Cathay Pacific axes 800 jobs: Is this the answer?

TIMES are hard for legacy airlines, it seems, when major airlines such as Singapore Airlines (SIA) and Cathay Pacific are beset with economic woes.

Courtesy Cathay Pacific

SIA announced a plan to transform the airline after reporting a last quarter loss of $S41 million (US$ 29 million) (see SIA’s transformation is long overdue, 27 May 2017). Cathay, losing HK$585 million (US$103 million) in 2016 – its first annual loss in eight years – is set to cut 800 jobs. Both airlines cited intense competition, mainly from the big three Middle East carriers of Emirates Airlines, Etihad Airways and Qatar Airways, and carriers from China. Cathay additionally suffer substantial fuel hedging losses.

Invariably cost cutting is almost every airline’s clarion call to try to get back into the black. It helps, of course, and such an exercise can eliminate wastage and improve productivity when in good times the airline has lost the discipline. However, more may be needed to be done if the issues are structural and operational. It calls for a deeper review of product, procedures and processes, and marketing strategies against a changing aviation landscape that renders old successes irrelevant and demands new innovative approaches.

Like SIA, Cathay is caught in a price-sensitive market where competitors have been able to provide comparable services at lower fare, and that’s not talking about low-cost carriers (LCCs) alone. Cathay risks losing its position as the gateway airline at the door of the huge China market as more carriers from the mainland commence direct services to destinations beyond China and offer connections out of Shanghai and Beijing. Also, partnerships between China carriers and other airlines are also threaten to cut Cathay out of the game.

Some analysts think Cathay is disadvantaged by the absence of budget arms, unlike SIA which is supported by Scoot and Tigerair. The solution really is not for Cathay to go budget, but to make that difference between flying low-cost and flying full-service in its favour.

Cathay’s loss is a sign of the times

Courtesy Cathay Pacific

WHEN an airline like Cathay Pacific reports a loss, you may assume it is a sign of the times. The Hong Kong-based airline made an annual net loss of HK$575m (US$74m) in 2016, its first since the global financial crisis and the third in its history. Last year, it made a profit of HK$6bn.

The culprit is the competition it faces, primarily from mainland Chinese carriers and Middle East airlines.

Cathay’s positioning at Hong Kong as the gateway for many Chinese travellers has been affected by increased direct services offered by carriers such as Air China and China Eastern Airlines. This has not been helped by a continually price-sensitive market.

The aggressive presence in the region of Middle East carriers such as Emirates Airlines, Etihad Airways and Qatar Airways offering competitive fares has also affected not only Cathay but also other airlines such as Singapore Airlines. Indeed, the Gulf carriers have earned that unenviable reputation across the globe, raising the ire of airlines in Europe and the United States. While they have been accused of being unfairly subsidised by state support, there is no denying that their competitive fares are matched by a good product, excellent in-flight service and wide network connections.

Cathay lamented the falling demand for business and first class seats, which has been a mainstay of its profitability. Unfortunately, the uptick for premium travel has been slow in the recovery since the financial crisis, and while the airline has invested heavily on the product, this has taken a toll on the yield. But this is not a problem faced only by Cathay. Some airlines are already auctioning empty seats as a matter of course.

Also, the increased popularity of premium economy is in fact pulling in an opposite direction.

All said, even Middle East carriers known for their lavish premium product are paying more attention on the product offered in the rear of the aircraft as the competition intensifies, and as legacy airlines recognize as well the threat posed by low-cost carriers which are advantaged by the current low fuel prices.

Cathay chairman John Slosar said 2017 would be “challenging” as he announced plans for restructuring which would result in jobs being axed. He said: “Our organisation will become leaner.”

It is interesting how the business seems to be following a cycle of growth and cutbacks, and the cycle is getting to be shorter and shorter. Too often, in good times we conveniently forget there ever was such a thing as bad times.

Air New Zealand leads the pack

Courtesy Air New Zealand

Courtesy Air New Zealand

Air New Zealand is the world’s best airline according to AirlineRatings.com based on criteria that include fleet age, safety, profitability and leadership in innovation for passenger comfort. The agency’s Airline Excellence Awards program which lists the winning airlines is endorsed by the International Civil Aviation Organization.

Many travellers would recognize ANZ for its attention-grabbing in-flight safety video that takes them into Middle Earth, the kind of out-of-the-aircraft features that a few other airlines have tried to imitate but fared only poorly. AirlineRatings.com Editor-in-Chief Geoffrey Thomas said: “Air New Zealand came out number one in virtually all of our audit criteria, which is an exceptional performance.” The airline was favoured for its record-breaking financial performance, award-winning in-flight innovations, operational safety, environmental leadership and motivation of its staff.

Skycouch: Picture courtesy Air New Zealand

Skycouch: Picture courtesy Air New Zealand

But, of course, there are surveys and there are surveys that publish their own lists of favourites. Some airlines such as Singapore Airlines (SIA) and Cathay Pacific have a ubiquitous presence, and there also notable absences. This is where it is most telling, bearing in mind that the ranking is dependent on several factors such as the excellence-defining criteria and the population surveyed.

The other nine airlines ranked behind ANZ in the top ten list by AirlineRatings.com are in descending order: Qantas, SIA, Cathay, Virgin Atlantic, British Airways (BA), Etihad, All Nippon Airways, EVA Air and Lufthansa.

It is interesting to note that the top two airlines come from the remote Southwest Pacific. Qantas has in recent years been working on upgrading its product offerings, winning accolades for catering and airport lounges. Not surprisingly, innovation along with good service seem to be the driving winning streak going down the list – SIA and Cathay for their premium economy and revamped business classes, Virgin for its cabin ambience and friendly crew, BA for its leadership in in-flight entertainment, and Etihad for its equally impressive service in front and at the back of the aircraft.

Notable absences in the list are US carriers (no surprise there) and two of the big three Middle-East carriers (Emirates and Qatar).

Many survey rankings are skewed by the weight they place on service in the premium classes. However, Mr Thomas of AirlineRatings.com said: “We are looking for leadership and airlines that innovate to make a real difference to the passenger experience particularly in economy class.” Considering that the majority of travellers are seated in coach, it is time that airlines crowned with the halo of excellence pay more attention at the back of the aircraft, for this may well make the difference as the competition intensifies. And, it is where the differentiation becomes even more challenging. Perhaps too, this could be the reason why Emirates and Qatar, known for their lavish premium service, did not make it to the top ten of the list.

Cathay Pacific losing grip of China card

Courtesy Cathay Pacific

Courtesy Cathay Pacific

Cathay Pacific reported plunging profits of 82 per cent for half-year results up to 30 June. Revenue fell 9.2 per cent to HK$45.68 billion (US$569 million). For an airline that had boasted record margins in previous reports, it demonstrates the volatility of the airline business today in spite of the continuing low fuel prices.

While Cathay chairman John Slosar put the blame on competition and the slowdown of the China economy – what’s new, indeed? – it is worthy of note that Cathay also suffered hedging losses in the spot market. Many airlines are apt to extol their ability to gain from fuel hedging but will remain reticent when the reading goes awry.

Mr Slosar said: “The operating environment in the first half of 2016 was affected by economic fragility and intense competition.” Apparently premium economy, which since its introduction has been Cathay’s pride, and the long hauls were not performing to expectations, confronted by competition from Middle East carriers Emirates Airlines, Qatar Airways and Etihad Airways, and from China carriers such as Air China and China Eastern which are offering direct flights thus doing away with the need for Chinese travellers to fly through Hong Kong.

Competition from foreign carriers in a reciprocally open market is to be expected, and which may be augmented by those carriers offering an improved product. Cathay’s main woe is probably the falling China market on two counts: the reduced demand for premium travel and the diversion away from Hong Kong as the gateway to the region. Cathay and Hong Kong International Airport have benefitted from the growing China market, but while it was able to prevent Qantas from setting up Jetstar Hong Kong, it can do little to stem the growth of China carriers.

Courtesy Singapore Airlines

Courtesy Singapore Airlines

It would be more meaningful to compare Cathay’s performance with its major regional competitors. Singapore Airlines (SIA) reported Q1 (Apr-Jun) profit of S$197 million (US$144 million) (up from S$108 million) while the other carriers in the Group – SilkAir, Scoot and Tigerair – also did better on the back of lower fuel prices. But group revenue declined by 2.1 per cent because of lower contribution by parent airline SIA. In July passenger load was down 1.2 per cent (1.676 million from 1.697 million), and the load factor by 2.2 pts at 82.4 per cent from 84.6 per cent. Except for East Asia (with flat performance), all other regions suffered declining loads.

This may be indicative of the global economic trend. Like Cathay, SIA’s fortune has shifted from the longer haul to the regional routes. Europe suffered the highest decline (4.5 pts) followed by Americas (3.1 pts). The picture will become clearer when it reports Q2 (making up the first half year) results. According to Mr Slosar of Cathay, the business outlook “remains challenging”.

Courtesy APP

Courtesy APP

However, it is good news downunder as Qantas reported record profit of A$1.53 billion (US$1.15 billion) for the year ending June 2016, up 57 per cent – the best result in its 95-year history. Qantas Domestic, Qantas International and the Jetstar Group all reported record results: the domestic market chalked up a record A$820 million, up A$191 million, and the international division A$722 million, up A$374 million. The Qantas Transformation program seemed to have continued working its magic to “reshape the Group’s base and ability to generate revenue” according to its report. CEO Alan Joyce said: “Transformation has made us a more agile business.” And, unlike Cathay, effective fuel hedging saw the Group secure an A$664 million benefit from lower global fuel prices, leaving us to wonder what Cathay would say to that.

It is once again a feather in Mr Joyce’s cap. He added: “The Qantas Group expects to continue its strong financial performance in the first half of financial year 2017, in a more competitive revenue environment. We are focused on preserving high operating margins through the delivery of the Qantas Transformation program, careful capacity management, and the benefit of low fuel prices locked in through our hedging.” He believed the long-term outlook for the Group to be positive.

The contrasting fortunes of airlines may prompt one to ask how in the end that as much attribution of an airline’s performance is attributed to global influences, so too as much is balanced by its self-discipline in adjusting to the vicissitudes of the times, its astuteness in seizing shifting opportunities and, of course, its ability to read global and regional trends as unpredictable as they are.

Making sense of flying the world’s longest flight

Courtesy Singapore Airlines

Courtesy Singapore Airlines


ONCE upon a time, the honour of flying the world’s longest nonstop commercial flight belonged to Singapore Airlines (SIA). That was in June 2004 when SIA launched its non-stop service from Singapore to New York (Newark), a journey of 19 hours on the Airbus A340-500 jet covering a distance of 9,535 miles. SIA had earlier in February of the same year inaugurated a non-stop service to Los Angeles, flying 8,770 miles in 18 hours.

Both services had been terminated by SIA, to Los Angeles in October 2013 and to New York a month later. Looking back, SIA chief executive officer Goh Choon Phong cited the unsuitability of equipment for such a long flight that contributed to the unprofitability of both routes and their eventual discontinuation. He said: “There isn’t really a commercially viable aircraft that could fly nonstop.” The airline is said to be talking with Airbus Group SE and Boeing Co. on developing a plane with new technology that would make flying non-stop to the US profitable. In Mr Goh’s words, “We, of course, want it as soon as possible.”

With SIA out of the race, the world’s longest flight today is operated by Australian flag carrier Qantas, from Dallas-Fort Worth in the US to Sydney in Australia over a distance of 8,578 miles and taking up to 17 hours. But that record will soon be broken when Emirates Airlines mounts a service from Dubai to Panama City, Panama in February next year. The journey of 8,588 miles will take 17 hours and 35 minutes. And yet again the title will pass on to another carrier when Air India flies from Bangalore in India to San Francisco as planned, a distance of 8,701 miles that would take up to 18 hours of flight time.

Courtesy Airbus

Courtesy Airbus

Surely there is more to the business of flying such a long route than the media hype that comes with it. In truth a flight of more than 15 hours is hardly an exception. Middle East carriers are aggressively connecting US destinations directly with their home bases. Emirates is already operating from Dubai to San Francisco, Los Angeles and Houston. Etihad Airways flies from Abu Dhabi to Los Angeles, San Francisco and Dallas Fort Worth. Saudi Arabian Airlines has a service from Jeddah to Los Angeles. Qatar Airways operates from Doha to Houston and Dallas Fort Worth.

Courtesy Qantas

Courtesy Qantas

Besides Dallas Fort Worth, Qantas also operates from Melbourne to Los Angeles. Air India already flies from Mumbai to New York (Newark). American carriers are not left out of the game. Delta Air Lines operates from Atlanta to Johannesburg. American Airlines has a service from Dallas Fort Worth to Hong Kong. United Airlines also has a non-stop service to Hong Kong from New York (Newark) and from Chicago, and to Mumbai from New York (Newark) as well as to Melbourne from Dallas Fort Worth.

Other carriers that operate similarly long routes nonstop include Cathay Pacific (from Hong Kong to New York, Boston, Chicago in US and Toronto in Canada); China Southern Airlines (from Guangzhou to New York), EVA Air (from Taipei to Houston and New York), South African Airways (from Johannesburg to New York), and Air Canada (from Toronto to Hong Kong).

It is clear that the operations of such a flight have in the past been hampered by the limitations of an aircraft’s range. With advanced technology, gone are the days of the milk run of an airline hopping from port to port, making the n3ecessary technical stops, to reach its final destination. Take, for example, an airline such as SIA flying from Singapore to London in the 70s stopping en route at Bangkok or Mumbai, then Bahrain, and then Rome and Amsterdam to drop but not pick up passengers. The flying time (including time spent in transit) has been cut down drastically today for a non-stop between Singapore and London, taking only 13 hours.

Additionally what has opened the windows for long distance non-stop flights is the onset of a more liberal open skies aviation policy adopted by like-minded nations around the world. A major problem facing many airlines that are operating services over a long distance with stopovers is the hurdle of the absence of fifth freedom rights. SIA’s Goh recognised this in the case of SIA. He said, with specific reference to SIA’s interest in the US: “There is a lack of viable intermediate points. That’s largely because the countries concerned are not really giving us the rights to operate what we call the fifth freedom from those points to the U.S.” This may be pushing SIA to consider not only putting back its nonstop services to New York and Los Angeles but also adding other points. SIA’s withdrawal is largely seen to have benefitted rival Cathay Pacific which introduced a nonstop service between Hong Kong and New York on the heels of SIA’s termination of its service between Singapore and New York.

Ultimately it is all about filling up the plane. Nonstop services thrive on demand for seats point to point. In an earlier piece that I wrote, a reader commented on how American carriers are losing out by not operating nonstop services from the US to Singapore. The same “how” question may be asked of them as of SIA: Is there enough traffic to justify SIA’s nonstop services to the US? Presently SIA operates from Singapore to New York via Frankfurt, and to San Francisco or Los Angeles via Hong Kong, Taipei, Seoul and Tokyo. Its services are popular in the markets of the intermediate points. Yet it would be presumptuous to think that Singapore’s lack of a hinterland market, compared to, say, Hong Kong situated at the doorstep of the huge China mainland, may not do as well for a nonstop service to the US. The market is as wide as how you define it and make it work. Clever and effective marketing supported by an excellent product and a strong network of connectivity entailing growing partnerships with other airlines can overcome germane geographical issues, the reason why SIA flights to North America continue to be popular among Indian travellers even if they had to connect at Singapore with a layover, the way that the numbers are also increasing in competition on Cathay Pacific connections out of Hong Kong.

But the aviation landscape is constantly shifting and changing. Timing is everything but can also surprise. Emirates’ planned flight to Panama City is premised on what it noted of the Latin American city’s advantageous location, burgeoning business environment and gateway for tourism. Similarly, Singapore too is noted for its strategic geographical location as a gateway to Southeast Asia and beyond, and as a centre for global business, the way that Dubai too has grown in geographical importance as a gateway to not just the Middle East but also the rest of Africa and Europe. There is a hint of the early bird advantage in Emirates’ strategy. The Middle East carrier has so far been quite successful expanding its network across the globe, and its penetration into the US territory has recently caused the big three of American carriers (United, American and Delta) to cry foul alluding to an unfair advantage it enjoyed from state subsidies.

So too would SIA have enjoyed that early bird advantage when it launched its nonstop services to Los Angeles and New York, and becoming the first legacy airline to operate an all-business class service, which indicates the market segment that SIA was after. In fact, SIA was not the only Southeast Asian carrier to operate nonstop to the US. Thai Airways International introduced nonstop services to New York and Los Angeles in 2005. The New York run was short lived, ending in 2008. The nonstop Los Angeles service followed much late in 2012. The spiralling cost of fuel was cited as a reason.

Courtesy AP

Courtesy AP

But for Air India, there could not a better time than now in the context of the low fuel price that airlines are enjoying. The carrier’s planned service from Bangalore to San Francisco is a dream stolen from erstwhile Indian competitor Kingfisher Airlines which went under a heap of debts before it could realise its ambition. The new link appears to be a logical move particularly when there is a significant Indian population in Silicon Valley and there is increasing demand for travel between the two cities which are cyber hubs on opposite sides of the world. Besides, India has a large population base to justify more nonstop flights, unlike Singapore but like China, which has seen more nonstop flights from China to countries like Australia. Air India’s first challenge would be to attract Indian passengers back to flying with them non-stop where the options are available instead of connecting on other carriers. The record for flying the world’s longest flight is good only when the plane has the load to make it profitable.

This article (alternatively titled “Making sense of ultra long-haul flights” was first published in Aspire Aviation.

The real battle behind Jetstar HK’s rejection

Courtesy Jetstar

Courtesy Jetstar

IT might well have been a technical inquiry. Jetstar Hong Kong (JHK)’s fate was hanging in the balance as the court debated the definition of “principal place of business” (PPB) which Cathay Pacific Airways and other airlines in the opposing camp so successfully narrowed down to as the sole criterion to decide Jetstar’s legitimacy. They contend that “the task before ATLA (Air Transport Licensing Authority) is the determination of whether JHK meets the PPB requirement now, and not whether 25 other airlines met that requirement at any point in the past.”

The objectors submitted that JHK does not have its principal place of business in Hong Kong, so granting it a licence to operate scheduled air services contravenes Article 134 of the Basic Law. If they had attempted to set the direction of the proceedings, they had succeeded, stating that “the common law meaning of PPB, i.e. that the PPB of an entity where the effective exercise of central and ultimate management control of the entity lies, is thus the intended meaning as it best suits the intended purpose of ensuring that only Hong Kong-based airline may be licensed by the HKSAR (Government of Hong Kong Special Administrative Region) authorities.”

It has been two years since JHK set up its intended base in Hong Kong, initially as a joint venture between Qantas and China Eastern Airlines. Cathay and other home-based airlines – Dragonair, Hong Kong Airlines and Hong Kong Express Airways – were quick to protest, and as it became clear that the PPB clause would be the hot issue of contention, local conglomerate Shun Tak Holdings came on board as the majority shareholder (51%), and its managing director Pansy Ho was named the new company’s chairman. The onus then rested on JHK’s shoulders to demonstrate how that composition, the control and decision making machinery as structured by it, would make the airline a Hong Kong company. JHK contends that it “has entered an arrangement with Jetstar Airways Pty Limited (JAPL) as licensor of the ‘Jetstar’ brand and as a service provider.”

In the end, ATLA decided that was not good enough. It said: “In determining whether the principal place of business of an applicant is in Hong Kong, the answer is not confined to where the day-to-day operations are conducted (but) its activities must not be subject to the control of senior management, shareholders or related parties located elsewhere.” It concluded: “The Panel is of the view that JHK cannot make its decisions independently from that of the two foreign shareholders. The Panel does not have to decide whether its nerve centre or whether its principal place of business is in Australia or the mainland China. The Panel needs only to determine whether JHK has its PPB in Hong Kong. We are of the view that it is not and therefore the PPB requirement is not satisfied.”

Naturally both Qantas CEO Alan Joyce and JHK CEO Edward Lau expressed disappointment at the outcome, but one wonders if they were at all surprised even though they had previously expressed confidence that ATLA would eventually approve JHK’s application. The thing is that technically the state of play is not theirs to win, for as much as Mr Lau insisting that “we genuinely believed that Hong Kong is Jetstar Hong Kong’s principal place of business.” JHK as a branch of the main Jetstar entity and Qantas’s vehicle to extend its market reach is more than just implied in the brand’s genesis, which the objectors made capital of, pointing out that “JHK is related to Qantas via Jetstar International Group Holdings Co. Lrd and through Qantas to JAPL.” They contend that it is all part of a Jetstar Pan-Asia Strategy “to create an integrated Jetstar network in which each Jetstar LCC will, far from operating independently, share aircraft, boarding, airport facilities and a further range of unspecified goods and services.” JHK’s rebuttal that JAPL, in spite of the relationship, is but an outsource partner was not convincing.

To some degree, JHK might have felt straitjacketed by the narrow scope for arguing its case. Mr Joyce said ATLA’s ruling was as disappointing for JHK shareholders as it was for travellers: “At a time when aviation markets across Asia are opening up, Hong Kong is going in the opposite direction. Given the importance of aviation to global commerce, shutting the door to new competition can only serve the vested interests already installed in that market.” That is an issue that the Hong Kong government may have to address separately, as a matter of policy unprejudiced by JHK’s application.

As a key aviation hub in the region, Hong Kong International Airport (HKIA) can only benefit from an open policy and more competition.  Throughout the proceedings were timely reminders of the importance of maintaining “the status of Hong Kong as a centre of international and regional aviation.”

However, Qantas had misread the apparent liberalised aviation landscape in Hong Kong, assuming it to be as open as, say, Singapore. When it once considered setting up an Asia-based premium carrier, Hong Kong was an attractive alternative because of the growing traffic from the China hinterland. Qantas had also failed to anticipate the strong opposition from OneWorld partner Cathay and compatriots, considering the relative ease that it had experienced in setting up the Jetstar brand in other locations such as Singapore, Vietnam and Japan. At some point, the advance is apt to draw awareness of the competition it poses.

Across the globe, entering into a joint venture with a local partner provides a convenient channel for a foreign carrier to gain a foothold in the local market, perhaps made easier if the partner were an airline, better still, the national flag carrier. In that connection, Shun Tak might have been viewed by the objectors as a potential local threat to come into its own riding on the back of more experienced operators.

Qantas might also have placed too much weight on the facilitation expected of a name like China Eastern. That became apparent when the court pointed out that “the Central People’s Government (of China) shall give the Government of the Hong Kong Special Administrative Region the authority to issue licences to airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong.” It may even be suggested that the relative silence of both Shun Tak and China Eastern in the tussle could only project their passive roles but Qantas’s prime-mover position.

The technicality of Article 134 of the Basic Law as a moot point aside, it cannot be denied that  implicit in the objectors’ presentation is their concern of the competition posed by JHK. They contend that the joint venture aims “to deepen the Qantas Group presence in Asia-Pacific.” Refuting JHK’s claim of “the economic benefits which can be brought by the new airline and its contribution to maintaining Hong Kong as an international aviation hub,” the objectors insist that the Jetstar business model is designed “in the wider interests of all the Jetstar LCCs rather than JHK alone” and that all decisions pertaining to JHK’s operations such as capacity and aircraft purchases “are made with a view to maximising profitability for the Qantas Group.” They argued that through the Jetstar Pan-Asia Strategy, “Qantas is increasing the international competitiveness of a key Australian business by seeking to capitalise on the growth in demand for air travel services in Asia for its own benefit and ultimately the benefit of Australians.”

Indeed, Cathay’s early objection had hinged on the economic aspects of JHK’s proposition, which might have given JHK firmer ground to promote its application. Cathay insisted that unlike other Asian countries, the nature of the Hong Kong market is such that it has no real need of LCCs – that, in spite of the operations of Hong Kong Express and calls made by foreign budget carriers. Why would Cathay, already one of the world’s most successful and profitable carriers, be so threatened by JHK? It is apparent that the rivalry is more specific than general, the wariness of an expanding Jetstar network that is supporting an international competitor.

All’s fair in war as in love even as some observers hint at Cathay’s political sway. What next then for JHK? As at December last year, Qantas has invested some A$10 million (US$7.7 million) in the joint venture. JHK has already sold eight of its nine aircraft. Rather than accept ATLA’s decision as a natural demise of the unborn carrier, Mr Joyce has not ruled out appealing the decision. Consulting experts may already be working at more creative solutions to skirt round the technicality of the Basic Law. Or, as Qantas too had hinted, it might reconsider basing the low-cost carrier in Hong Kong, perhaps elsewhere but close enough where the real market screams loud to be served. No doubt a costly affair, it all depends on how much farther the shareholders are prepared to go.

And as the objectors hailed ATLA’s ruling as “the right decision for Hong Kong” with Cathay corporate affairs director James Tong reiterating that it “ensures that important Hong Kong economic assets, its air traffic rights, are used for the benefit of the people and the economy of Hong Kong,” proponents of more liberal aviation competition may begin to wonder to whom the real victory belongs.

This article was first published in Aspire Aviation.

Qantas-China Eastern partnership: Dressing up an old arrangement

qf logocea logoQantas and China Eastern Airlines announced a new agreement that the airlines said will enlarge their existing codeshare arrangement signed in 2008 for a deeper level of commercial cooperation on flights between Australia and China. A statement issued by Qantas referred to the new relationship as a “joint venture”. In the application to the Australian Competition & Consumer Commission (ACCC), it was referenced as a “Joint Coordination Agreement”. Whatever the terminology, one wonders if this agreement is any different from the usual run-of-the-mill alliances that are not much more than a formal handshake.

There is the standard co-ordination and sharing of facilities such as airport lounges. A key feature is the co-location of both carriers’ operations within the same terminal at Shanghai International Airport. This reduces transit times by about an hour to facilitate a wider range of onward connections. Qantas CEO Alan Joyce said: “Coordination means the opportunity to improve schedules and connection times, and to deliver improved products such as a joint lounge and streamlined check-in facilities in Shanghai.” The Australian flag carrier is banking on more of its customers opting to fly to not only Shanghai but also beyond from there, in a region where it is much weaker compared to Asian carriers such as Cathay Pacific and Singapore Airlines (SIA).

Many codeshare partners are already making similar arrangements. Star Alliance airlines, for example, operate out of a dedicated terminal at London Heathrow. So what’s the big deal about the Qantas-China Eastern agreement which, subject to regulatory approval, will commence in the middle of next year and be effective for five years?

According to Qantas, the agreement is designed to complement the Qantas-Emirates partnership for Europe, Middle East and North Africa, and the Qantas-American partnership for the United States. That covers almost the whole world and makes Qantas truly a global airline. But to what avail? Interestingly, Qantas itself has limited operations to some of the regions. It operates to only London in Europe, Dubai in the Middle East, Johannesburg in Africa and Santiago in South America. The airline’s presence in North America is limited to Dallas/Fort Worth, New York, Los Angeles and Honolulu.aa logo

The Qantas-American agreement signed in 2011 is a codeshare arrangement for transpacific flights between the US and Australia to also include New Zealand. It does little more than what the global alliances, in this case OneWorld of which Qantas and American are members, have been set up to achieve. American does not operate to Australia.

emiratesThe Qantas-Emirates alliance caused a stir when it was announced in 2013 because of changes made to the traditional kangaroo route when Qantas shifted its operations hub from Singapore to Dubai. While Qantas is leveraging on Emirates’ extensive networks in Europe, the Middle East and Africa, it looked like the move was aimed at checking the competition posed by SIA. However, the real winner is not Qantas but Emirates, which is aggressively making inroads into the Asia-Pacific market. More than a year after, Qantas continues to make losses. It posted the biggest loss in its history of A$2.84 billion (US$2.66 billion) for the last financial year ending June 30.

How different from these other agreements is the new partnership between Qantas and China Eastern, and how will it play out for Qantas?cathay2

The flying kangaroo has long eyed the growing China market as a way to improve its bottom line. A partnership with a Chinese carrier makes sense for a quick and easy penetration into the large market in addition to its current daily service between Sydney and Shanghai. The agreement is also supposed to complement Qantas’ existing services to mainland China via Hong Kong, competing with Cathay Pacific and Dragonair. In its application to the ACCC, Qantas says it “does not consider the Hong Kong and Shanghai gateways to be mutually exclusive” the way that Dubai has replaced Singapore as the hub for its European flights. Quite clearly, Cathay which has a stake in Air China Cargo is a veritable rival to reckon. The rivalry has heightened in the Jetstar Hong Kong saga. China Eastern’s participation as partner in the budget joint venture does not seem to be able to do much to facilitate its application for approval to fly. After two years of its launch, approval is still pending.

siaThen there is SIA, the other competitor with a strong presence in the region, mentioned in the Qantas-China Eastern application to ACCC. Qantas notes how SIA’s subsidiaries Tigerair and Scoot are flying from Australia to Singapore with onward connections to China. As if pre-emptory to the new agreement, the existing Qantas-China Eastern codeshare already covers flights out of Singapore.

While Qantas will gain wider access across China, so will China Eastern within Australia. Passenger air services between Australia and China have been growing at an average rate of 11% for the four years to April 2014. In the past 12 months to June 2014, passenger numbers grew by 8%. In the application to ACCC, Qantas expresses fear of being “marginalised”. On its own, it says it “will not be able to keep pace with the capacity growth being driven by carriers such as China Southern and Sichuan Airlines.” ACCC will have to decide whether the case is about Qantas or Australia, notwithstanding the former`s status as the country`s flag carrier. Yet Qantas has argued that the proposed agreement is far from being anti-competitive, though clearly that fear has been exacerbated by the growing importance of Chinese carriers if only the competition could be limited to a single but partner airline, other strong regional carriers, and rival Virgin Australia’s reciprocity with Delta, Air New Zealand, Etihad and SIA in the wider network.

As with the American and Emirates alliances, the agreement with China Eastern once again is a case of Qantas needing its partner more than the other way round. The partners continue to retain their distinct identity vis-à-vis brand, product and pricing differences. Qantas runs the risk of its customers switching loyalty to its partner by the lure of lower fare, better facilities and services. Emirates, for example, may offer more than just a convenient hop from Dubai to other destinations for Qantas customers when it also competes on the kangaroo route. Before Emirates, there was speculation that Qantas might form the alliance with Cathay instead. That would make a formidable force, but Qantas would have faced the same risk. Besides, a partnership between giants is apt to be paved with problems unless the advantages to one partner are worth its compliance, if not silence.

Will China Eastern similarly flip the game for Qantas? The China carrier has much to gain. Qantas desperately seeking to check competition and new growth may find its prowess neutralized, dressing up an old arrangement.

This article was first published in Aspire Aviation.