The downgrade of Qantas’ credit rating to junk status by Standard & Poor’s has sparked serious concern for the future of the airline.
But the fact is the airline industry has largely been unprofitable since deregulation initiated by the US in 1978. The financial performance of airlines has subsequently become volatile and unstable, vulnerable to slight changes in economic conditions and government policies.
Price wars are inevitable in deregulated aviation markets that have eliminated entry barriers, but re-regulating the industry or re-nationalising a troubled airline like Qantas is not the solution, nor is direct government aid. All these options bear significant opportunity costs and create entry barriers which are unfair to new carriers and other airlines.
Qantas needs to constantly adjust to the ever-changing and deregulated environment. Strict cost control is one possible solution, but developing a long-term strategy through optimising its flight network and taking advantage of its strategic partners’ resources is equally important.
With the withdrawal from its European destinations, Qantas now needs to strengthen its Asia strategy as soon as possible. Singapore Airlines and Cathay Pacific are Qantas’ long standing rivals, on the Kangaroo route (Australia to Europe), and on most lucrative Asia-Pacific routes. China Southern, the largest carrier in the China-Australia market, has also become a serious challenger in recent years.
Cathay Pacific has already formed a strategic partnership with China’s flag carrier, Air China, through a share swap. A similar deal between Singapore Airlines and China Eastern was proposed but failed. Qantas was right to seize the opportunity and turn its two Chinese competitors, China Southern and China Eastern, into strategic partners in 2013. These two airlines are both SkyTeam members and there have been calls in China for the merger between them.
Take on Cathay Pacific
However, code-sharing with its Chinese partners is only one small step forward. Developing win-win and extensive cooperation is urgently needed to secure a long-term partnership. Given that a large number of Chinese passengers choose to travel to Australia via Hong Kong and Singapore, Qantas and its Chinese partners could particularly foster closer cooperation in these markets and feed passengers onto each other’s flight networks. This would challenge Cathay Pacific and Singapore Airlines’ comfort zones.
It is logical for Qantas to set Jetstar Asia and Jetstar Hong Kong in its rivals’ home bases, Singapore and Hong Kong. But setting up new carriers and launching new routes are always costly and risky.
Jetstar Hong Kong, a joint-venture between Qantas and China Eastern, remains grounded at this moment, awaiting government approval. Qantas may have underestimated Cathay Pacific’s resolution to block the launch of this new low cost carrier.
Cathay Pacific has long been able to exercise strong influence over the decisions of Hong Kong’s aviation authorities. In fact, it was difficult for China’s aviation authorities to negotiate flying rights for the Chinese carriers even after the 1997 handover. Dragonair, once controlled by China National Aviation Co., was only allowed to fly limited international routes to and from Hong Kong.
Australia and Singapore have the most liberalised aviation environments in the Asia-Pacific region, according to an APEC Policy Support Unit report published in 2011. Although Australia still retains a 49% cap on foreign investment in Australian international airlines it has allowed 100% foreign investment in domestic airlines. Australia has a relatively small domestic market due to its small population size.
Although a particular market may not be big enough to support more than one carrier, the market in which an airline can provide services would expand if more liberal bilateral and multilateral arrangements are pursued. Qantas should sustainably look beyond the Australian market and position itself as a major international player instead of engaging in frequent price wars with Virgin Australia in order to defend its domestic market share.
Seek a different form of government assistance
Therefore, what the government should do is not inject cash into the so-called “national” carrier. It should seek to help Australian airlines, including Qantas, gain access to new markets and push for the removal of unnecessary restrictions on air transport, as has been done in pursuing free trade agreements with China and other major Asian trading partners.
In the last three decades, many big names in the airline industry have experienced financial difficulties and subsequently taken refuge, or sought protections from uncertainty, in mergers. In many recent cases, the merging parties retained their separate brands and identities such as KLM-Air France, and British Airways and Iberia.
Why the fuss about seeing Qantas taken over or merged if it fails to save itself? We should have every confidence that the Qantas brand will not disappear given its long and successful history. It is still a valuable asset to its strategic partners and potential acquirers.