Dec 20, 2012

ACCC rates survival of competition higher than that of Qantas

Benefits of Qantas-Emirates deal 'not great' says ACCC, which reminds the airline industry it is there to preserve competition, not Qantas

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

The ACCC has made a very significant decision in proposing to conditionally approve the Qantas Emirates business partnership in saying that a smaller Qantas can be outweighed by the competitive response of other foreign carriers.

Taken to its logical extension, the ACCC’s chairman Rod Sims is indicating in his statement and interviews today that the survival of Qantas is less important than the benefits of continued strong competition to consumers and the tourism industry.

It is also a clear reminder that the ACCC isn’t a Qantas preservation authority, but a competition and consumer authority constructed and empowered to maintain competition and compliance with the trade laws, and not to save national icons that fall on hard times through mismanagement or misfortune.

This is the statement the ACCC made this morning:

In its response Qantas has indicated it is not completely happy with the ACCC’s position. Qantas Group CEO Alan Joyce says:

“We will now focus on responding to the issue raised by the ACCC in relation to the trans-Tasman as we move to securing final approval of this landmark partnership.”

This strongly suggests that Qantas was planning to jointly reduce the total capacity it and Emirates currently offer on the trans Tasman routes, which are the largest international visitor routes for the Australian tourism industry.

Sims, in interviews, emphasised that the ACCC wouldn’t allow this to happen on the Australia-New Zealand routes, while maintaining that the reduction of competition that would arise where Qantas and Emirates overlapped on other routes from their being permitted to co-operate on setting timetables, frequencies and fares would be overcome by the competitive responses of other carriers.

In short, this means the ACCC is saying that the trans Tasman bloodbath caused by free access to all airlines who want it should continue.

Every week Emirates A380s and 777s are mixing it with the A330s flown by China flag carriers, and A340s from the main Chilean and Argentine carriers,  to the disadvantage of the airlines of Australia and New Zealand operating more frequent flights by the smaller 737s and A320s of Air New Zealand, Virgin Australia, Qantas and Jetstar.

What will ACCC approval mean in the immediate term to Qantas as well as to consumers and the tourism industry?

Starting with Qantas, the ACCC conditional approval is a sobering read. As its chairman Rod Sims also said in many interviews this morning, the benefits of the partnership are material, yet not large.

He confirmed as reported earlier that there will also be a reduction of competition where Qantas and Emirates currently overlap except across the Tasman, but that because of  the strength of competition from other foreign carriers this will not disadvantage consumers because of the alternatives on offer in those cases.

The decision also means that from April, when the Qantas-Emirates partnership starts, Qantas will exit the Perth, Adelaide and Brisbane to Europe routes in favour of trying to punt its customers into code-shared seats it will be allowed to sell on Emirates jets.

In QLD, SA and WA the Qantas slogan-You’re the reason we fly,  might fairly become Qantas-we’re the reason you fly Emirates.

However the ACCC chairman Sims this morning told reporters he wasn’t concerned about the profitability of Qantas in announcing the decision but the maintenance and enhancement of the level of competition enjoyed by consumers and the tourism industry.

He said the risk that Emirates fares might rise to Qantas levels under the deal, or that there might be less (or no) Qantas seats in some markets would be offset by the competitive response of other foreign airlines, going so far as to mention Singapore Airlines and Etihad, who are major alliance partners of Virgin Australia.

The deal fits in with the clear concern by Qantas management to reduce its exposure to the risks and capital expenditure needs of being a significant international full service carrier.

It makes Qantas smaller. The Minister for Infrastructure and Transport, Anthony Albanese, has issued a statement in which he says the ACCC decision “also provides Qantas the opportunity to invest in additional aircraft capacity and international services, especially to meet the growth in Asia but also its broader international network.”

He is either trying to be funny, or has been seriously mislead by his advisors.

But what does Qantas-Emirates mean for Australian consumers?

If you are already an Emirates customer you’re sitting pretty.  There is nothing in it to make you change to flying Qantas long haul, and in fact, even if you use flights departing Sydney or Melbourne for Europe, Qantas capacity in its own metal has been cut to just one A380 a day via Dubai, where you will have to change to Emirates flights to fly to anywhere but London anyhow.

Similarly, if you are a Qantas customer on the kangaroo routes, and you haven’t been disenfranchised by the attempted handover of your business to Emirates in QLD, SA or WA, you have fewer seats to buy on a real Qantas flight, and it would be much more convenient to fly all the way to whatever your final destination may be on Emirates, avoiding changing carriers in Dubai.

However there is an incentive to continue to fly Qantas within Australia because of the reciprocal but conditional benefits members of both the Emirates and Qantas loyalty programs will gain from the partnership.

Depending on how you use the Emirates network you may however do best by making sure you are in both programs since you will only get Qantas benefits on those Emirates flights that carry a Qantas code shared flight number, which will not apply to all of the connections at Dubai.

This is same situation Virgin Australia Velocity members face with that airline’s alliance with Singapore Airlines. You won’t get Velocity points on all Singapore Airlines flights, and vice versa if you belong to the Krisflyer scheme, so you may need to be in both airline programs to maximize your benefits, or with those of the other Virgin partners Etihad, Delta and Air NZ.

The real advantage of Emirates for the Australian economy is the new markets it has opened up between here and central Asia, the Middle East, Africa, eastern and western Europe, and centres other than London in the UK.

Although Qantas CEO Alan Joyce has said that a successful partnership with Emirates will allow the carrier to return to flying to Europe via Dubai with its own 787-9s, he has cancelled the firm order for those Dreamliners, and says he will only exercise options Qantas has for those jets from 2016 if it has returned to profitability, which means by sometime in 2014, when Boeing will want money in order to build the optioned airliners to the Qantas specifications.

In fact nothing Joyce has said will happen in terms of expanding the Qantas reach in Asia has happened, and he surely couldn’t be alluding to the expansion of the Jetstar franchise in Asia, as it doesn’t offer a product that any full service or premium Qantas customer would regard as an acceptable change of gauge at Singapore or Hong Kong airports flying between Australia and other parts of China and Asia.

Qantas is downsizing. Emirates is continuing to upsize. Fewer Australian than ever will be able to fly real Qantas jets from here to Europe, and shareholders get nothing for the generosity of this one-sided arrangement other than reduced risk, and by extension, a reduced company in the longer term.

Of course they may get an earlier payout, assuming either the current management or private equity raiders decide to liquidate or spin off such assets as its cash reserves, its frequent flyer program, or Jetstar,  or all of the above.

Emirates isn’t without competition in bringing new markets to Australia, as its dominant relationship with Qantas will meet challenges from Etihad, Qatar, Singapore Airlines and quite possibly Turkish Airlines in coming years, and of course, a full suite of China flag carriers.

The deal also co-opts Emirates to help Qantas serve Asia in so far as it has frequent flights from various Australian cities to Bangkok, Kuala Lumpur and Singapore, and has undisguised intentions to fly here through Indonesia once it can navigate the costly approvals this is likely to involve.

Being sold a Qantas seat on an Emirates jet to a major city in SE Asia may seem unthinkable to some Qantas loyalists.  Get over it. The future of Qantas is that of a cipher rather than an airline in its own right, and it’s a future its management has enthusiastically embraced.

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2 thoughts on “ACCC rates survival of competition higher than that of Qantas

  1. Scott

    While I expect nothing less than Qantas bashing from Plane Talking, the expectation of ACCC approval for this tie up is why the share price of Qantas and Virgin have moved in opposite directions since mid November.
    Nothing but good news for Qantas share holders here.

  2. Ben Sandilands


    As pointed out there are benefits for Qantas customers and it is an incentive for those who fly the airline domestically to continue to do so.

    I don’t think it is Qantas bashing to point out the connectivity in Asia onto Jetstar flights is poison for the higher yielding business or discretionary customers Qantas keeps saying it wants to serve.

    I think we can see good news for Qantas investors so long as the main play is driven by the short term gains that flow from reducing investment in new aircraft, but making the airline smaller on long haul will not necessarily lead to joy in the long term, if anyone cares about that.

    If the best thing about this deal is that Qantas thinks its customers will be happy to be punted onto Emirates flights it may prove to be a mistake in its detail rather than its overall intent. Most Qantas customers fly with the carrier out of choice or loyalty, and being put on Emirates may well cause them to choose an alternative, as the ACCC says in what is a significant and well reasoned decision.

    Returning to short term outlook for Qantas shares. I’m not a licensed trader, and I am not giving advice, but I am noting that unlocking Qantas assets for short term dividends either by the actions of this management or as as already proposed by the dissident shareholder voices could produce big profits for the players, although not necessarily for the shareholders.

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