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Keeping one hop ahead on the kangaroo route

Posted 12 November 2012 · Add Comment

Analyst Saj Ahmad studies the latest jump in the kangaroo route between Europe and Australia with the Middle East as the feeding ground.

For many years, both British Airways and Qantas have enjoyed joint success on the legendary ‘kangaroo route’ between the United Kingdom and Australia.

While the partnership, or joint service agreement between the two oneworld alliance partners has come to an end with Qantas’ new partner in Emirates, the competitive nature of the northern-to-southern hemisphere connections was not always that simple.

In many ways, that Qantas has now aligned itself with Emirates, a carrier that it berated and levelled all sorts of wild accusations at, seems to demonstrate to good effect just how strong the allure and pull of the GCC region has become. And with it, we’re seeing many airlines waking up to a dawn of new realities that they had hoped would either never manifest themselves, or were brushed off as wishful thinking.

Pending approval of the ten-year pact, Emirates and Qantas plan to operate a combined 98 flights a week between Dubai and Australia. When the deal was announced Qantas had no services to the GCC. By signing the deal Qantas has performed one of the biggest airline industry U-turns ever seen.

During the last decade as Emirates expedited deliveries of its ever-growing, and still expanding Boeing 777 fleet, Qantas, along with a great number of European and other airlines was routinely launching savage, and unfounded, attacks on the UAE airline.

The most common of these was that the Government of Dubai was subsidising Emirates at all costs to keep up its aggressive campaign of global growth and to undermine the economics of other, independent airlines that did not enjoy the same sort of financial and economic support.

Other charges, levelled by Qantas in particular, claimed Emirates did not pay for its fuel, or that if it did, the fuel was heavily discounted and/or subsidised to give the airline an added financial edge and alleviate the burden of fuel hedging. Another such accusation, which is probably as absurd as anything that has been bandied about between aviation giants, is that of Emirates getting free landing rights in Dubai.

For almost ten years Emirates, as well as other Arab airlines, has had to endure a litany of fingers pointing in its direction for alleged market distorting practices propping up the business, yet all the while, the very accusing parties never once provided a shred of cohesive evidence to substantiate their bizarre claims and instead failed to expand or compete in kind.

That Arabian airlines have utilised their respective Governments’ money to good effect is something that should be commended. Hit the reverse button and you see that just three or four decades ago, a great many airlines in Asia, Europe and beyond all enjoyed the lavish monetary injections they got from their Governments with next to no increased value for customers, products, innovation or expansion.

Fast-forward to today, and Arab airlines are not squandering their investment. They’re capitalising on the capital they’ve been afforded.

One look at Qantas and your see that its international operations have been losing money for quite a while, so it came as little surprise that it announced a dropping of its Singapore-Frankfurt service when it revealed its deal with Emirates.

Without its low-cost subsidiary Jetstar, Qantas would be dead. It is that insatiable appetite the world over that customers have for no frills, low-cost travel that has made Jetstar a popular consumer and travellers’ choice when flying to Asia – often at significantly lower cost than competing fares offered by Qantas.

But further afield? While perceptions vary, the fact remains that many of the culinary, cabin and other awards almost always wing their way to the trophy cabinets of the Middle Eastern airlines. And to date, it is rather shocking that the very detractors of these GCC airlines have done nothing at all to improve their competitiveness.

The cruel reality for many of these critical airlines, which thought it easy to lambast Middle Eastern carriers, is that customers simply do not perceive the traditional kangaroo route as providing either meaningful value or any better connections across the globe. That is why Etihad has been quick to leverage its political connections via Abu Dhabi to get with Virgin Australia.

Virgin Australia over recent years has started to ebb away at Qantas’s domestic dominance and now is a credible alternative to many trans-Tasman routes as well as intra-Australian connections.

Etihad was quick to realise this intrinsic game changer and that’s why it increased its shareholding in Virgin Australia to 10%. In all likelihood, while Etihad maintains that it is not interested in running the airlines it has stakes in, it allows it to better support Virgin Australia’s expansion.

Going forward, the landscape of Emirates/Qantas vs Etihad/Virgin Australia vs Qatar Airways looks as tasty as it does intriguing. Don’t forget, there is significant player just out to the east of Australia that is overlooked in all this and it would not be surprising to see Qatar Airways make a play for some deal with Air New Zealand.

There has been a monumental power shift to the Middle East hubs with unique one-stop services to literally anywhere on the planet.

Qantas and Australia have learnt the hard way that transit through congested hubs in Asia is no longer worth the hassle. Airports in the Middle East are being built and expanded with support from investors, Governments, airlines and people, all in concert. Contrast that to the delays seen in getting Heathrow’s Terminal Five approved (let alone built) and the furore today over whether to expand it further or look at other options, such as the Thames estuary airport project to the east of the UK capital.

Virgin Australia, too, has realised that Etihad’s on-going investment in new aircraft allows it to get a head start on the Emirates-Qantas tie-up. While the latter two carriers must wait until the second quarter of next year to ratify their plans, Virgin Australia and Etihad are looking to boost services between Australia and the UAE and beyond.

Etihad takes deliveries of its 787-9s, for which it is the biggest customer to date, as well as A380s around mid-decade; which allows it not just the opportunity to open up long-range routes that were previously only serviceable with stop-offs, but also to cut fuel bills. Even with the 777-300ERs that it is inducting, Etihad is, through its partnership with Virgin Australia, snaring market share and valuable high yield business traffic away from Qantas and Asia through its Abu Dhabi hub.

Through its ownership and partnership with Air Berlin, Etihad has even more options for customer connections to and through Europe. As well as organic growth, Etihad is securing inorganic.

So why did Emirates entertain Qantas?

Well, there are a number of reasons but, in short, Emirates has effectively pounced on its prey in the same way a lioness does to feed her cubs. Qantas, for all its past glory, is a spent force. Without Jetstar propping it up, the airline would have gone to the wall. It has damaged its future by squandering the coveted slots for the 787-9 by cancelling orders for 35 of them, when it could just have easily deferred deliveries. Those slots have already been taken up by customers.

So while Qantas lumbers around with gas-guzzling A330s, it will have to wait until 2016 before it can realistically get its hands on a 787-9, assuming of course that it hasn’t ditched its remaining purchase rights!

Emirates, with orders for 777-300ERs, A380s and A350s, is already geared up for the future. By giving Qantas a home in Dubai International Airport’s Terminal Three it should not be seen as some joining of equals. Emirates’ decision is one of mercy on a poor participant.

Qantas may well enjoy the new kangaroo route through the GCC but the one aspect it cannot defend against is the very likely probability of its high yield and/or leisure traffic filtering off on to Emirates-liveried aircraft in Dubai for onward travel.

Qantas is retiring its ageing 747-400 fleet; its A330s are not fuel efficient against the likes of the 787 family or 777 family, and Emirates has hedged its future growth by making sure it has the aircraft inventory in place to cope with demand.

Throw into the mix the spectre and equally frenetic growth of low-cost airlines in the GCC, thanks to innovators like Air Arabia and the relentless growth shown by a young flydubai, and Qantas will have it all to do. There is simply no way that Emirates will allow its planned partner to siphon off traffic for its own ends.

And where does that leave the likes of Qatar Airways, British Airways and Jetstar? Qatar Airways has not shown any enthusiasm at all for entertaining British Airways. And rightly so.

BA is mired in its own angst due to a struggling Iberia. The much-vaunted synergies that the British Airways-Iberia merger was supposed to have brought are taking far too long to realise. BA, perhaps, should instead look to focus with Emirates and Qantas in Dubai.

For Jetstar, the sad reality is that Qantas’s termination of the 787-9s means that its plans for services to Europe will be dropped. Forever.

Jetstar will remain a low-cost player in the domestic, regional and Asian market, but will be exposed more heavily to the aggressive growth that will accompany the expansion of rivals like Scoot and the two planned long-haul start-ups that Lion Air wants to set up by mid decade – ironically using 787s that may well have been vacated thanks to Qantas’s order cancellation.

Like Qantas, Jetstar cannot rely on the A330 forever.

While the orders it has for Airbus A320neos will address the regional and domestic replacement of its existing A320 fleet, the 787 is a much-needed aircraft for it to realise its true potential.

Of course, there is a great case for Jetstar to deploy the 787 to Dubai if conditions allow the Qantas-Emirates partnership to let in a long-haul, low-cost option. But the priority will always be given to Emirates’ smaller sibling in flydubai. While flydubai has not expressed a preference for any low-cost long-haul flights, that it is already operating its 737-800s on sectors over five hours means that it may well examine the possibility of augmenting Emirates expansion with a hybrid low-cost option that may well halt a Jetstar 787 ever landing in Dubai.

One thing is for certain though. With Qatar Airways and Etihad ready to up the ante, thanks to their own growing fleets, Emirates and Qantas will not have it all their own way.

Qantas’s domestic footprint assures it nothing.

Virgin Australia and Etihad have already shown that their partnership is ready, willing and able to throw resources behind their expansion. Qatar Airways, too, with its planned move to its new home at New Doha International Airport, coupled with the imminent arrival of its 787-8s, will give it the legs to expand to those Australian cities that it does not yet serve.

Qantas can ill afford to see its backyard overrun with rivals while it eyes another prize in Dubai.

Consumers of course, will be absolutely spoiled for choice.

The prospect of what we can see in terms of connectivity from Australia into Europe, via the Middle East has started to heat up. There will be pressure on fringe players like Gulf Air, Royal Jordanian Airlines, Saudia, Egyptair, Kuwait Airways and also Iraqi Airways.

When you look at what is on offer between the Arabian ‘Big Three’ today, you can only surmise that their desire to pull in more traffic to their hubs is going to be a foregone conclusion. But with so much at stake, no definitive assurance that the Emirates-Qantas tie-up will get the necessary approval at the first time of asking and without any changes remains to be seen. What is clear, however, is that the kangaroo route has changed direction – possibly for good.

  

The growth of  connections

 

Between the three big Gulf airlines – Emirates, Qatar Airways and Etihad – there are an ever-growing number of flights to Australia from the hubs in Dubai, Doha and Abu Dhabi.

Emirates has 70 flights a week across four Australian cities, Brisbane, Melbourne, Perth and Sydney.

Qatar Airways flies ten times a week to the country with daily services to Melbourne and three weekly flights to Perth.

Etihad has 21 flights a week from Abu Dhabi to Brisbane (via Singapore), Melbourne and Sydney.

As of November 1, Emirates planned to add to its tally with new services to Adelaide with four new weekly services – and from February 1, 2013, a daily flight. 

Emirates is also upping its weekly services to Perth from the current 14 to 19 flights from December. That service will go triple-daily in March, giving Emirates a whopping 84 flights per week Down Under.

Qatar Airways is also growing its Australian presence. In December it will increase frequencies to Perth to daily flights, giving it 14 flights per week, while the airline is looking to 2013 as a possible springboard for more cities to service. On the cards are Sydney, Brisbane and Adelaide.

Etihad will be increasing its flights to Brisbane to a daily service in February, giving it 25 flights per week to Australia. With its partner, Virgin Australia, the two airlines offer an additional three flights per week on the Sydney-Abu Dhabi route for a total of 28 flights per week.

 

 

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