Qantas’ Chinese connections

EVERY airline looking east (or westwards or northwards depending on where they are based) wants a foothold in China, that huge market with a growing population of air travellers.

Three years or so ago when Australian flag carrier Qantas announced a transformation program, chief executive Alan Joyce identified Asia, in particular China, as the answer to the airline’s woes in the international arena. The rising wealth of Asia’s most populous country makes good reason for Qantas to consider an Asia-based premium carrier near enough to tap into that market, and to set up a budget carrier in Hong Kong, the gateway to China, jointly with China Eastern Airlines and a local conglomerate owned by casino magnate Stanley Ho. While the former proposal was aborted, the latter is awaiting regulatory approval – against the wishes of Cathay Pacific – with ordered planes parked at the Airbus factory awaiting delivery. That, Mr Joyce had said, was not unusual for start-up airlines.

Courtesy Qantas

Courtesy Qantas

All that did not stop Qantas from building up its Chinese connect ions through codeshare services. In a recent agreement with China Southern Airlines, Qantas customers can gain direct access to four destinations within China including Guangzhou from Sydney, Melbourne, Brisbane and Perth. China Southern customers will similarly gain access to domestic destinations across Australia as well as beign able to fly between Sydney and Auckland.

Qantas International CEO Simon Hickey said: “Partnerships are at the core of our strategy in Asia and together with our airline partners, we’re pleased to now offer customers access to 179 flights to 12 cities in Asia each week, with fares available to over 120 additional Asian cities.” He added: “The Qantas Group has never had a stronger presence in Asia. More than one sixth of our total revenue now comes from flights to and within the region, and we plan to keep opening up new travel opportunities.”

This can only mean high alert for rival airlines, particularly those which by fifth and six freedom rights have been routing travellers through their home bases.

Qantas already has a codeshare arrangement with China Eastern Airlines between Australia and China via Singapore.

None of the mainland China-based airlines are members of the OneWorld alliance to which Qantas belongs. That may be of little consequence, considering that codeshare partners Chna eastern and China Southern are both SkyTeam members. Air China and Shenzhen Airlines are members of the Star Alliance. Out of Hong Kong, Qantas` Jetstar may face stiff competition from Hong Kong Airlines and Hong Kong Express, both carriers owned by the Hainan Airlines Group, besides Cathay’s Dragonair. Note however that Hong Kong Airlines and Dragonair are by definition regional and not budget carriers.

If there is any indication of China’s growing demand for air travel, it is Shandong Airlines’ recent order of 50 Boeing 737 aircraft to the tune of US$4.6 billion. At the same time, however, Air China warned that its first quarter profits would be 65 per cent lower compared with that last year because of the falling yuan. A statement issued by the airline said: “The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses.” Fellow competitor China Southern issued a similar warning on falling profits. These are but minor blips that will not deter foreign airlines from connecting with the China market.

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Cathay considers switch from OneWorld to Star Alliance: Is it a matter of choice?

Rumor is rife that Cathay Pacific Airways is considering switching from OneWorld to Star Alliance. The reason: Cathay objects to fellow members British Airways (BA)’s and Qantas’ support of the HNA Group’s Hainan Airlines joining OneWorld. The HNA Group has a 46 per cent stake in both Hong Kong Airlines and Hong Kong Express, which are Cathay’s competitors.

Cathay’s chief executive John Slosar (who took over the helm in March 2011) apparently once said he “cannot rule out” such a move.

Alliance membership is not cast in stone. Shanghai Airlines left Star Alliance in October last year to join SkyTeam, to be in the same stable as parent China Eastern Airlines. Star Alliance is courting Shenzhen Airlines, which is owned by member Air China. That makes OneWorld the only one of the three major airline alliances without any mainland China connections – something of a setback since China is one of the world’s fastest growing economies and airlines are looking to tapping its potential.

If Cathay switches, so too will Cathay-owned Dragonair.

Cathay’s change of heart is therefore no more than part and parcel of a business decision. It makes sense when Cathay is a stakeholder of Air China and has a 49 per cent stake in Air China Cargo, a joint venture set up by the two airlines. Cathay’s membership will also strengthen the Star Alliance, whose members include Singapore Airlines (SIA), United Continental, Lufthansa, Air Canada, Air New Zealand and All Nippon Airways (ANA). The strong list of possible replacements should allay any concern Cathay may have about losing the benefits of any existing tie-ups with OneWorld partners such as BA, Qantas, American Airlines and Japan Airlines.

Any further development now hinges on: (1) whether Cathay’s threat to leave OneWorld is strong enough for OneWorld to reassess its position, basically how important it is to the alliance to stake a vigorous presence in China (before it is too late) with the enrolment of Hainan Airlines vis-à-vis the benefits of a strong partnership with Cathay (better a strong than weak partner), (2) whether behind Cathay’s veiled threat, Cathay still prefers to remain in OneWorld, its predicament being a case of the push rather than pull factor, (3) whether Star Alliance member SIA has any objection to Cathay moving into the same house since both airlines are known to be keen rivals not only in the region but also for the long haul, and (4) whether Cathay itself also relishes that idea of co-existence.

Prior to the establishment of largely sectarian multi-airline groups – Star Alliance (1997), OneWorld (1999), SkyTeam (2000) – individual airlines have engaged in agreements of co-operation that include flight code-share, first preference for passenger transfers, station representation and joint use of common facilities such as CIP lounges. This practice has continued inside and outside of the alliances, even between rival group members. For example, Air Canada not only code-shares flights between Vancouver and Singapore with fellow Star Alliance members SIA and ANA but also with OneWorld member Cathay.

While any alliance is supposed to promote the collective interests of its members, the reality is that in the game of survival, the dominance of self-preservation is not easy to disguise. Qantas, hungry for a greater presence in China is likely to favor the candidacy of Hainan Airlines that together with Hong Kong Airlines and Hong Kong Express may complement its wider network including that of subsidiary Jetstar. If endorsed by OneWorld, it is up to Cathay to choose to go or to stay.

In the rival camp, SIA that openly champions competition is unlikely to make an issue of objecting to Cathay joining Star Alliance which includes regional competitor Thai Airways International. Viewed positively, there could not be a more formidable force than a partnership between Asia’s two most usccessful airlines to confront and check the growing competition posed by budget carriers in the region. So again it is up to Cathay to decide where it wants to belong. According to reliable sources, Cathay is more likely to switch camps than to compromise to stay in OneWorld. However, one wonders if it is really a matter of choice.

Yet in the end, it may matter little, considering how promiscuous alliance relationships have become and that membership is no protection against even intra-group, let alone inter-group, competition.