Bloomberg News

Emirates Seeks Closer Qantas Ties for Australian Growth

June 10, 2012

Emirates Seeks Closer Qantas Ties as Australian Business Grows

Emirates could take a stake of as much as 30 percent in a Qantas domestic unit if the international operations were separated, Sydney-based Deutsche Bank analyst Cameron McDonald wrote in a May 24 note. Photographer: Antoine Antoniol/Bloomberg

Emirates Airline, the world’s largest carrier by international passenger traffic, will seek deeper ties with Qantas Airways Ltd. (QAN), the Australian company struggling with escalating losses on long-haul routes.

The Dubai-based carrier is examining a “commercial arrangement” with Qantas to benefit from the Australian aviation market while stopping short of an equity stake in the Sydney-based airline, Emirates president Tim Clark said in an interview with Bloomberg Television in Beijing today.

Qantas slumped 32 percent last week after forecasting its first annual net loss as a publicly traded company as unprofitable long-haul routes and restructuring charges wipe out earnings from domestic flights, where it has about 65 percent of the market. A deeper alliance with Emirates would allow the Australian airline to drop loss-making international services, while the Dubai-based carrier could take international passengers connecting from Qantas’s domestic flights.

“The Australian market has been one that is hugely successful for Emirates,” Clark said today. “We want to grow our business there and it makes a lot of sense to come to a commercial arrangement with the major player in Australia.”

Qantas Chief Executive Officer Alan Joyce said June 5 that the carrier would make its first annual net loss, sparking a four-day stock slump which wiped about A$1 billion ($1 billion) off the value of the company and pushed its stock below A$1 for the first time since it first sold shares to the public in 1995.

Joyce declined to talk to reporters in Beijing, where he was attending the International Air Transport Association annual meeting.

Credit Downgrade

Losses before interest and tax on Qantas’s international network will total A$450 million in the year ending June 30, compared with a loss of A$216 million a year earlier, the company said. The domestic routes will post profit of about A$600 million, the airline said.

Standard & Poor’s said June 8 it was considering a downgrade of Qantas’s credit ratings, its highest for any airline.

Qantas “have to do something or the shareholders will be looking to get rid of the Qantas board and Alan Joyce,” Neil Hansford, chairman of consultants Strategic Aviation Solutions, said by phone from Salamander Bay, Australia. “The international business can only get worse.”

Etihad Airways PJSC, the Middle East’s third-largest carrier, said June 5 it had bought 5 percent of Virgin Australia Holdings Ltd. (VAH), the country’s second-ranked carrier.

“If Emirates are going to be successful against Etihad they need the feed from Qantas’s domestic network,” said Hansford.

One-stop Destinations

Qantas and partners, including British Airways (IAG), only fly one-stop to five destinations in Europe and the Middle East from Australia. Virgin Australia is able to fly one-stop to 19 destinations in the region from Sydney, Melbourne and Brisbane through a tie-up with Abu Dhabi-based Etihad.

Qantas’s mainline carrier now flies to just 16 destinations outside Australia and the South Pacific. The Australian airline could potentially add more than 40 one-stop destinations to Europe and the Middle East through an Emirates deal, based on the Dubai airline’s website.

No Equity

Several major destinations, including Beijing, Osaka, Seoul, and New Delhi, are run only as shared flight codes with partners or operated by Qantas’s budget carrier Jetstar.

While Clark said Emirates’s relationship with Qantas was “strong”, he said “it won’t get to a situation where we will be taking equity.”

Emirates could take a stake of as much as 30 percent in a Qantas domestic unit if the international operations were separated, Sydney-based Deutsche Bank analyst Cameron McDonald wrote in a May 24 note.

Qantas has been hit by higher oil prices, which will help boost annual fuel costs by A$700 million to A$4.4 billion, Qantas said June 4. The price of jet fuel has averaged $127.30 a barrel in Singapore since June 30, 18 percent higher than a year earlier, according to data compiled by Bloomberg.

The carrier has a BBB rating from S&P, the highest among airlines worldwide. The credit ratings company’s review, which will take as long as 90 days, will probably only result in a one level reduction, S&P said. That would reduce the carrier to the lowest investment grade of BBB-, the same ranking as Southwest Airlines Co. (LUV:US) and Deutsche Lufthansa AG. Those are the only carriers not rated as junk by S&P.

To contact the reporters on this story: Zeb Eckert in Hong Kong at zeckert1@bloomberg.net; David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net


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