Qantas, A little international difficulty

QANTAS, Australia’s oldest and biggest airline, is going through what Alan Joyce, its Irish-born chief executive, calls an “exceptional period”. On August 23rd, the company announced a net loss for the year to June of A$244m ($251m). It was its first loss since privatisation 17 years ago. Qantas has a healthy record in Australia’s domestic market—the problems lie in its international division, where losses reached A$450m. The airline is now reported to be seeking a partnership with the Dubai-based carrier Emirates. Without confirming this, Mr Joyce says the company’s biggest challenge is to return Qantas International to profit in three years.

The financial carnage of its international division is a cruel irony for the airline known, from its iconic tail-fin emblem, as the “flying kangaroo”. The high value of Australia’s currency has made it cheaper than ever for Australians to travel overseas. In the year to June a record 8m people, more than a third of Australia’s population, did so. Their five top destinations—New Zealand, Indonesia, America, Thailand and Britain—are among those Qantas could once have counted on dominating. Not any more.

Mr Joyce cites three causes for his airline’s international problems: record high fuel costs; warfare with some unions, which prompted him to ground Qantas’s worldwide fleet last October (at a cost of A$194m); and the global economic downturn. But Qantas is just as worried about another, less trumpeted cause: growing price and route competition from cashed-up, and often state-backed, airlines in Asia and the Middle East that are moving into the Australian market.

China Southern Airlines, China’s biggest carrier, is the latest and probably the most aggressive competitor. Almost unknown in Australia a few years ago, it now links Sydney, Melbourne, Brisbane and Perth, as well as Auckland in New Zealand, with its base in Guangzhou. Last year, China Southern increased its services to Australia and New Zealand six-fold to 42 flights a week; it plans to raise them to 55 a week. In early August, the airline opened an Australian headquarters in a six-storey building it bought in Sydney, its first such overseas office purchase.

Some of this expansion has to do with capturing China’s burgeoning market of middle-class travellers. In the year to June, the number of Chinese tourists visiting Australia grew by 19%, the fastest growth rate for visitors from any country. “Chinese pockets are full,” says Henry Hi, China Southern’s Australia manager. But it would seem that China Southern has Qantas in its sights as well. In June, it launched thrice-weekly flights between Guangzhou and London Heathrow; they are due to go daily from October. China Southern wants to use this new service it calls the Canton Route (after Guangzhou’s old name) to compete with the “Kangaroo Route” to London that Qantas and British Airways have long operated through Singapore. So far, there is one hitch. Chinese authorities have yet to approve short-term visas that would allow travellers from Down Under to use Guangzhou as a rival to Singapore for a stopover to Europe.

If Qantas’s discussions with Emirates prove fruitful, the Australian carrier would probably end up using Dubai as a stopover for many of its London flights (Frankfurt is Qantas’s only remaining destination in continental Europe). A Qantas-Emirates alliance would have a twofold purpose. It would give Qantas passengers access to the extensive Emirates network in Europe, the Middle East and Africa. Emirates, in turn, would connect with the 65% of Australia’s domestic market that Qantas controls. In June Etihad, another Gulf airline, bought 5% of Virgin Australia, Qantas’s main domestic competitor. Mr Joyce sees Asia as the biggest growth travel market. Competing more aggressively there will probably be key to any strategy Qantas pursues in turning its international outfit around

http://www.economist.com/blogs/gulliver/2012/08/qantas