Qantas Airways Ltd. (QAN)’s 10-year alliance with Emirates will help the Australian carrier’s international unit break even by 2015, Chief Executive Officer Alan Joyce said.
“This is a big step in the right direction for Qantas international,” Joyce said yesterday in an interview with the Australian Broadcasting Corp.’s Inside Business program. “We see a path through to this business breaking even by financial year 2015. We do want to make sure Qantas international goes back to profits.”
Sydney-based Qantas announced Sept. 6 a revenue and cost- sharing agreement with Emirates, the world’s largest airline by passenger traffic, in an attempt to reverse its first full-year loss in at least 17 years. The carrier lost A$450 million ($467 million) on international routes in the year to June 30.
Competition from Etihad, Emirates Airlines and Qatar Airways Ltd. has contributed to losses at Qantas International as the Middle East-based airlines are able to offer a wider range of one-stop flights to Europe. Virgin has also expanded its international reach by cooperating with Etihad, Singapore Airlines Ltd., Delta Air Lines Inc., and part-owner Air New Zealand Ltd.
The two airlines will coordinate pricing, sales and scheduling under the new accord, which still requires approval from the Australian Competition and Consumer Commission, the country’s regulator. The pact sees Qantas drop its revenue- sharing agreement with British Airways.
Qantas has struggled to compete with Mideast airlines that have built hubs in the Persian Gulf to offer a wider range of connections to Europe. Under the Emirates accord, Qantas will shift its European transfer hub from Singapore to Dubai, which will be served by 98 flights a week from Australia by the two airlines.
“This enhances competition,” Joyce told the ABC. “We’re already seeing the competition react to this. We don’t take it for granted, we know the regulators have to review it, but we think there is a very strong case for the approval of this alliance.”
Revenue-sharing accords, like those London-based British Airways has had with Qantas and began with American Airlines in 2010, are the deepest form of airline cooperation short of full mergers, allowing carriers to split sales receipts and expenses, coordinate prices and operate integrated timetables.
Emirates, Qatar Airways and Etihad Airways are exploiting the Gulf’s position at the heart of inter-continental flight paths to build hubs served by waves of departures using the world’s biggest wide-body planes. That’s won them a higher share of lucrative long-haul traffic and is pressuring earnings at network operators including British Airways and Qantas.
“Qantas to Europe and to Asia would have had problems without this deal with Emirates,” Joyce said on ABC yesterday. “We’ve made it very clear that we had to fix those two problems.”
Standard & Poor’s cut the airline’s credit rating to the lowest investment grade. Its debt grade was lowered by one level to BBB- with a stable outlook, according to an e-mailed statement Sept. 7 from the ratings company. Joyce’s interview with ABC was prerecorded before S&P’s statement.
“Qantas’s business risk profile has weakened because of the structural pressures affecting the airline’s international business,” Melbourne-based analyst May Zhong said in the S&P statement. “Persistent pressures have eroded Qantas’s market share and inflicted losses on the airline’s international operations in the past few years.”
Qantas has “significant underlying strengths,” the airline said in a Sept. 7 statement responding to the downgrade, pointing to its free cash flow and dominant share of the Australian market.
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