

In addition to the routes on which BA carries the QR code, Qatar Airways carries the BA code from Doha to five destinations in Pakistan and one in Africa.

Routes covered by British Airways-Qatar Airways codeshare agreement

Qatar Airways routes from Doha carrying BA code	BA routes from London Heathrow carrying QR code	BA routes from Manchester carrying QR code	BA routes from Oslo* carrying QR code
Addis Ababa	Amsterdam	Billund	Aalborg
Dhaka	Belfast City		Aarhus
Islamabad	Dublin
Karachi	Glasgow
Lahore	Hamburg
Peshawar	Leeds Bradford
	Newcastle

Qatar also has a new codeshare with Vueling

In Aug-2016 Qatar Airways and IAG's LCC subsidiary Vueling launched a codeshare agreement, under which Vueling carries the QR code to 52 European destinations - primarily in South Western Europe.

This agreement covers 49 Vueling routes from Barcelona and 19 from Rome Fiumicino (some destinations are served from both airports).

BA offers strengths in Europe; Qatar in Middle East, Africa and Asia Pacific

At this stage the details of the airports that will be included in the new BA-QR joint venture have not been published, and the route schedules covered by the extended codeshare between the two airlines have not been filed with OAG.

Both airlines should benefit from being able to offer their passengers a wider range of destinations in regions where one airline has a relatively low presence and the partner airline has a relatively high presence. In addition, they should each gain from additional feed from the partner into their own regions of strength.

According to data from OAG for the week of 3-Oct-2016, the two airlines serve a total of 272 airports between them. Of these, 78 are served by both BA and Qatar, while 194 are served by only one of them.

BA has 111 destinations in Europe, including 14 in the domestic UK market. This compares with Qatar's 37 destinations in Europe, of which 4 are in the UK. Clearly it is BA's European network that is of prime interest to Qatar.

For its part, BA will gain increased access to cities in Asia Pacific, Middle East and Africa, where it serves fewer destinations than Qatar. In Asia Pacific, BA has 16 destinations, compared with Qatar's 50. In Middle East, BA has 12 and Qatar 28 (including Doha), while BA's African destination count of 17 trails Qatar's 23, although they have different geographic strengths in what is a large continent.

British Airways: number of nonstop passenger destinations by region at 9-Oct-2016

Domestic	14
Europe	97
Africa	17
Middle East	12
Asia Pacific	16
Latin America	19
North America	27
Total	202

Qatar Airways: number of nonstop passenger destinations by region at 9-Oct-2016

Domestic	1
Europe	37
Africa	23
Middle East	27
Asia Pacific	50
Latin America	2
North America	11
Total	151

Question is: whether Australia will be included

It is not clear from the announcement by the two airlines whether or not the joint venture will include Australia, or if that is planned for a later stage The statement talks of Asia, but not of Asia Pacific, which would more clearly include Australia.

British Airways currently only serves Sydney with a single daily flight via Singapore, whereas Qatar Airways operates from Doha to four Australian cities. Qatar has daily services to Melbourne, Perth, Adelaide and Sydney (the last two of these were launched only this year). Both of Qatar's Gulf airline competitors also have high levels of capacity into each major Australian gateway, so BA would expand its reach in this way. BA's former partner Qantas has established a successful partnership with Emirates that addresses UK-Australia (among other markets).

The UK is an important market from Australia with a number of intermediary airlines feeding on the market, so there is opportunity for BA. BA has not replaced its Qantas partnership and it might be expected that its new JV with Qatar would also cover Australia.

IAG has fewer Asia Pacific destinations than Air France-KLM or Lufthansa Group

As a group IAG has fewer destinations in Asia Pacific than are served by the other two major European legacy airline groups. The new JV with Qatar Airways should help IAG to close the gap with Air France-KLM and Lufthansa, in terms of Asia Pacific presence.

IAG's Iberia serves one destination in Asia Pacific (Shanghai), but BA also serves this city and so - IAG has only 16 destinations in Asia Pacific. Even when Iberia adds a second, Tokyo Narita, this will not add to the IAG total, since BA already serves it. Iberia is not part of the new JV with Qatar, but it probably makes sense to build the relationship step by step.

Air France has 15 destinations in Asia Pacific and KLM has 16. After taking account of destinations served by both, the Air France-KLM group has 23 unique destinations in Asia Pacific. Air France-KLM also has joint ventures with China Southern and China Eastern and a limited codeshare with Etihad.

Lufthansa has 22 destinations in Asia Pacific and this is the same number as applies to the Lufthansa Group, since the eight served by SWISS and the four served by Austrian are all also Lufthansa destinations. The Lufthansa Group also has a JV with ANA on routes between Europe and Japan; an imminent JV with Singapore Airlines; and a JV expected with Air China.

See related reports:

IAG and BA have significant JV experience, but this one has additional complexity

BA has significant JV experience elsewhere - most notably on the North Atlantic (BA/Iberia/Finnair/American) and on routes to Japan (BA/Finnair/JAL). IAG is also awaiting regulatory approval for a JV with LATAM on the South Atlantic (BA/Iberia/TAM/LAN).

However, the main focus with these other JVs is on the traffic between the respective hubs of the two principal airlines, both of which are important O&D markets. Moreover, in these other JV situations there is a more balanced share of capacity between them than in the new agreement.

In the case of the BA-Qatar JV, traffic between the two hubs of London Heathrow and Doha will be very low O&D. Furthermore, it will be carried by Qatar's six times daily service and BA's daily service. The skewing towards QR will be further boosted by the fact that it also serves Manchester, Birmingham and Edinburgh from Doha.

There is further complexity in that the two partners will be able to serve a range of city pairs - for example between Europe and Asia Pacific, either via a Heathrow connection or via a Doha connection, in addition to routing passengers via both hubs. The revenue sharing model needs to take account of these complexities.

A positive move for BA and Qatar, but may cause discomfort in oneworld

It is true that BA enjoys the benefits of London being a stronger O&D market than either of Frankfurt or Paris, and so has arguably less to lose than Lufthansa or Air France-KLM from the erosion of sixth freedom traffic flows through its hub. Nevertheless, this development once again underlines IAG's more progressive stance - compared with its main European rivals - when it comes to dealing with the threat of Gulf competition.

One area that may be inflamed by the new deal between BA and Qatar is relations within the oneworld alliance. A statement from BA and Qatar says: "This agreement will also strengthen the oneworld alliance and enable it to compete more effectively on the included routes creating greater competition and increased options for consumers."

BA and Qatar may be able to compete more effectively, but other oneworld members with a significant interest in the regions covered may feel that this could be at their expense. It is unlikely that Qantas, Cathay Pacific, Finnair or Malaysian Airlines will individually feel strengthened, even if oneworld as a whole gains more capacity in those markets.

BA and American Airlines are each other's most important partner, for size and because the partnership covers their most important international region (North America-Europe). The BA-American JV does not include the markets under the BA-Qatar agreement, but even American may become uncomfortable as BA grows more intertwined with Qatar, one of the three Middle East airlines American, Delta and United attacked politically (apparently with no success). As CAPA has suggested many times, this may only make it more inevitable eventually that American - followed by the other large US airlines - will also decide to partner with a Gulf carrier.

For now the JV looks like a positive step for IAG and for Qatar, but may mark a further loosening of the already relaxed ties within oneworld. The alliance is increasingly placed on a Qatar Airways axis. Other members may feel Qatar's position in oneworld is becoming too strong.

There is not a single alternative for all of them, so they must continue to find individual solutions. So far, none of those solutions have involved exiting oneworld.

Note: Issue 36 of CAPA's Airline Leader contains a full analysis of the workings of oneworld and the other two major branded global alliances, Star and SkyTeam