Qantas-Emirates link forces Cathay Pacific to rethink network strategy

The Hong Kong flag carrier could lose its 'kangaroo route' passengers to alliance that is offering more destinations in Europe from Dubai

PUBLISHED : Monday, 14 January, 2013, 12:00am
UPDATED : Monday, 14 January, 2013, 3:01am

The proposed alliance between Australian carrier Qantas Airways and Dubai's Emirates could lure so-called "kangaroo route" passengers away from Cathay Pacific Airways.

The move will force Hong Kong's flag carrier to rethink its network strategy as an increasing number of carriers form bilateral agreements to increase their competitiveness.

The Australian Competition and Consumer Commission last month released a draft ruling proposing to allow the airlines to co-operate on passenger and freight operations across their networks. But it plans to limit the deal to five years because of concerns about the impact of the alliance on airline competition between Australia and New Zealand.

Although the final decision will not be made until April 1, it is highly likely that Emirates and Qantas could win approval and proceed to a comprehensive alignment on their schedules, air fares and products, so as to increase traffic between Australia and Europe through Dubai.

The so-called kangaroo route is an important revenue source for Cathay, which uses Hong Kong as a hub to transit passengers between the two continents.

The airline carried more than 120,000 passengers between Europe and Australasia last year, said Rupert Hogg, the director of sales and marketing at Cathay.

"The kangaroo route has always been an important component of Cathay's network," Hogg told the South China Morning Post.

"Cathay pioneered long-haul non-stop flights from Hong Kong to Europe in the late 1980s and this, combined with the attractiveness of Hong Kong as a stopover and our extensive network into Australasia, ensured that we were a key player in this market from its inception."

But the marketing niche offered by Emirates exposes a weakness in Cathay's network. That is because Emirates can offer 33 destinations in Europe from Dubai while Cathay flies to only seven European cities now.

"The points beyond Dubai are of interest to many Australians," said Tim Clark, the chief executive of Emirates. "Working together with Qantas, we have the prospect of having a strong relationship."

"Cathay should ask itself how to add more destinations to Europe through its own network or through partnership," said Will Horton, a senior analyst at CAPA, a Sydney-based airlines think tank.

"Airlines cannot operate by themselves any more and need to build deeper partnerships through bilateral agreements."

Clark said the proposed tie-up with Emirates would see Qantas reconsidering its Oneworld alliance, to which Cathay also belongs.

"The world of alliance is changing. We will see major realignments in the next three to five years since they are not delivering the value that certain carriers thought they were going to get," Clark said.

Bilateral agreements between airlines had been in place for a long time and Cathay had been involved in a code-sharing agreement with American Airlines for several years, Hogg said.

The Qantas-Emirates tie-up would pose a competitive threat for Cathay, he added, but neither partners were "based in our backyard and sitting on all of our major traffic flows". Aside from the kangaroo market, there was strong and reciprocated demand for flights from Hong Kong and mainland China to Europe and Australia.

Transiting passengers contributed half of the passenger volume to Cathay, Hogg said.

"We are fortunate to have a strong and dynamic underlying market, where half of the world's population is within a five-hour flight from Hong Kong, while [mainland] China is the next big destination with huge traffic."

Although Cathay is well-located on the doorstep of mainland China, a neighbouring "crouching tiger" - Guangzhou-based China Southern Airlines - is gearing up its international services. Last year, it introduced a service to Australia, using Guangzhou as a transiting hub for European destinations.

Using Airbus 380 and other widebodied aircraft, China Southern has opened six destinations in Australia. Although it is still dwarfed by Cathay's 78 weekly services to Australia, the mainland carrier is mulling increasing the frequency of flights significantly.

In terms of product, Cathay is the only operator offering premium economy class to Australia. There are nine seats per row in the economy class in the Boeing 777-300ER aircraft operated by Cathay, versus 10 in the Emirates planes.

But in terms of networking, Gulf carriers enjoyed a comparative advantage and Hogg said Cathay would need to partner with a Middle East carrier in the long run.