September 6, 2012 6:24 pm

Qantas has high hopes for Emirates tie-up

Australian airline carrier Qantas©EPA

Qantas is “sleeping with the enemy” by striking a far-reaching partnership with Emirates Airline, quipped one senior figure at another leading airline.

This person was only half-joking. Emirates, the fast-growing Gulf airline founded in 1985, has inflicted financial pain on several long-established carriers in Europe and Asia by wooing their passengers, including Qantas.

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But the Australian carrier, which in the year to June recorded its first net loss since being fully privatised in 1995, is hoping the deal with Emirates it announced on Thursday will play a key role in restoring Qantas’s international operations to profit.

Alan Joyce, Qantas’ chief executive, said at the unveiling of the 10-year partnership with Emirates: “This is the biggest arrangement Qantas has ever [gone] into with another airline . . . It will deliver benefits to all parts of the group.” Investors seemed to agree – Qantas shares closed up almost 7 per cent on Thursday at A$1.20.

The partnership, set to take effect in April after regulatory approval, has a code-share at its heart that will give Qantas passengers much greater choice on routes between Australia and Europe, the Middle East and Africa because they can fly on Emirates aircraft.

Qantas passengers are currently able to fly to five European cities with the Australian carrier and its partners but from next year that should reach 33.

Although Qantas will continue to operate the Kangaroo route – its twice daily service to London’s Heathrow airport – the partnership with Emirates gives the Australian carrier the opportunity to abandon lossmaking destinations. So Qantas is planning to withdraw its service to Frankfurt.

Just as importantly, the partnership affords Qantas the chance to restructure its Asian operations, partly because Emirates’ Dubai hub will replace Singapore as the stopover point for the Australian carrier’s European services.

Following this change, Nomura analysts said Qantas would fly into south-east Asia at times that suit business travellers, in a move that could improve its competitiveness against airlines including Cathay Pacific.

Overall, Macquarie analysts said the partnership with Emirates could generate an annual earnings uplift of A$80m ($82m) to A$90m for Qantas at the pre-tax level.

For Emirates, a key attraction of the Qantas deal is the opportunity to help fill its fast-expanding fleet of aircraft by flying some of the Australian carrier’s passengers.

State-controlled Emirates is the world’s largest operator of the Airbus A380 superjumbo, with 23 in the skies and another 67 on order, and from April it should be able to tap passengers from Qantas’s domestic operations.

Australia jostles with the UK as Emirates’ second most valuable market and it hopes the partnership with Qantas will bolster its position against rivals. Abu Dhabi-based Etihad Airways established a codeshare with Virgin Australia in 2010.

But this is not just about competition with Emirates’ Gulf rivals: routes between Australia and Europe are heavily contested, with the new breed of Chinese airlines, such as China Southern Airlines, vying with longer-established players like Singapore Airlines.

Analysts noted that the partnership between Emirates and Qantas is due to be far more than a simple code-share. They are proposing a joint-venture under which they share revenue and profit on flights between Australia and Dubai.

Qantas plans to remain a member of Oneworld, the global airline alliance, but Tim Clark, Emirates’ president, said the Gulf carrier had no wish to join this organisation or one of the alternatives. Emirates “[wants] to control our own destiny and not be beholden to anybody”, he added.

Emirates is now focused on expanding its services into the US – underlining how American carriers may therefore feel some of the Gulf-induced pain experienced by European and Asian airlines.

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