Saving the Red Roo overseas.

Disclaimer: I am, by no means, an expert in the aviation industry, let alone someone highly versed in aviation economics. Just throwing out a suggestion from what I understand of the industry, that's all.

Some of you might not realise my interests also lie with other industries beyond groups of girls singing and dancing in theaters and stages all over. If you only care about that latter aspect of me, I suggest you give this article a pass. On the other hand, if you'd like to see me discuss about airplanes, beyond my comfort zone, read on.

Let's face it: Qantas is struggling to make money right now. The recent structural split between its domestic and international operations highlights the difficulty Qantas is facing internationally, especially not only from the fast-paced growth of Virgin Australia but also from well-established Middle Eastern and Asian carriers, let alone from poor financial and economic conditions worldwide. One could assign recent mismanagement and operational failures - most notably the Qantas grounding incident and industrial action last year - to a certain Mr. Alan Joyce, the criticisms and attacks against him on such a ferocious scale which Yasushi Akimoto could never match in his entire lifetime. But I won't be joining the Greek chorus here. What I'm more interested in, however, is the operational side of things. 

Qantas International Now

You know, I might have got into this ad if I didn't ditch after 2 years as a young kid in this choir. True story. 

Even if you're not Aussie, Qantas is a familiar name in the travel industry, both itself and its low-cost carrier subsidiary, Jetstar. Once the poster child for airline safety, now tainted by various incidents, most notably the QF32 A380 one, it is currently under intense pressure to lift is operational and strategic performance amidst the backdrop of a sagging share price and perceived managerial incompetence. 

Qantas (International) currently flies to pretty much all six inhabitable continents around the world (although it also does do charter flights to Antarctica) and Jetstar's operations are heavily concentrated around the Asia-Pacific rim, so it's pretty hard to miss its presence, unless you live somewhere in like North Africa or Central Asia. It is part of the oneworld global alliance, which also includes familiar heavyweights like American Airlines, British Airways, Cathay Pacific and Japan Airlines, and like Singapore and Emirates, were one of the early A380 adopters with major flight hubs in Sydney, Melbourne and Singapore. 

But it's been a rocky road thus far. Previously mentioned managerial, competition, industrial action and global economic issues aside, it's 35-strong Boeing 787 fleet order has been delayed twice, hampering Qantas' fleet renewal plans, and Qantas itself, as a former state-owned entity, is limited by the provisions of the Qantas Sale Act 1992, limiting (among other things) total foreign equity investment in Qantas to 49% with each foreign investor unable to have more than a 25% stakeholding - on the other hand, Virgin Australia does not have such restrictions.

Whilst Qantas domestic is facing its own challenges at home against Virgin Australia and a resurgent Tiger Airways, Qantas international is cleanly in the red - hence the structural segmented split. With sagging global economic conditions, leading to lower consumer discretionary income levels and surging fuel prices, as well as the enforcement of the much-debated carbon tax and emissions trading schemes worldwide, Qantas management needs to act to ensure not just it maintains its competitiveness, but also its survival. 

Note that I won't be touching on Jetstar, as it's doing its own thing (and fairly well in fact) in the low-cost market and given that most full-service airline travel is by the well-heeled or for business purposes, there's little overlap between the two target markets - especially for corporates, as it's unlikely that businesses will trade from premium airlines (with their corporate accounts and frequent flyer programs) to low-cost carriers designed for leisure travellers and business travel is relatively more demand inelastic than for leisure. And since this article is about Qantas' international operations (which are of more critical interest), I'll be putting aside its domestic business and its New Zealand operations. 

With a little help from my (oneworld and Arabic) friends

N.B. Malaysia Airlines is scheduled to join in 2013.

Friends have benefits, right? Ironically, just look at the many partners of Virgin-ity (who isn't in any global alliance either). So Qantas should make use of them.

Americas

Current destinations: Los Angeles LAX, New York JFK (via LA), Dallas Fort-Worth, Honolulu, Santiago

Current friends: American Airlines, LAN

Current enemies: United Airlines, Delta Airlines + Virgin Australia, Air Canada

Qantas flies its A380 to LA from Melbourne and Sydney, and its 747-400ER to Dallas from Brisbane and Sydney. At the moment, it really needs the 787 for Dallas operations to make more economic sense, of which it can link straight into American's hub network out of Dallas. LA is a giant, Pacific "catch-all" hub so I don't see that changing. But what other options are there? Not everyone wants to go (or even likes to land in) LA. 

What about it's Asian partners? Could Qantas theoretically tap them on the shoulder? Cathay prefers to be a loner anyway, but how about Japan Airlines from Tokyo? Coming fresh out of restructuring, it enjoys trans-Pacific antitrust immunity with American and regularly serves many North American cities - many that Qantas doesn't serve itself. Qantas currently enjoys a codeshare partnership with American from LAX, but the problem is, not many people like LAX and would prefer a different route to get onto North American soil, especially if one wants to go to Canada (and hence try and avoid the USA altogether). 

Current (non-code shared) North American destinations from Tokyo on JAL

As shown on the picture above, cities of possible interest not currently serviced by Qantas could be Vancouver, Boston, Chicago, San Diego and San Francisco. Of course, for the USA cities, it could rely on its existing American code-share network instead. But for Vancouver, and if JAL decides to fly to other Canadian cities such as Toronto or Montreal with future fleet like the 787, transiting in Japan would be a much easier affair than in USA. Fifth-freedom rights currently prevent Qantas from operating beyond Tokyo itself, but it could latch onto JAL or American flights for greater access to North American destinations and any option from Tokyo avoids the need to arrive in LA completely. 

Central American access, especially to Mexico, is easily, and currently, obtained via American's convenient Dallas hub. Not much to speak of here. Same with Qantas' South American strategy, by flying the long and (profitability-speaking) thin service to Santiago and transiting to LAN's vast South American services from there. 

North Asia

Current destinations: Hong Kong, Tokyo, Shanghai

Current friends: Cathay Pacific, Japan Airlines
Current enemies: Singapore Airlines + Virgin Australia, China Southern, Air China, China Airlines, Korean Air, Asiana

With Asian economic growth already outpacing much of Europe and North America, there has been a renewed focus on Asian travel across the airline industry, especially when it comes to China. How should Qantas best take advantage of this?

Let's start with China and North Asia first. The problem, here, is Cathay. Air China's 17.5% stakeholding in Cathay Pacific might be a bit of concern for the rest of oneworld, fearing it could leave for Star Alliance completely. Moreover, its reluctance to partner with other airlines (due to competition on other routes, most noticeably London to Hong Kong) means oneworld has a less-than-favourable position in China. Adding another Chinese partner to oneworld (Hainan Airlines has been cited quite a few times recently) would add further fuel to the fire of Cathay's jealousy. Jetstar's planned joint-venture with China Eastern for a Hong Kong-based low-cost airline might cause a bit of annoyance on Cathay's part due to a potential loss of revenue for Cathay. On the other hand, Cathay's full-service subsidiary, Dragonair, has quite an extensive mainland China network from Hong Kong. 

I suggest oneworld better start getting back in bed with Cathay and Dragonair, if only for their access to its mainland Chinese network.  Of course, Cathay would also want them to return back the favour, which might see concessions on the rest of oneworld's part to Europe - most notably from British Airways (of whom it directly competes with from Hong Kong) and Japan Airlines - or at least the strengthening of ties.

Nevertheless, whatever oneworld or Cathay does, this is a Qantas article, not a oneworld one. With Cathay dominating the Australia to Hong Kong airline market, unless it can form a oneworld-based mainland China strategy with Cathay to Australia, Qantas might have no other choice but to look at other options elsewhere. But what else is there? Looking at Japan Airlines' options from Tokyo Narita (which it serves Beijing, Dalian, Taipei, Guangzhou and Shanghai), it doesn't even come close to matching Cathay/Dragonair's network into China. Some of these options (e.g. Guangzhou and Shanghai) are better off served by itself or through Cathay anyway. 

What about if Cathay decides to ditch oneworld for Star Alliance? Qantas could look to see a strengthening of ties between it and its existing codeshare partner in China Eastern from Shanghai, and/or fly into Beijing and hook up with Hainan Airlines, in which it has a strong domestic network presence. The latter option looks particularly appetising if Hainan Airlines decides to join oneworld, due to China Eastern's links with Skyteam. Either options, at least in the short-medium term, would be decent replacements for Cathay, in regards to mainland China access.

As for the rest of North Asia, namely Japan and Korea? Japan would be well sorted via a code-share partnership with Japan Airlines. Consequently, there would be no need to send its own planes to Korea - due to its geographical advantage, the JAL partnership could extend to Korean flights as well. Or it could also use Cathay/Dragonair from Hong Kong.

South-East and Central Asia
Current destinations: Singapore, Bangkok, Jakarta
Current friends: Malaysia Airlines (2013), SriLankan Airlines (2013)
Current enemies: Singapore Airlines + Virgin Australia, Thai Airways, Garuda Indonesia, Air India

There's not much to be said here: Qantas desperately needs Malaysia Airlines, and fast, as the Singapore + Virgin combination dominates ASEAN travel as far as the Australian airline industry is concerned. Malaysia has an extensive South-East Asian and Indian subcontinent network that Qantas would love to get access to. I'd go even further and suggest pulling out of Bangkok, which Malaysia Airlines can comfortably serve from Kuala Lumpur. There is another reason as well, which I'll get to later when I talk about Europe.

For Central Asia, Qantas could either take advantage of connections with Malaysia Airlines' existing network, or wait until its other new oneworld entrant, SriLankan Airlines, comes online. Such a two-pronged oneworld-based partnership could just be what Qantas needs.

EMEIA
Current destinations: London (Heathrow), Frankfurt, Johannesburg
Current friends: British Airways, Cathay Pacific, Air Berlin, Finnair, Japan Airlines, Royal Jordanian
Current enemies: Singapore Airlines + Virgin Australia + Etihad Airways, Emirates Airlines, Qatar Airways, China Southern, China Eastern, Air China, Thai Airways


With the European debt crisis firmly on everybody's lips, air travel seems to be the least of many a European's worries. Thus the decline in air travel in/outbound, as well as sagging profits in European air travel. Not only that, but where there are profits, the Middle Eastern airlines have the biggest advantage - both geographic and state-based taxation benefits. 


It is high time Qantas taps one of these Middle Eastern carriers on the shoulder. Obviously, Etihad's taken by Virgin Australia, so you have Emirates and Qatar left. Emirates prefers to send a combined A380 and 777 assault on the Australian market by itself instead, so a more natural partner might be Qatar. Yes, Emirates' EMEIA network is far larger than Qatar's to both Europe and Africa, but it avoids stepping over existing oneworld relationships by going with Qatar. And for Qatar, if it really wants to start clawing in some market share against Emirates (and Etihad), using Qantas (and oneworld) might be a good way to start. 

Larger image here

For destinations not served by Qatar, Qantas could utilise its other oneworld partners - for example, Cathay to Amsterdam and Finnair to Helsinki (both from Hong Kong). In this way, Qantas could just send planes to Hong Kong, Singapore and especially to Doha, and have the ability to connect to a lot more places in Europe than it would otherwise be possible if Qantas did it themselves or asked its customers to transit through London. 


Also, because of Doha's (or any Middle-Eastern location) geographical advantage, it opens up access to vital destinations of economic importance in Africa for Qantas e.g. Nairobi and Cairo. Qantas already has flights to southern Africa from Sydney; however, central and northern Africa, places with vast resources, is now opened up too thanks to a Qatar-based partnership. 

A (somewhat) Capital-light Strategy

If only...

Ultimately, Qantas should aim to have a multiple-tier fleet strategy. Unless otherwise stated, assume that all flights are on A330s or its eventual successor, the 787, unless there is sufficient demand to fly a 747/A380 there.

For America, the following fleet and destination strategy could be implemented.

• Retain current A380 services between Melbourne and Sydney to LA (and onto New York). Brisbane could also be served by one, or eventually a 787 depending on demand. 
• Move to a 787 between Sydney and Dallas, as well as for Santiago, or just use LAN's existing services to Sydney instead of sending its own plane there. It's profitability on this route is pretty thin anyway, but demand could change over time. 
• Launch a code-share trans-Pacific partnership with Japan Airlines and/or American for flights from Tokyo. Consequently, increase flights to Tokyo from Sydney and re-introduce (either JAL or Qantas) services between it and Melbourne or Brisbane (or both if sustainable - JAL could do Brisbane whilst Qantas for Melbourne, or vice versa etc.), aiming for at least daily services in all cases. 
• Central American services via Dallas-Fort Worth (American) and South American services via Santiago (LAN). 
• Ditch Honolulu and transfer that over to Jetstar exclusively for the time being. Same with Fiji. 

Therefore:

Sydney: Los Angeles/NYC (A380), Dallas Fort-Worth, AA/JAL via Tokyo (Qantas & JAL), Santiago. 

Melbourne: Los Angeles/NYC (A380), AA/JAL via Tokyo (Qantas or JAL).

Brisbane: Los Angeles/NYC, AA/JAL via Tokyo (Qantas or JAL). 

Perth: domestic connection to Sydney or Melbourne.

Adelaide: domestic connection to Sydney or Melbourne. 

For Asia and EMEIA:

• Target cities: Singapore, Hong Kong, Kuala Lumpur, Shanghai or Beijing, Tokyo, Doha
• Ditch Bangkok, or at least temporarily suspend operations there until Qantas can re-introduce services there when its other European and Asian operations are more stable, profitability-wise. Same with Jakarta. 
• Singapore: A380 from Sydney, and then onwards to London Heathrow, as per current operations. This will be the only Qantas-operated service to London. Melbourne, Brisbane and Perth to Singapore, but no further. Can co-ordinate with BA's own Sydney services to London via Singapore, too. 
• Hong Kong: Sydney, Brisbane, and Melbourne flights to connect onto Cathay's, BA's or Finnair's flights to Amsterdam, London or Helsinki respectively, as well as connections to China.
• Doha: Qantas A380 from Sydney; Melbourne, Brisbane and Perth to be served via codesharing off Qatar's own services. 
• Shanghai (Beijing): Sydney flights into Shanghai (Beijing) connecting onto China Eastern (Hainan Airlines)'s network. Melbourne could be served here, too, whereas Brisbane can use Hong Kong (via Cathay/Dragonair) or codeshared with China Eastern (Hainan Airlines) for access to China. 
• Tokyo: As stated above, Sydney flights into Tokyo, with either a service from Melbourne or Brisbane along with possible codesharing for the other city pair. 
• Kuala Lumpur: The entire operation into Kuala Lumpur and beyond could be done without Qantas flights; instead, utilising code-sharing and frequent flyer partnerships - Malaysia is already sending in A380s to Sydney and is considering Melbourne, too. 
• Access to Central Asia via Kuala Lumpur, or send a plane from Sydney and/or Melbourne to Colombo and/or Mumbai. 

Therefore:

Sydney: Singapore + London-Heathrow (A380), Doha (A380), Kuala Lumpur (MH), Hong Kong, Shanghai/Beijing, Tokyo

Melbourne: Singapore, Doha (Qatar), Kuala Lumpur (MH), Hong Kong, Shanghai/Beijing, Tokyo (QF or JAL)

Brisbane: Singapore, Doha (Qatar), Hong Kong, Kuala Lumpur (MH),  Shanghai (China Eastern)/Beijing (Hainan), Tokyo (QF or JAL)

Perth: Singapore, Doha (Qatar), Kuala Lumpur (MH), Hong Kong (Cathay)

Adelaide: Singapore, Hong Kong (Cathay), Kuala Lumpur (MH)

• European access by Singapore (London), Doha (Qatar's network), Kuala Lumpur (London, Paris, Amsterdam, Frankfurt) and Hong Kong (London via BA/Cathay; Amsterdam, Rome via Cathay; Helsinki via Finnair). 
• South-East Asian access by Kuala Lumpur. 
• China access by Hong Kong and Shanghai/Beijing.
• North Asia access by Tokyo. 
• Central Asia access by Kuala Lumpur (or Colombo/Mumbai in the future with Sri Lankan/Qantas). 

Notice how most of the planes are being sent to Asian cities, with a noticeable reduction in European and American flights from Qantas - gone is the Frankfurt flight, for example. In fact, if Qantas was really stingy, it could just get customers to access New York via a codeshared flight from Tokyo instead of passing through Los Angeles or Dallas (and onto American for the final leg), but some do prefer an entirely Qantas-operated service and the options are there to choose anyway. Or Qantas could just pare everything down to just flying into Doha, Tokyo and Singapore-London, and just codeshare with Cathay and Malaysia Airlines if it really wants to pursue a truly capital-light strategy, akin to what Virgin Australia is doing right now - just on a bigger scale. 

Conclusion

For this to be successful though, Qantas really needs more medium-long ranged aircraft like the A330 and, more importantly, the 787. It missed the boat when it came to 777 orders, choosing to hedge its bets on the 787, so that's not a possibility. Right now, it has to make do with a motley combination of A380, A330 and 747 - and 767s in some cases. 

In any case, with a tough European and American market that is slim on profits and exhibiting limited growth opportunities, Qantas needs to refocus its operations on Asia and the Middle East - the latter providing better opportunities into Europe than if it still stuck to loving London (and BA) - if it wants to claw itself back into profitability and ultimately, into the hearts and minds of many an Australian traveller.