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Emirates says "No" to stake in Qantas

By David Flynn     Filed under: emirates, qantas

Emirates has ruled out taking a stake in Qantas, despite the much-trumpeted partnership between the two airlines.

Although foreign airlines are allowed to hold as much as 35% of Qantas under the terms of the Qantas Sale Act, Emirates President & CEO Tim Clark over the weekend ruled out investment in the beleaguered airline, which faces record losses and has seen its credit rating downgraded to 'junk' status.

"Equity is not on the table” Clark told Geoffrey Thomas, editor of the AirlineRatings website.

Clark also took a shot at Gulf competitor and Virgin Australia partner Etihad Airways, admitting that while he “will watch [the Qantas situation] carefully”, Emirates didn't possess Etihad's "bottomless pit of cash."

Etihad holds 20% of Virgin Australia – a share valued around A$250m – and expects that stake to increase to 21.2% as a result of Virgin's call for an additional $350 million of capital, pending approval from Australia's Foreign Investment Review Board.

Read: Virgin Australia – Air New Zealand, Etihad & Singapore Airlines take bigger stake

Qantas is downplaying Clark's statement, with a Qantas spokesman telling Australian Business Traveller "We’ve been clear since day one that our partnership with Emirates isn’t about equity or ownership."

"It’s about network, frequency, lounges, loyalty programs and customer experience."

A foreign leg-up for the Flying Kangaroo?

Much of the current debate about "the level playing field" has cited the limits imposed by the Qantas Sale Act in comparison to Virgin Australia's lack of similar foreign ownership restrictions.

Under the Act any single foreign investor is limited to a 25% stake in the airline. Foreign airlines can hold no more than 35% in total, while total foreign ownership is capped at 49%.

However, not a single Qantas partner airline – not Emirates, not any of the oneworld allies, nor per-region partners such as China Eastern or new chum China Southern – has taken out any equity in the Flying Kangaroo.

Qantas Group CEO Alan Joyce has often called the Qantas Sale Act "the elephant in the room" when discussing potential equity opportunities with other airlines including British Airways, Malaysian Airlines and even Singapore Airways.

Joyce has consistently maintained that the airline is not seeking a handout from the Australian government, and would more likely welcome changes to the Qantas Sale Act and a government guarantee of its debt.

The former could improve the chances of investment from foreign airlines, while the latter could help Qantas regain its investment-grade credit rating and lead to reduced interest rates on borrowings, leasing and foreign exchange hedging costs compared to 'junk' status.

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About David Flynn

David Flynn is the editor of Australian Business Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

 

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1 on 16/12/13 by ArnoldMarsupial

I'd be interested to see who would want to invest in QANTAS, even if the foreign ownership laws are changed. QANTAS's high cost base, low staff moral, lack of direction from management all conspire against it. I still can't believe their CEO would ground the airline over EBA negotiations that recur every 3-4 years and still have a job! While QANTAS is happy to go and set up domestically in NZ and Asia, the level palying field they say the require isn't reciprocated with Open Skies in Australia. Bilateral rights are still negotiated between countries carriers and Australia.

1 on 17/12/13 by DB

When you're being held to ransom by a group of greedy unions and key staff members that don't have the long-term foresight to see the potential damage being done to Qantas, - as a CEO you have very little choice but to draw a line in the sand and say enough is enough.  The decision to ground the fleet that day sent a very clear message to the unions that their requests were beyond unreasonable.   Ever wondered why Qantas staff are so highly paid compared to other airlines, and why they're struggling now?  You can thank, in part,  the unions and their constant push to squeeze more and more out of the airline.   Whilst the grounding was inconvenient for the public, and a painful experience for those involved, in was in my opinion very necessary.   

2 on 16/12/13 by MartinS

Any investment is likely to come from Asian or Middle East airlines. They would be interested in the domestic, trans-Tasman and trans-Pacific operations. They would probably want to see a cut back in Qantas' operation to Asia and Europe, routes on which Qantas struggle to compete anyway because competitors have lower cost bases and, for some at least, better service.China Southern could acquire a significant stake in Qantas and cut its international operations, leaving just domestic, New Zealand, North America, South Africa, Hong Kong, Singapore and Tokyo. Jetstar might remain to service the pacific islands, Bali, Phuket, and the Japanese tourist routes. CZ could route to South America via Sydney.

A Middle East airline partner would give Qantas more scope to play in the Australia to/from Asia market. The more anglosphere senior management of the Middle East airlines would probably make management co-operation easier too.

Who are the likely investors?

- Emirates (Rules themselves out today, but could change their mind if a competitor was about to acquire a major stake in Qantas)

- China Southern (Australia is a significant proportion of CZ's int'l network. Would the CAAC allow it? Would the FIRB approve it?)

- Singapore (Unlikely now they've invested in Virgin, but it doesn't pay to rule out the unlikely when considering airline co-operation. Would probably provoke Emirates to make pre-emptive investment in Qantas.)

- Cathay Pacific (Is CX capable of serious co-operation with Qantas?)

- Garuda (Would have huge potential to hub Australian traffic via Indonesia with minimal backtracking. Could lead to very significant cuts in QF's Asian network. But would require Garuda to substantially grow its European presence to make sense.)

1 on 16/12/13 by Robert

MartinS,I agree with most all you state.But QF operations costs are some 27% plus over and above any any and all larger comercial carriers not to menchion the many low cost operators to Australia.I would only see foreign airines/investors interested if structual change is possible. The Australian way would not see pilots/all staff accepting payy cuts.Would anyone operate a business in the current enviroment.

2 on 16/12/13 by spinoza

I think no one will express interest now, because if a Chinese airline says they will take over Qantas if the sale act is changed, the act will not be changed. If it looks like it won't imminently be taken over, there'll be less public outcry and less likely politicians will chicken out. Once the act is changed, surely an Asian or Middle Eastern airline will move in. A 20% stake isn't that meaningful, if it was, they could do it today. I *think* if you are going to buy more than 20% you need to make a takeover offer, which I think is worthwhile.

The appeal being, with a network such as CX or EK, you can keep the profitable domestic routes, and merge / consolidate all the international routes (basically cut all of QF's unprofitable international routes), and still keep the value of the QFF program. Do most of the maintenance outside of Australia. Such a Qantas would be actually quite profitable. 

It would make no sense for a European airline to buy Qantas, since there's so little route overlap, they wouldn't be able to cut Qantas' international routes. American airlines wouldn't have the money to, and probably doesn't make that much sense either.

I don't think FIRB would approve a Chinese airline owning it, since the public would view it as de facto Chinese govt controlled. 

No, CX and QF cannot cooperate, so would be great if CX could just take it over, hostile or otherwise. 

3 on 16/12/13 by 7OD

I imagine that a major reason for foreign investment would be to secure traffic rights across the pacific. I have heard that Emirates intends to use a large portion of their recently ordered 777-X and A380 aircraft for fifth freedom flights, and if they were able to secure similar rights through Australia by investing in QANTAS, then they probably would. 

4 on 16/12/13 by tronixstuff

Large investments in QF will only happen if new management can come along with it. No organisation would pour their own money into QF group with the current management.

5 on 16/12/13 by eminere

Emirates is wise.

6 on 16/12/13 by jetsetter86

It would be very intersting to see if QF flyers start moving all of their earning activity on to EK metal given qantas' impending doom.... I mean what is it that Alan Joyce and the board have up their sleves to fix the problem?? Wonder if they have comissioned any analysisi into current routes, pricing and demand on those routes (potential revenue) and their current cost base. If they got bums on seats and filled the planes as much as possible would they make money? is it just a load issue or are the costs out of control? Any Qantas financial analysts care to comment?

7 on 16/12/13 by flyhigh86

Qantas - The worlds most experieinced airline? So comparing the International product with other airlines of choice, you will receive basic meals, outdated IFE systems, old crew near retirement age and offcourse old aircraft, especially if living in Brisbane where 767 and 747 are amongst the most common wide bodied aircraft flown from here. Would Qantas have financial problems if they lifted their game? If they invested in new aircraft, lowering the average fleet age from 7.5 years to 2 - 4 years? We are talking about a well established airline, so why does it take so long to upgrade all aircraft? You would think they could have made a mass order and immediatly scrap older aircraft once the new ones arrived. Fair call the 787 was delayed but how about moving towards A330 to replace the 767 or bringing the remaining A380 order forward to replace all 747's? A good example on the delays with "upgrading Qantas" is the J class upgrade on A330. Why should it take 18 months to upgrade? By then, the competitor will come up with something much better again.  Will the same problem exist if the product offered was the same as Asian / UAE compeditors? If they were on par you would find that more people from International destinations will choose to fly Qantas. I am not saying that all of the problems arise from International operations but the way the company do things. 

1 on 16/12/13 by MartinS

As you say the 787 delay was outside Qantas' control, and I'm not sure it would have been possible to bring forward A380 deliveries (have there been any spare slots in the A380 production schedule?). The fleet is getting old. Qantas should have made an earlier decision on fleet replacement. What could it do whilst waiting for deliveries? There aren't a lot of latest model aircraft available. If they wanted a few A340s then no problem, but short term leases on shiny new A330 or 777 are another matter. And Qantas don't have the capital to order big in the expectation they could lease out aircraft if they don't need them when delivery is due.

I don't understand Qantas' strategy with the J class product. Surely with a high cost base is would make sense to offer a top-notch product for which you can charge a premium price. Qantas has done ok on trans-Pacific where it was competing with the second rate US airline product, but going to Asia or Europe most customers are going to prefer the CX or SQ product. Direct aisle access from all J seats is where the premium market is at.

Why doesn't Qantas get totally slaughtered in this market? Is it because (outbound at least) it relies on the corporate account discounts it offers and frequent flyer scheme loyalty. Both of these are dependent upon having a reasonable sized international network that can serve the bulk of business customers' needs.

8 on 16/12/13 by Really

Time for new mangement.Too many ex Ansett managers running the joint.Is it heading in the same direction as Ansett?

1 on 16/12/13 by Really

new management.......

9 on 18/12/13 by gippsflyer

Emirates are nobody's fool, and they've always stated they had absolutely no intention to invest in Qantas. As it is, they've already got everything they could possibly want, and can reasonably attain - and at no great cost to them (they've been very smart about the whole alliance link - pretty much Qantas came begging to them). Since there is little real chance of Emirates carving into the Australian domestic market golden goose (political landscape making that difficult), enjoying feeder routes thru the Qantas link-up is the next best thing. All they had to sacrifice was giving up space to Qantas Frequent Flyer Gold & Platinums in their lounge network (a small price to pay).

Why would Emirates buy a minority stake in a cow, when it gets the milk practically for free!

In short, whether the Qantas Sale Act changes or not, nobody is going to be buying Qantas. Why would you? Smarter minds see much more value not chaining themselves to a sinking ship, captained by a dangerous value destroyer like Alan Joyce and his cortège. More likely is a push to open up domestic competition, or wait for the Qantas fire sale when you can buy the assets on the cheap.

 

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