In 2013, Qantas linked up with Emirates to create a new “strategic alliance”. For Emirates, it eliminates some competition. But what does Qantas get out of this marriage?
Unquestionably, the deal represents a U-turn for Qantas, which had been a vocal critic of Emirates’ business strategies, and had relied on British Airways or its own metal to serve Europe. But, gradually, that network kept shrinking and Qantas believed an alliance with Emirates was the answer.
This alliance brought big changes. Qantas moved its hub for European services from Singapore to Dubai. It ended its 17-year partnership with British Airways, stopped code-sharing with Asian airlines from their hubs to Europe, and dropped its own daily flight to Frankfurt. The only European city Qantas now serves in its own livery is London. Except for Finnair, because Emirates does not serve Helsinki, Qantas now codeshares exclusively with Emirates on flights to Europe, the Middle East, and North Africa.
Neither Emirates nor Qantas holds equity in the other, but they share revenue and co-ordinate operations, including schedules and capacity, marketing, distribution, pricing and frequent flyer programmes. Looking ahead, they talk of new routes, joint purchases and maintenance, and shared handling and airport lounges. From a network standpoint, the deal gives Emirates codeshare access to every airport in Australia and expands the Qantas network on a codeshare basis from two European cities to whopping 33. During the first year of this alliance, Qantas reported a leap in sales to these new European destinations, plus a three-fold boost in Emirates bookings on Australian domestic flights operated by Qantas.
On so-called “trunk routes”, where both airlines fly (such as Australia-Dubai and Dubai-London) they pool revenue and share it. The sharing is on a net benefits basis, which appears to measure how much more each airline earns on these routes than it did before the alliance. On routes that only one of the carriers flies, the operating airline keeps the revenue but pays a commission to the non-operating airline that booked the passenger. Critics claim this favours Emirates because it has a much larger network, so that Qantas codeshares on many more Emirates flights than vice versa. This is especially true of flights from Dubai into Europe.
Before this alliance, a passenger flying from Sydney to, say, Amsterdam could fly Qantas all the way to London, with a short connection from there to Amsterdam on British Airways. Now, Qantas delivers that passenger to Emirates at Dubai (instead of its former partner BA), and only receives a commission on the codeshared Dubai-Amsterdam sector flown by Emirates. This yields less revenue for Qantas than under its prior routing.
Qantas responds that this overlooks what was happening before the alliance. It was already losing Amsterdam passengers to one of several Asian or Gulf carriers, including Emirates, who could use their sixth freedoms to offer a one-stop Australia-Amsterdam service, whereas Qantas could only offer its two-stop routing through London. And if a passenger’s final destination was not Amsterdam but somewhere else in Europe, the London connection might require a big backtrack. Hence, European passengers were already leaving Qantas. Its pre-alliance operations in Europe were in terminal decline.
By moving its hub from Singapore to Dubai, Qantas set off the equivalent of a gold rush among rivals on the Kangaroo Route. They saw its move as creating a vacuum or weakness that they could exploit. Nine Asian carriers and two Gulf operators besides Emirates are adding capacity, routes or both to link Australasia over their hubs to Europe. Some see the stakes as so high that they are willing to incur heavy initial losses as the price for a permanent presence in this market.
China Southern, for instance, is offering Sydney-London fares up to 50% lower than its rivals. As part of this effort, it is asking Chinese authorities to waive the visa requirement for international passengers transiting through its hub at Guangzhou Baiyun International Airport. Garuda Indonesia, too, want a piece of the action, and this rapidly-improving airline recently added a non-stop route from London Heathrow to Jakarta (which itself is probably the longest direct flight in existence out of LHR) and onwards flights all over Asia and Australia. Making its own move, Cathay Pacific added two more Australian destinations in 2014 that can feed into the five daily Hong Kong-London flights it already operates.
Meanwhile, Singapore Airlines is not resting on its laurels. Late in 2014, Air New Zealand and Singapore Airlines announced a strategic alliance between New Zealand and Europe, utilising Changi as a stopover. From Air New Zealand’s standpoint, this may partially replace the service it dropped last year between Hong Kong and London. But for Singapore Airlines, it is another block in building what it hopes will be the biggest and best Kangaroo Route hub.
Singapore Changi Airport is determined to hold its position as the key hub between Australasia and Europe. Transit passengers already account for over 30% of its traffic, and it aims to grow this segment. With Changi airport’s fourth terminal under construction, work underway to open a third runway, and a fifth terminal already on the drawing board, Singapore Changi’s expansion outpaces all other rivals in South East Asia.
There are certainly interesting times ahead for all of these alliances, as the Gulf carriers get stronger and stronger and are taking more share of the market. Qantas have already given in and joined the devil, as it were, and you have to wonder what the future may hold for others.