Qantas Airways Limited’s (ASX: QAN) shares have taken off in morning trade, on reports that the company is set to establish an alliance with the world’s largest airline, Emirates, which could turn-around Qantas’s international business. In 2011 alone, the international business reported losses of over $200m on reported capital invested of over $5 billion.
At lunchtime, Qantas shares were up 6.6% to $1.055.
According to the report in today’s Australian Financial Review (AFR), Emirates and Qantas are working on a code-sharing deal which would see Qantas fly to Dubai and rely on Emirates to transfer passengers to destinations across Europe, the Middle East and Africa.
Emirates has the largest international network of any carrier in the world, with 30 destinations in Europe and 18 in Africa, and the agreement would give Qantas passengers easier access to all those destinations. The fact Emirates planes are younger on average and more luxuriously appointed, suggests most Australians wouldn’t have a problem transferring to an Emirates flight after landing in Dubai.
Qantas currently flies to only two destinations in Europe, London and Frankfurt, and is set to pull out of Frankfurt, due to the region’s economic woes and worsening outlook, which would leave London as its lone European destination.
The report also suggests that the new deal would almost certainly mean the end of Qantas’s long association with British Airways. More than 25% of Qantas passengers flying into London transfer to British airways to head back into continental Europe. That traffic would likely dry up instantly with the Emirates deal.
Merrill Lynch analysts liked the deal, suggesting it “could be the key catalyst to turn around Qantas’s international business” and “By removing unprofitable European long-haul flights, Qantas can quickly remove costs from the international business and at the same time, Qantas can then either accelerate the retirement of its ageing fleet, or increase its services into Asia.”
With a fuel bill of over $4.4 billion per year, the deal for Qantas appears to make some sense.
For Emirates, the deal would deliver Qantas’s dominant share of domestic traffic away from rivals such as Singapore Airlines, which has formed an alliance with Virgin Australia Holdings Limited (ASX: VAH).
Despite the reports of a deal, there’s a long way to go before it becomes concrete. Should it fall through, Qantas’s options for its international operations could be limited. As a worst case scenario, we could see Qantas stop flying to Europe altogether, concentrating on Asia and its domestic operations.
One wonders how long it will be before Qantas turns its attention to its under-performing 29% stake in Jetset Travelworld Limited (ASX: JET), especially since Qantas launched the Hooroo online accommodation site, which appears to be a competitor to TripAdvisor. Jetset shares have lost more than 50% of their value over the last 12 months.
Airlines are notoriously bad investments – in aggregate airlines globally lose billions most years. These moves by Qantas may be well intentioned, but the results are unlikely to be a spectacular turn-around in its fortunes.
In my opinion, investors would be better off considering investments in Sydney Airports Limited (ASX: SYD), which has many of the airlines’ benefits, with far less risk.
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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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