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Qantas Teams With Emirates, Ends British Airways Alliance

September 05, 2012

Qantas Ends 17-Year British Airways Tie-Up for Emirates Alliance

A partnership with Emirates, the world’s largest carrier by international passenger traffic, would allow Qantas to cut loss-making long-haul routes and focus on its profitable domestic and budget airlines. Photographer: Jerome Favre/Bloomberg

Qantas Airways Ltd. (QAN) will work with Emirates on European routes as it ends a partnership with British Airways after almost two decades in a bid to end losses on international operations.

The accord will let Qantas add more than 60 new one-stop destinations to its network, as it shifts its European hub to Dubai from Singapore, according to a statement today. The two airlines will offer 98 flights a week to Dubai under the 10-year agreement, which is due to begin in April.

Qantas jumped in Sydney trading on speculation cooperation with the world’s largest international carrier and changes to its Asian services will help it turn around long-haul operations that lost A$450 million ($459 million) in the year ended June. The Sydney-based carrier has struggled to compete with fast- growing Middle East airlines that have used hubs in the Gulf to offer a wider range of connections between Australia and Europe.

“It’s a huge step in the right direction,” said Sondal Bensan, an analyst at BT Investment Management Ltd., whose parent Westpac Banking Corp. owns 5 percent of Qantas. “Take this in conjunction with the fleet deal with Boeing and it’s a material change in both their balance sheet and their operating profit outlook.”

Qantas Aug. 23 canceled an order for 35 Boeing Co. (BA:US) 787 Dreamliners. It also got $433 million in compensation and refunds from the planemaker.

The Emirates deal will probably be worth more than A$90 million a year to Qantas, as it will boost the carrier’s appeal to corporate travelers and grow its international business, Bensan said.

Coordinated Pricing

The two airlines will coordinate pricing, sales and scheduling under the new accord, which still requires regulatory approval. The airlines will also align their frequent-flier programs, allowing passengers to earn points on both carriers’ flights. Neither company will buy equity in the other.

Qantas will begin services to Dubai from Melbourne and Sydney using Airbus SAS A380s. These services will continue to London. The carrier will halt routes to Europe via Singapore and end flights to Frankfurt.

The deal will give Qantas passengers one-stop services to more than 70 Emirates destinations in Europe, the Middle East and Africa. Emirates will gain access to Qantas’ domestic network covering more than 50 destinations. The two airlines will also coordinate Australia-New Zealand and Australia- Southeast Asia services.

“This is the most significant partnership the Qantas Group has ever formed,” Chief Executive Officer Alan Joyce said in a statement.

Asia Services

The Australian carrier will also reorganize services to Asia to offer passengers a 25 percent increase in connections via Singapore. The carrier will boost dedicated capacity to the city-state as it shifts Europe services to Dubai, it said.

The airline jumped 5.3 percent to A$1.185 at 12:49 p.m. in Sydney, paring this year’s decline to 19 percent. Virgin Australia Holdings Ltd. (VAH), which cooperates with Abu Dhabi-based Etihad Airways PJSC on European routes, dropped 2.2 percent.

Qantas’ tie-up with International Consolidated Airlines Group’s British Airways will end in March, according to a separate statement. Qantas will remain in the Oneworld alliance.

Joyce has also already pared overseas services, delayed the arrival of new A380s and split international operations into a new unit in a bid to end losses. The airline posted its first annual net loss since listing in the year ended June.

Credit Rating

Standard & Poor’s placed the airline’s BBB rating on review for a possible downgrade on June 8. The company and Southwest Airlines Co. (LUV:US) are the only two carriers worldwide to have investment grade ratings from both S&P and Moody’s Investors Service.

S&P’s 90-day review period for Qantas expires today. It can be extended, spokesman Richard Noonan said this week. The ratings company will probably need more details on the financial side of the deal before it can complete its review, BT’s Bensan said.

The extra yield investors demand to hold Qantas’s $513.6 million of 6.05 percent bonds due in April 2016 instead of similar-maturity Treasuries was little changed at 472 basis points as of 12:17 p.m. in Sydney, according to BNP Paribas SA prices.

To contact the reporter on this story: 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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