Bold Strategic Move 1: Airline alliances

On 6 September 2012 Qantas fired a salvo, announcing an alliance with Emirates.

A Middle Eastern affair in the air.

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In August, Alan Joyce, CEO of Australia’s national carrier, Qantas, took a well-reported swipe at rival Virgin’s alliance with United Arab Emirates airline Etihad, remarking that it looked “like being offered the bike before the BMW”.

In the wake of the successful partnership Joyce and his cohorts had formed earlier this year with that other mid-east airline, Emirates, the outspoken CEO was clearly suggesting that Virgin’s alliance was barely worthy of comparison.

While Qantas has significantly ramped up its offering by aligning with Emirates, renowned for its impeccable service standards, many industry players are mindful that the smaller offshoot of Richard Branson’s airline empire had the idea first.

In 2010 Virgin Blue was the disrupter when it contracted a strategic alliance with Abu Dhabi-based Etihad under the stewardship of its new CEO, former Qantas senior executive John Borghetti, who joined with grand plans to change the DNA of the no-frills carrier.

The deal, involving joint pricing and scheduling and full codesharing between the two carriers, was part of Borghetti’s three‑year plan to increase Virgin’s share of the corporate market.

The airline’s various brands were swiftly consolidated under the main moniker, Virgin Australia, and the brand received a complete overhaul.

The number of business class seats was increased, member lounges overhauled and new uniforms and livery were introduced.

Last year, ahead of its strategy schedule, the carrier grabbed 20 per cent of the domestic corporate market and also won Domestic Airline of the Year, a prize formerly firmly held by Qantas after the demise of Ansett Airlines in 2001. 

Qantas CEO Alan Joyce, left, and Emirates president Tim Clark.

Qantas CEO Alan Joyce, left, and Emirates president Tim Clark.

Meanwhile, the iconic Flying Kangaroo was suffering, its international arm struggling to compete on European routes with the likes of Emirates and Etihad.

On 6 September 2012 Qantas fired a salvo, announcing an alliance with Emirates. The 10-year partnership was to go beyond codesharing to encompass integrated network collaboration, with coordinated pricing, sales and scheduling.

In March the competition regulator gave the deal its blessing, for five years.

While the Qantas and Virgin strategies have a similar flavour, there are pros and cons for each.

Qantas wins on the number of ports it has access to via Emirates’ Dubai hub: 33 to Etihad’s 18 (although the latter claims it has a growing network in Europe, where it is focusing on developing secondary hubs in Lebanon and Greece).

Previously Qantas accessed Europe through only two ports, Frankfurt and London (it still flies to the UK capital on a limited service).

Then there’s scale, which is everything in the international airline business.

Last year, according to airline analyst Aspire Aviation, Emirates transported 39.4 million passengers to Etihad’s 10.2 million, although the latter’s passenger numbers are climbing at a higher rate.

While size and reach clearly count for Joyce, his counterpart at Virgin (who was with Qantas for 36 years) scores points for the innovative concept – being first to recognise the appeal of joining with one of the premium Middle East carriers.

“If you’ve got a lower price and a better product, it’s virtually a no‑brainer,” says consultant Dr Tony Webber, a former Qantas chief economist. “John Borghetti recognised the value in forming a relationship, because you can’t compete with them on product, price and destinations.”

While Qantas is slightly later to the game, the Emirates deal provides two critical competitive advantages.

“Qantas was getting crushed competitively by Emirates and to a lesser extent Etihad,” Webber says. “The alliance has taken all that competitive threat away, plus it has given them the opportunity to fly more people directly into Europe. The strategic benefit to Emirates is that it has terrific access to Qantas’s domestic network.”

Some 8 to 10 per cent of Australian domestic travel involves international connecting flights or domestic journeys by foreign travellers. “There are benefits to the brand to be able to offer your services not only internationally but domestically as well,” says Webber.

The strategic benefit to Emirates is that it has terrific access to Qantas’s domestic network.

The strategic benefit to Emirates is that it has terrific access to Qantas’s domestic network.

And it’s really at home where the two local carriers are slugging it out for market share. Qantas is still the clear winner with 65 per cent of the domestic market and 85 per cent of the local corporate market.

However, Qantas’s Asian hub for 66 years, Singapore, part of the traditional route to Europe, is no more.

Passengers now fly 14 hours to Dubai instead of just 7.5 hours for their first leg to Singapore, whereas Virgin, through its alliance with Singapore Airlines, still retains the island city as a hub for passengers looking to break the journey.

“A subset of people just love a stopover in Asia; around 50 per cent of people like to break up the journey. Some, particularly families, can’t sit on the plane for more than 10 hours and will just detest that really long sector [that Qantas and Emirates has] at the start,” says Webber.

This article is from the October 2013 issue of INTHEBLACK magazine.

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