More red tape, or red lights, for Qantas in China?

Qantas faces some substantial objections to its proposed ‘coordination’ arrangement with China Eastern from Australia’s competition guardian the ACCC, which has served notice that it proposes to deny its application its approval.

It comes only days after its stalled Jetstar Hong Kong venture revealed that it has sold down its standby fleet of A320s to one.

It also follows Air China announcing a new route between Melbourne and Beijing, and concerns voiced for some time in other circles that the upgraded free trade arrangements with China didn’t deliver equity for Australian flag carriers as they address the rapidly growing Australia-China demand for flights.

If Qantas is unable to persuade the ACCC to change its rather firmly worded objections to the closer relationship with China Eastern that had been proposed on the route to Shanghai it would have to consider investing in alternative routes into the PRC, perhaps including alternative commercial agreements with other China flag carriers.

That and other possible workarounds would require Qantas to invest more resources into the China market than was involved in the ‘capital light’ China Eastern strategy.

This is what the ACCC says on its website.

In a draft decision, the Australian Competition and Consumer Commission is proposing to deny authorisation for Qantas (ASX:QAN) and China Eastern to coordinate their operations between Australia and China under a proposed Joint Coordination Agreement.

The ACCC considers that the agreement is likely to result in significant public detriment by giving Qantas and China Eastern increased ability and incentive to limit capacity and/or increase airfares on the Sydney – Shanghai route.

“The ACCC understands Qantas’ desire to form an alliance with a Chinese airline to establish a gateway to North East Asia. However, the ACCC’s concern is that they have chosen to do so with their main competitor on the one route between Australia and China on which Qantas operates direct flights,” ACCC Chairman Rod Sims said.

“Qantas and China Eastern together account for more than 80 per cent of capacity (seats flown) on direct services on the Sydney – Shanghai route. They are the two major airlines on the route and the only airlines offering daily flights, and so the major competitive constraint on each other. Competition between them will be greatly reduced under the proposed Agreement.”

The Sydney – Shanghai route accounts for around 24 per cent of all direct flights between China and Australia.

The ACCC accepts that the Agreement will result in some limited public benefits. In particular, under the Agreement, Qantas would co-locate at China Eastern’s terminal in Shanghai. This would provide improved connectivity and convenience for Qantas passengers transferring to a China Eastern flight in Shanghai and would also result in cost savings in processing passengers and freight for Qantas and China Eastern.

However, the range of travel options available to passengers for travel beyond Shanghai would not automatically be increased. Passengers who value this connectivity and convenience are already able to fly with China Eastern directly. Therefore, this public benefit will only be likely to arise for passengers who have a preference to fly with Qantas.

“The ACCC currently considers that these limited benefits will not outweigh the significant public detriment likely to result from Qantas and China Eastern coordinating their services on the Sydney – Shanghai route,” Mr Sims said.

The ACCC is seeking submissions from interested parties in relation to its draft determination, before making a final decision. Submissions are due by 8 April 2015.

The Qantas response is also notable for the direct language it uses in putting its case for improved access to the China market into context with recent moves by other China flag carriers to grow their access to the Australian market.

Qantas and China Eastern are reviewing the ACCC’s draft determination on their proposed joint venture and will discuss with the regulator in the coming weeks.

The joint venture, announced in November 2014 alongside the signing of the Australia-China Free Trade Agreement, would see the two airlines cooperate on services between the two countries.

For customers, this cooperation would deliver better departure and arrival schedules, reduced transit times, and a wider range of onward connections within China and Australia.

As with other elements of the Free Trade Agreement, the partnership is expected to facilitate commerce between the two trading partners, including an increase in business traffic, as well as taking advantage of the huge inbound tourism opportunities for the Australian market.

As these links grow, the airlines hoped to use the partnership to increase services and ultimately open up new routes between Australia and mainland China.

Qantas International CEO, Gareth Evans, said: “There are more than 20 airlines already providing services between Australia and mainland China, and the sharp pricing on these routes demonstrates that the market is highly competitive.

“New traffic rights recently granted to Chinese carriers means the competition in this market will only increase, which underlines the importance of Qantas forming a strategic partnership with China Eastern so that we can strengthen our network and scheduling offer to customers.

“Over the coming weeks Qantas and China Eastern will work with the ACCC and highlight the customer benefits of the proposed partnership,” added Mr Evans.

The ACCC has already received a number of submissions in support of the joint venture, including from the Department of Infrastructure and Regional Development, Melbourne Airport, Perth Airport and Tourism Victoria.

The two airlines currently have a reciprocal codeshare agreement on a total of 17 flights a week between Australia and mainland China, as well as a number of onward domestic destinations in both countries.

China is Australia’s most valuable inbound tourism market – projected to contribute up to $9 billion annually to the Australian economy by 2020.

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