ANALYSIS: Airlines bid to bolster long-haul profitability

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(Changes second reference to Qantas in paragraph three to Virgin Australia)

Air New Zealand is the latest carrier to signal it is looking for partners to help return its long-haul routes to profit. Chairman John Palmer told shareholders that Air New Zealand hopes to "extend its global reach without extending its balance sheet".

Australia's Qantas also announ­ced it is handing its Bangkok-London and Hong Kong-London sectors to Oneworld partner British Airways. It will only codeshare with BA on those routes. Qantas is also looking to feed Australia-European passengers into Kuala Lumpur, where future Oneworld partner Malaysia Airlines could carry them to European cities such as Rome. The only flights Qantas will continue to operate through to Europe on the 'Kangaroo route' are its A380 flights to London over Singapore.

Plans by Qantas for a venture with Malaysia Airlines parallel the alliance Virgin Australia has made with Etihad Airways, where Virgin Australia flies its Australia-European passengers to Abu Dhabi and Etihad delivers them to Europe.

Common to these arrangements are an ultra-long route that requires an intermediate stop, and turning over the second sector to a partner airline. BA also does this on its London-Auckland route, handing over its UK-New Zealand passengers to Cathay Pacific at Hong Kong. David Bentley, joint managing director of the UK's Bigpond Aviation, said Qantas's long-haul changes are a response to the sixth freedom hubs Emirates and Etihad have created in the Middle East that siphon off substantial Australia-Europe traffic on the Kangaroo route. Qantas, Bentley said, is trying to reassert itself against them by "reducing overall route costs through sharing ultra-long routes with alliance partners".

Air New Zealand expects to unveil details of its long-haul revamp by year-end. Its route to London via Los Angeles is likely to be a first candidate for review. Flying this sector on its own, Bentley says, was "always was a bit of an anomaly and better to be serviced through an agreement with United/Continental within Star".

One of the key advantages of global alliances has been the added options. So why this rash of long-haul alliances? Virgin Australia/Etihad do not belong to any global alliances so their deal is strictly bilateral. With Qantas and Air New Zealand, however, both have recently complained that long-haul operations are losing money. Bentley sees these moves as "a fire-fighting measure". Qantas, he says, is trying "to minimise its exposure to very long flights".

The advantage of turning over marginal routes to codeshare partners was recognised by Australia's Competition and Consumer Commission (ACCC) when it approved the Qantas-BA joint operating agreement on the Kangaroo route. Codesharing under these circumstances, says the ACCC, allows an airline "to maintain a presence following withdrawal from an unsustainable market pending possible re-entry at a later stage". Bentley foresees possible re-entry on some of these routes as the Boeing 787 becomes available. This will not happen everywhere. As an initial strategy, Virgin Australia opted to feed its traffic to Etihad at Abu Dhabi rather than try to fly to Europe on its own. As John Borghetti, Virgin Australia's chief executive, explained at the time, his airline could never access all those destinations by itself "without buying squadrons of aircraft".

In other cases, such as the Qantas proposal to feed Australia-Europe traffic to Malaysia Airlines, Qantas lacks traffic rights from Kuala Lumpur to do the same thing on its own. Kuala Lumpur could be for Qantas what Abu Dhabi is for Virgin Australia. All these adaptations pose questions about the right balance between extra fleet and operating costs for an airline to fly all sectors by itself, compared with revenue lost by turning passengers over to a codeshare partner. In some cases, that partner will reciprocate by trading passengers at the intermediate hub but in the Virgin Australia/Etihad deal, for instance, Etihad also flies the Abu Dhabi-Australia sector and so competes with Virgin Australia. The deal is saved by a metal-neutral alliance with antitrust immunity that allows both airlines to share revenue on the shared route.

Qantas and BA have a similar immunised accord on the Kangaroo route so they can trade traffic without losing revenue. In a straight codeshare, however, economics encourage each airline to maximise its own benefits. Instead of working together, carriers may try to channel passengers toward their own flights.

Sharing revenue under an immunised deal gives them more incentive to co-operate. Neither Qantas-Malaysia Airlines nor Air New Zealand-United-Continental have immunised alliances and may find trading traffic at intermediate hubs also requires them to consider antitrust immunity.