ANALYSIS: Qantas-Emirates talks show changing thinking

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While Emirates Airline has indicated its recently disclosed alliance talks with Oneworld carrier Qantas Airways will not cover a revenue accord, there remain plenty of questions about the potential co-operation.

The two airlines have confirmed talks are taking place, but details remain sparse. Qantas, coy about specifics, adds a standard disclaimer that "at any one time, Qantas may be in contact with a wide range of companies about potential commercial co-operation."

Emirates chairman Sheikh Ahmed bin Saeed Al Maktoum meanwhile is quoted in the Gulf media as saying the parties hope to reach a codeshare deal in the next six months. He added the objective of the talks is to eventually see Qantas operate through through Dubai, but says the two sides are not discussing a revenue-sharing deal.

Reports have been pointing to a joint venture similar to the Virgin Australia-Etihad alliance co-operation, which would feed traffic between Australia and a network of European cities through Dubai.

These developments illustrate something of a twist on the route-specific alliances that have gained traction with long-haul carriers.

Intermediate stops on long routes are used for both operational and commercial reasons. Increasingly, long-haul carriers are forming alliances at these intermediate stops, transferring traffic to their partners for the second sector, and thereby saving costs. Thus, Air Canada delivers its India-bound traffic to Lufthansa at Frankfurt, and Qantas announced last year that, instead of flying all the way through from Australia to London, it would turn its Bangkok-London and Hong Kong-London sectors over to long-standing joint venture partner, British Airways.

But a new reason is emerging for these alliances. A Qantas-BA deal to trade passengers at Bangkok and Hong Kong merely stitches together the ends of two spokes. But a Virgin Australia-Etihad Airways pact over Abu Dhabi feeds traffic in and out of a hub, thus allowing Virgin Australia to offer many more European destinations than it could ever fly on its own.

For years Qantas refused to embrace this strategy, choosing to fly to Europe on its own or through end-to-end combinations with BA. The result has been a gradual decline in the number of European cities Qantas serves. It is now down to two - London and Frankfurt. In recent years, Qantas has talked of launching Jetstar-operated Boeing 787s to Rome and Athens, a strategy that could restore at least two long, thin routes.

Middle Eastern carriers in the meantime have exploited their geographic advantage and sixth freedom rights to divert more Australia-Europe traffic away from Qantas. Emirates now operates more than 70 weekly flights in and out of Australia, all of them carrying passengers to or from Europe. This traffic diversion by sixth freedom carriers largely explains why the overseas market share of Qantas has plunged to 17% and its international arm will lose A$450 million this year.

So it marks a strategy shift that Qantas now confirms it is talking to Emirates. "Against the backdrop of an Etihad-Virgin Australia partnership, this is largely driven by Qantas wanting to beef up its international network. The 'kangaroo' routes are so difficult to make money on," says Shakeel Adam, managing partner at consultantcy Aviado Partners. "They have looked at what Virgin Australia is doing and want to compete. While they are playing catch-up, this would be a significant leapfrog. Emirates is huge in Australia and would provide universal access for Qantas customers throughout Europe, the Middle East and Africa. For Emirates, this will provide significant access to the corporate market in, to and from Australia." The UAE carrier already serves Brisbane, Melbourne, Perth and Sydney from Dubai.

Speculation is rife about how Qantas might move its current stopover base on the kangaroo route from Singapore to Dubai, and how an Emirates alliance might jeopardise the long-standing partnership between Qantas and BA. The partners have anti-trust immunity in place for their joint ventre on the kangaroo routes and the impact is not clear-cut.

A Qantas pact with either Emirates or Qatar would bring obvious benefits. By joining forces with one of these sixth freedom rivals, Qantas could stop hemorrhaging Australia-European traffic to them. If it aligned with Emirates, Qantas could offer more than 30 European destinations instead of two. A Middle Eastern partner could match aircraft size to demand on the European sectors, something Qantas cannot easily do from Australia. Lower costs might bring lower fares, too.

The downside of such an alliance, of course, is a decreased presence or the disappearance of this Australian icon from the last two European cities it still serves, the effect of this on its frequent flyer programme, and a need to pro-rate revenue with a partner on the Middle East-Europe sectors.

Virgin Australia successfully addressed the revenue issue by obtaining antitrust immunity, renewable after five years, for its Etihad alliance. This allows both these carriers to share revenue and confer on fares, capacity, and schedules. Virgin Australia and Etihad both praise the benefits of this immunised relationship.

The concept may be spreading. After Air France-KLM suspended its Abu Dhabi service early this year, it started talking to Etihad about a Paris-Abu Dhabi codeshare. Talks have since moved past this stage. In July, Alexandre de Juniac, president of Air France, said his airline is negotiating a joint venture with Etihad. Without offering specifics, de Juniac hints at a venture reaching beyond Abu Dhabi. Analysts point to east Africa, southeast Asia, and Australasia as markets where such a pact with Etihad would give Air France-KLM a greater presence.

It is too early to know how many other major carriers might reach the same apparent conclusions as Qantas, Virgin Australia, and Air France-KLM - that it makes more sense to align with the sixth freedom carriers than to pick or persist in a losing fight against them.