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Opinion: QANTAS’ Asian carrier should base at Guangzhou

Earlier this week, QANTAS, the beleaguered Australian national carrier, announced part of its major restructuring plan for the international division; doing so ahead of the initially planned August 24th date. There were numerous changes announced, but the carrier plans to hash out the details in the coming weeks so more news is still forthcoming.

QANTAS Airbus A380-800 VH-OQD lifts off from runway 27R at London Heathrow

These are some of the highlights of the announcement.

  • Qantas will defer delivery of 6 of its remaining 10 Airbus A380s on order to the 2018-2021 time frame.
  • Qantas is to acquire 110 Airbus A320 family aircraft, of which 78 are firm orders for Airbus’ new A320neo, which promises 15% reduction in fuel burn over current generation aircraft.
  • The carrier will improve premium cabins and check in for Trans-Tasman flights, as well as invest in new and bigger lounges in Singapore, LA, and Hong Kong.
  • 9 Boeing 747-400s will be refitted with the A380 cabins and these aircraft will remain in Qantas’ fleet till at least 2018
  • 1,000 jobs will be cut from Qantas Group
  • Jetstar Japan, a joint venture with Mitsubishi and Japan Airlines will be started, first on Japanese domestic flights before expanding to international routes.
  • A new premium carrier in Asia will be launched (location and date still TBD) using 11 A320s at the start
  • They are looking at Kuala Lampur as a good hand-off point for passengers traveling to Europe/the Middle East alongside their new OneWorld partner Malaysia Airlines
  • Switch the flight to Buenos Aires to Santiago to feed into LAN’s larger hub
  • End Bangkok and Hong Kong to London sectors and simply transfer passengers onto British Airways at those two points – London flying to be focused at Singapore only.

While all of the changes mentioned above are news-worthy, the one that perhaps is the most important is Qantas’ new carrier in Asia. The development of this new premium carrier is likely to dominate Qantas’ international strategy for at least a few years; until the 787 has arrived in significant numbers. Indications have been that the premium carrier would be based at either Hong Kong or Singapore, though Kuala Lampur has also been mentioned as a potential hub.

Qantas’ international wing has shriveled in the face of increased international competition and rising costs. Qantas has said that its mainline international business will post a loss of about $200 million AUD in FY 2010. Its market-share in the foreign sector has shrunk drastically – to just 18% last year. Asian market-share is just 14%, and competition has grown even to encompass their previously comfortable duopoly with United to Los Angeles.

Qantas’ main strategic mistake has been that it failed to capitalize on the growing demand to and from China. While most of the airline serving Australia were surprised at the speed with which Chinese demand grew, Qantas has been by far the slowest to respond; even cutting flights to Beijing. China is now Australia’s largest export market (especially to Western Australia with its rich natural resources), and in-bound tourism from China is the fastest growing segment of leisure passengers.

And therein lies part of the problem with Qantas’ new premium carrier. Basing at Singapore or Kuala Lampur doesn’t really solve the issue of flights to China; SE Asia is too far away to be a fully effective connecting hub. Furthermore, Singapore would see strong competition from a myriad of carriers, who have driven fares lower in recent years. Singapore Airlines with its golden service reputation and lower costs will likely draw more premium passengers while still being able to undercut “Qantas Asia” on economy class fares. Kuala Lampur presents its own problems; the market for premium travel at KLIA is relatively small, and with Qantas’ new partner Malaysia Airlines facing financial troubles, Qantas may be reluctant to enter Malaysia.

And while Hong Kong would provide better access to China, it is also the home base of one of Qantas’ OneWorld partners; Cathay Pacific. The Hong Kong airline market is also much more consolidated, with Cathay Pacific (and subsidiary Dragonair) combining with Hainan Airlines subsidiary Hong Kong Airlines to control more than 60% of the market. Thus Qantas would have to compete fiercely for origin and destination passengers (O&D).

So what’s the solution for Qantas? For a carrier that has been criticized repeatedly for its placid strategy with regards to international flights, the time has come for them to take bold action. Thus, I propose that Qantas base its new Asian premium carrier at….

A Chinese airport, utilizing a joint venture with a China-based carrier to get over any regulatory hurdles. Of the choices, perhaps the best one is basing at Guangzhou in a joint venture with Air China.

Basing at Guangzhou makes sense for multiple reasons. Firstly, Guangzhou is one of the fastest growing markets to and from Australia. Its status as the hub of the Pearl River Delta, China’s largest industrial production base and soon to be world’s largest megalopolis, means that demand should continue to grow into the future. Moreover, with an expanding base of premium traffic to short-haul destinations, Qantas would be able to grow more quickly, and capture a larger share of the market than in the (relatively) more stagnant premium markets of KLIA, Singapore, or even Hong Kong. The shorter range of the A320 would also not be a problem, as Qantas could first “cut its teeth” in the highly profitable domestic sector before jumping into the international fray. Guangzhou’s market is currently dominated by SkyTeam’s China Southern Airlines, with no real viable second competitor.

QANTAS Airbus A330-300 VH-QPC departs Mumbai airport runway 27. Photo copyright Vedant Agarwal.

More importantly, Guangzhou is perfectly located to cater for a strong hub to Northern, Eastern, and even Southeastern Asia, as well as Europe and the Middle East. All major destinations in Australia and New Zealand are easily within the range of the A330-200 from Guangzhou.

If, after a few years, the venture is successful, Qantas could shift the A330s replaced by 787s at Jetstar to the new carrier; and allow it to open flights connecting all Australian points (as opposed to just Sydney) to Asia and beyond. Even the European market is (semi) ripe for the taking. China Southern operates to just Amsterdam and Paris in Europe, leaving such prime markets as London Heathrow and Frankfurt open to competition. With its growing demand base, coupled with smart connections to and from Australia, there’s no reason why Guangzhou could not function as an effective scissors hub for the Kangaroo route.

Part of Qantas’ problem in the past few years has been that it has effectively ignored the markets of Brisbane, Melbourne, and Perth; while electing to build up Sydney in the British Airways London-Heathrow model. But with a scissors hub in Asia, especially at the strategically located Guangzhou, Qantas could re-attack those passengers with well designed connections, especially on European flights where an Australian passenger has to connect somewhere.

The choice of Air China as a partner is also important; as it solves many logistical issues. As China’s “flag” carrier, Air China’s involvement is likely to speed up regulatory processes and the like. Furthermore, Air China has strong ties to oneworld member, Hong Kong based, Cathay Pacific, so even as a member of Star Alliance, they could work with Qantas as well.

For Air China, the benefit of the deal is twofold. Firstly, they’d get a stronger presence in the Guangzhou market; the largest one in China without a major Air China presence. And with Qantas likely to be the driving partner behind the venture, Air China’s risk and capital requirements would also be minimal.

While this plan may be shocking to more than a few readers (as well as probably Qantas itself), the time has passed for Qantas to maintain the status quo. Further cutting its operations (as the changes above indicate) will lead Qantas into obscurity; it’s time for a change.

About Vinay Bhaskara

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