Yet again, Australia looms large in Gulf aviation. First, Etihad Airways gets approval from Australia’s Foreign Investment Review Board to increase its stake in Virgin Australia to 10 per cent. Then Qantas’ share price goes up by that percentage when it announces that it is in serious discussion about some sort of cooperation with Emirates.
From the perspective of the Gulf carriers, the target is access to Australia’s domestic market. As I have previously mentioned, the arcane rules that govern air transport rule out the normal commercial options for accessing a market. So each of the UAE’s big two have taken their own road to get to market.
Australia is, in aviation terms, a special case. It is as if it was designed to be the world’s aviation test market. It is geographically huge and populated by some of the most industrious, peripatetic people on earth. Each weekend, for example, half the country seems to in airports following their football team to away fixtures. Sydney-Melbourne is one of the five busiest sectors in the world.
The mining boom means that on Monday mornings too, miners working on ‘fly-in; fly-out’ contracts are reporting for duty. That has put huge pressure on the existing infrastructure, particularly Perth and Brisbane airports. It has also meant that the domestic Australian market has been very strong. The strength of the Aussie dollar means Australians are taking overseas holidays in big numbers, making the international market strong too.
Beyond Australia is the trans-Tasman market and then going further east, there are the trans-Pacific routes to the USA and to Latin America to consider. Historically, trans-Pacific routes have been very profitable for Qantas. The Tasman is busy, but less profitable.
Emirates and Etihad need to access those keen-to-fly Australian passengers to feed into their network. Etihad’s strategy is to invest in like-minded carriers in certain markets — Aer Lingus in Ireland, airBerlin in Germany and Virgin Australia in Australia — and build feed from that relationship.
Emirates, to date, has not done that and has not done much in the way of traditional airline cooperation with other carriers generally. Its strategy has been to fly from its huge hub with new generation equipment to under-served markets that formerly required passengers to make a transfer to access. Geneva, Manchester and Lyon are examples of this; large cities on the ‘spoke’ of most airline networks. They have not needed to code-share to access these markets.
Code-sharing is an agreement between airlines to sell the flight using the airline codes of each airline, for each airline to sell the route as one it operates and then for the carriers to agree that only one of them will actually operate the flight on a particular day. It requires that each carrier be entitled to operate that route.
Pricing on the seats each carrier sells can be agreed individually, so it is not of itself anti-competitive to enter a code-share agreement. But it does have the effect of limiting, and sometimes reducing, the number of seats in the market. Reducing supply will usually work to increase prices.
Australia is different. Even if you fly to the big four — Sydney, Melbourne, Brisbane and Perth — there are still many passengers that need to fly on to other locations, or who commence their journey in other locations. It is those passengers that Emirates and Etihad are looking to bring onto their network.
For Qantas, an arrangement with Emirates will be interesting, to say the least. If it means that Qantas flies its passengers to Dubai, to have them transfer onto the Emirates’ European destinations, that will be good for Qantas’ passengers, giving them a vast choice of non-stop destinations, while avoiding a Heathrow transfer. But it will be a disaster for Qantas’ alliance partners, particularly British Airways, who will miss out on this traffic.
It will also signal a near final, fatal, retreat by Qantas from Europe. That will be a sad day for Australian aviation, but a lesson in airline management the world should learn from.
Emirates and Etihad shine out, like beacons in a blackout, to say that cost cutting and downsizing do not have to be the one and only way to build a successful airline. You need the right equipment, investment in your product, an understanding of your customers and their needs and vision.
Andrew Charlton is Managing Director of the Europe-based strategic advisory, government and public affairs firm Aviation Advocacy.
