Friday, 7 September 2012

The Qantas Kangaroo skips out of one bed and into another.

Relationships between Qantas and BA and its predecessors have been on and off in various forms since the mid 1930s. That's almost when airline life began. Whatever the formal relationships, there have almost always been tensions between the northern and southern hemisphere managements as well as between the staff of the two airlines. All the way up and down the Kangaroo route they have often simultaneously been  each others's main partners and bitterest rivals. The latest marital breakdown was therefore probably inevitable one day and should be no surprise.

Times change and nowhere more so than  in aviation. Technology, more speed, more range, more airports, more competitors, the emergence of first the Asian and now the Gulf high quality long haulers, the end of the stultifying iron grip of the old IATA anti-competitive regulations, the arrival of alliances, the growth of freebooting low cost carriers,  the end of restrictive bilaterals and of  much governmental protectionism have demanded rethink after rethink about how to stay in business, let alone thrive.

On the Kangaroo route Qantas and BA have usually clung together through all that in a kind of deadly embrace while the world flowed by and around them . The economics of the very long route with its low yields, poor premium traffic, and  high demands on aircraft time have got progressively worse, something of which both carriers have been painfully aware. Their 1995 response was the joint services agreement behind which blanket BA cut its costs and shrank its physical presence in Australia to just a single daily service. The current schedule is just 7 frequencies a week against Emirates' 72. To add to the woes there are the high quality Asian carriers all fighting over the same markets. Qantas' response has been to maximise its reach from Australia by hubbing over Singapore from several Australian cities and then continuing, mainly to London and using BA to feed onwards or back haul  into Europe from there. Against the growing flood of competitors, ever larger aircraft and increasing frequencies,  BA and Qantas' Kangaroo Route offering  on the a total of 28 flights a week to London, has been almost submerged. Hence Qantas' rethink and its dramatic change of tack in breaking with 80 or so years of  history.

While Qantas and BA had shrunk their core direct same aircraft flights to just Sydney and Melbourne to London ,the competitors were flowing round them from multiple Australasian cities to their hubs in Asia,- and latterly the Gulf-  and then to points beyond.  London was just one of these.  Additionally the Gulf newcomers, based just 6 or 7 hours flying from almost all of Europe, offer excellent connections throughout the Middle East and to Africa . That is where the current winners in the game are.

In the past  governments would come to the aid of beleagured national carriers by restricting the access, frequencies and aircraft size of foreign raiders. At one time in the 1970s, Britain and Australia came up with ICAP,- the International Civil Aviation Policy ,- in a Canute-like attempt to stop all but the two national carriers from carrying UK-Australia passengers. The sheer unreality of this and its colonial power overtones was extraordinary. Inevitably it failed. Countries  almost everywhere began to understand that the additional tourism and other business brought in by foreign airlines was worth far more than any losses suffered by a national carrier and that it made no sense to protect the home team, especially if it also relied on state handouts.  Australia could not now afford to remove or clip the wings of the newcomers, much though some of its nationals might like to. The Gulf airlines will though have been aware of sensitivities and had misgivings about audiable naggings that "something should be done" . It is entirely logical and sensible that Etihad, with its 10% share in Virgin Australia, and now Emirates with the Qantas deal have now taken defensive positions to deal with that.

Who are the winners and losers in Qantas' divorce and remarriage?

The number one winner is clearly Qantas . The Chinese say that the best way of dealing with an enemy is to "Embrace the bear". That way you pin its arms to its sides to neutralise it and then, depending on how far you want to go, you can crush it to death with a rib shattering embrace. Just as BA has tended in the past to pay disproportionate attention to British competitors rather than tackle its real ones abroad, Qantas notwithstanding the huge growth by the eastern carriers and despite all the relationships, has historically seen BA as number one rival and often viewed it with suspicion.  The 1995 Joint Service Agreement has seen the BA brand almost eliminated in Australia and severely weakened in South East Asia. Whether this was intended or not it has been a major strategic success for Qantas

In moving its hub for Europe to ideally located Dubai , Qantas , by means of  a near seamless transfer  to Emirates services  there,  effectively gets  one stop/transfer capability  to almost all primary, secondary and even some tertiary cities in the UK and Europe . In the late 1980s the airline quit Bahrein when the long range 747-400's  arrival ended the need for an additional stop between Asia and Europe. For the first time since then Qantas can now access all of the Middle East. Then there's East, West and North Africa.  By kangaoo-hopping over South East Asia, Qantas' hub will now be in the right place, 2000  miles closer to all its desired destinations.

All this sets the Asian carriers a challenge too. How will they deal with this shift in hubbing geography? New nonstop services to a plethora of European destinations by the highly efficient (in-service figures awaited) 200+ seater Boeing 787-800?  Again, giving them this headache is excellent strategy by Qantas. It is ruthless as far as BA is concerned and problem posing for other competitors .For the Australian airline it is bold and the right decision at the right time.

The Gulf hubbing idea wasn't a Qantas and Emirates first. Etihad and Virgin Australia had gone there already with their codesharing deal and by Etihad  taking a 10% shareholding in the Australian  airline.  With the Emirates deal, Qantas have made sure they aren't outplayed by their local rival. Again Qantas' strategists will be giving each other high fives.That's if their rather forbidding 3 tower Mascot HQ permits such things.

 The deal also looks like a a shrewd one for Emirates,- and for Dubai,- too.  Apart from some concerns about the actual brand equality of the Qantas product , it does not cause them any pain or restrict their much loved freedom to steer their own course in the world. It has neatly removed any possibility of Australia Plc trimming back its growth ambitions or any threat to its useful incremental trans-Tasman rights. It should also give the airline additional transfer business from Dubai to the rest of its network, thereby helping to support larger aircraft and/or more frequencies. All of this adds to Dubai's already impressive hub synergies.

The Emirate of Dubai itself will also welcome this very high profile success in becoming another perceived major airline's hub for its European traffic.  That sits well with Dubai's determination to be the prime regional centre for international business.

The prime loser is IAG/ BA. Forget the PR statements about an "amicable" separation.  This is a hard business world and there has to be a feeling that they have been done over however much they may understand the good sense and inevitability of Qantas' move. There won't be any high fives or openings of fizzy bottles in IAG's HQ overlooking Heathrow's runways or down the road in Waterside where the BA brand live in rather detatched isolated splendour in their reclaimed and manufactured parkland . Without the Qantas codeshare and joint venture their own brand presence in Australia is minimal.  It has also been sharply reduced in Singapore and Thailand where BA has no organisation of its own .The joint offline office in Malaysia , to which the airline has indicated it might return ,was recently closed.  It has therefore now got to rebuild its once strong presence in South East Asia almost from scratch.

BA will in time recognise that Qantas have in fact done them a favour. Maybe they do now. By taking the hard decision ,the Australians have forced Atlantic-focused BA to pay attention and seriously think about their business in Asia. It could and should be a major awakening leading to the seizing of new opportunities and fighting back in the maket. Alliance partners are all very well, but within them he who gets the business keeps all but a tiny fraction of the revenue. Airlines can't live on meagre interline and codeshare commissions. BA should be a major player in Asia. Instead, since the 1990s  it has progressively shrunk and withdrawn. Nagoya, Osaka, Fukuoka, Seoul, Manila, Taipei, Kuala Lumpur and Jakarta have all been abandoned. Seoul is now reopening and there has been talk of others and more direct nonstop services to China's new megacities.BA now has the rare opportunity of a fresh start in Asia but it will need to make some serious investments in aircraft, premesis and people.

A reasonable prediction is that BAwill before long  bite the bullet and cease serving Australia with its own through running aircraft. Operating end to end just isn't worth the candle.Load factors may  be high bit so are costs and yields per mile are dreadful.

Possible new BA "partners" for Asia and Australasia include Cathay Pacific,(traditional, known quantity, long history of relationships good and bad), Qatar Airways (new but unlike Emirates for Qantas , not ideally located for BA) or Malaysia Airlines.(again some past history, not all of it helpful ,but an interesting possibility with an underutilised base airport)

To enlarge a little, the simplest and culturally easiest choice might be Hong Kong's Cathay Pacific though historic relations with them have many similarities with the Qantas story. BOAC/BA and their then Hong Kong agents, Jardines until the mid 1970s fought to keep Swire owned and controlled Cathay out of London . The rivalry between the two airlines and their sponsoring two dominant trading companies was very much part of the local scenery. Even in the mid 1990s Cathay urged the Hong Kong government to halve BA's uplift rights between Hong Kong and Taipei and Manila thereby contributing to BA's withdrawal from these two end sectors The rapprochment and Cathay's joining of One World started after that so is still relatively recent. Since then Cathay have grown to 4 well spaced  flights daily to London while BA have shrunk to just two services. The westbound pair are in effect just one as they fly only 30 minutes apart. A new relationship with Cathay might see BA return to 3 flights a day, one timed to offer a range of direct onward connections to Australia but it would be a pretty tenuous link.  Why would customers not just opt for Cathay to Cathay where they know that the service will be consistent throughout.? (The same question applies of course to Qantas/Emirates codeshares over Dubai. How many who experience the Emirates product and style will want to fly on Qantas metal?)

 If BA followed Qantas and switched its Australasia hub to the Gulf , Qatar Airways is the only uncommitted possibilty amongt the three big new carriers there. BA's needs though are the reverse of Qantas'. Qantas needs to hub via as short legs as possible into the Middle East and Europe whereas BA needs to do the same to Asian and Australian cities.BA will probably therefore be more interested in an Asian hub. Hong Kong could be too far north for their Australian traffic.

Another loser could be One World . Tim Clarke's comments that the end may be beginning for the standard model mega-alliances is significant. Although the initial briefings indicate that Qantas will remain in the alliance, whether or not two serious divorcees sitting across the table from each other will really work is open to question. There is also the matter of the One World frequent flyer programme. Qantas are talking of allying their own scheme with that of Emirates who are not in One World , so where does that leave things? Just one of those details.

Qantas have taken the big ,adventurous mould breaking step. It's the best one for themselves. For everyone else the ball is therefore now in play. Cats amongst pidgeons?

No comments:

Post a Comment

Note: only a member of this blog may post a comment.