The logic behind the Qantas-Emirates upgrade

The updated deal will give Qantas a greater weighting towards Asia and expand its exposure to Europe.

Joyce is confident that the refreshed deal will create a bigger pool of revenue for both carriers to share while providing more choices and options for both customers and Qantas itself. John Feder/The Australian.

The proposed revision of the partnership between Qantas and Emirates represents a refreshing of the logic that drew the carriers together when they struck their original agreement in 2012 rather than any admission of shortcomings within the original agreement.

In 2012 Qantas was under real pressure, and not only because of the grounding of its fleet the previous year.

An international network whose European presence had shrunk to just two ports, Heathrow and Frankfurt, was being overwhelmed by the massive surge in capacity and routes being deployed by Middle-Eastern hub carriers with newer, better and more efficient product.

Virgin had just entered a number of code share agreements with Etihad, Air New Zealand, Delta and Singapore Airlines that gave Qantas’ domestic competitor a virtual international network of its own.

Qantas’ own international operations were haemorrhaging, losing $450 million in the 2012 financial year. It had to do something quite structural if it was to retain any ability to profitably service Europe.

The partnership with Emirates and access to its hub at Dubai was its response. The alliance gave Qantas customers access to more than 30 European ports and Emirates, which had been rapidly growing its share of the passenger volumes into and out of Australia, gained access to Qantas’ customer base and domestic network. In effect, Qantas and Emirates had negotiated their own virtual network.

While the agreement was originally greeted with some scepticism — the critics accused Qantas of giving its customer base and international aspirations away — it was a key element of the turnaround in Qantas International, which generated a profit of $327 million last financial year.

The airlines have never detailed the commercial relationship but it has been evident that Qantas generates revenue from the relationship when its customers travel on Emirates planes.

The ability to fly one-stop to what are now more than 30 European destinations (as well as Emirates Middle-East and African ports) has clearly been popular with Qantas customers. When they struck the deal in 2012 there were about 400,000 passengers on Qantas-coded flights to Europe. Today there are about 1.2 million.

The other benefits of the deal were that it freed up capacity, allowing Qantas to retire some aged capacity and redeploy other planes to Asia to support its more realistic ambition to grow its presence in the region, and that it helped boost its frequent flyer program and its earnings as points from Qantas-coded Emirates flights were redeemed.

The original agreement was for 10 years but, given that the authorisation of the arrangements by the Australian Competition and Consumer Commission only ran for five years, was always going to be revisited — and an application made for a new five-year authorisation — this year.

That’s provided an opportunity for Qantas and Emirates to update the arrangements with the knowledge of what they have delivered thus far.

There are some significant changes.

Since 2012 Qantas’ purchase of Boeing 787-9 Dreamliners has created options that didn’t exist in 2012. Next year Qantas will offer direct non-stop flights from Perth to London. Alan Joyce has also called on Boeing and Airbus to produce the next generation of long-haul planes so that the group can fly direct from the east coast to Europe and elsewhere.

Today he said that by 2022 he hoped to have Qantas-branded planes flying direct to London, Paris and one other European port.

The evolution of aircraft and of the Qantas network and strategies has enabled the two carriers to rethink their roles in the partnership in a way that will generate more choices for Australian customers — and, Qantas says, more than $80 million of annualised net benefits for Qantas by the 2019 financial year.

Under the revised arrangements Qantas will stop flying is own metal into Dubai, leaving Emirates to service the demand from customers who want to travel to Europe through that hub. Qantas will re-route its daily Sydney to London flights through Singapore and upgrade its Melbourne to Singapore capacity by displacing the existing A330 with an A380. Instead of the Melbourne-Dubai-London service it will have the Melbourne-Perth-London route made possible by the Dreamliners.

Those changes, the ACCC willing, will from March next year create three distinct route options for travel between Australia and Europe, boost Qantas’ presence and options in Asia and free up the A330 to be redeployed within Asia.

They will add capacity and create better connectivity for Qantas with its Asian network, both via the Jetstar Asia network based in Singapore and its regional alliances. In effect, Singapore will again become the key hub for Qantas’ own brands in the region and for its one-stop flights to London, with Perth providing a mini-hub for the direct flights to London and, potentially, other European ports.

Joyce is confident that the refreshed deal will create a bigger pool of revenue for both carriers to share while providing more choices and options for both customers and Qantas itself.

Having dispelled the cynicism that the initial announcement that Qantas was entering the partnership generated, and having gained real credibility from the spectacular turnaround in Qantas’ overall performance that he and his team have achieved in recent years, Joyce is in the process of framing quite different ambitions and settings for its international business.

The changes to the relationship with Emirates, the move out of Dubai and into an expanded Singapore hub and the pending launch of Dreamliner services to London (and subsequently, perhaps mainland Europe) should not only give Qantas a greater weighting towards Asia in its international business but ultimately help regenerate and expand the Qantas-branded exposure to the UK and Europe.