Is This the End of BA’s Australian Adventure?

British Airways (BA) has made a commitment to maintain its air services to Australia from London Heathrow but has told a competition watchdog that it will struggle to continue to operate its flights if the proposed commercial partnership between Qantas and Emirates Airline gets the green light.

The UK flag carrier has been cooperating with Australia’s national carrier Qantas on flights between the two countries, but this arrangement will come to an end in March 2013 ahead of the proposed new partnership with Emirates Airline taking effect from April 1, 2013. In a submission to the Australian Competition and Consumer Commission (ACCC), BA said this 17-year alliance with Qantas has been a “vital aspect” of its ability to successfully offer sustainable air services to Australia.

BA feels it would lack the cost and network advantages that Emirates, Qantas and Jetstar would enjoy as part of their arrangement and said that it would be “increasingly challenging for an international airline to operate services on long-haul routes between the United Kingdom/Europe and Australia in the absence of such an alliance”.

Without a local Australian partner, BA says it could lose access to the high-yield Australian corporate market as well as access to the Australian trade market, while through its Joint Service Agreement (JSA) it is able to offer better scheduling and connection opportunities in Bangkok, Hong Kong and Singapore, as well as provide more combinable fares with Qantas.

BA has said in a statement that it “remains committed” to maintaining its 77 year old links to Australia and that beyond the end of the JSA “Sydney is still very much part” of its future plans. “British Airways is looking to maintain and develop numerous existing codeshares with Qantas in Asia and Europe as part of oneworld, and the airline is currently exploring options for when the JSA ends,” said the airline.

In the table below we highlight the O&D traffic between Australia and the UK during 2011 and the split by airline operator. This clearly shows why BA feels so strongly about the proposed Qantas – Emirates tie-up and how it will find it hard to compete with the carriers in a market that it is already finding it hard to make profits. A combined Qantas and Emirates would account for almost half (44.7 per cent) of all the direct traffic between the two countries, with BA holding just an 8.9 per cent share.

A new BA strategy between Australia and the UK could be supported by Qatar Airways’ planned entry into the oneworld alliance and increasing links between the two operators. While, Qantas and Emirates will be cooperating through Dubai, BA and Qatar Airways could offer a similar arrangement through Doha, with responsibility for the flying being split between the two partners.

Qantas’ main local rival, Virgin Australia, has also expressed concerns with the proposed Emirates deal, saying there is a "real risk" the proposed alliance will reduce competition and strengthen the flag carrier’s dominance in domestic and international markets. In its submission to the ACCC, Virgin questioned the public and competition benefits the airlines claim will arise from their tie-up and although it said it will not oppose the deal, it is seeking limitations on the length of the arrangement.

Meanwhile, Emirates’ standing in Australia took a blow last week after a Federal Court in Sydney ordered Emirates to pay a total of $10 million in penalties for engaging in cartel conduct in breach of the Trade Practices Act 1974 (now the Competition and Consumer Act 2010). This decision comes just a week before the ACCC’s main proceedings are due to commence against a number of international airlines for alleged cartel conduct. The proceedings relate to alleged price fixing of fuel and other surcharges. Emirates is the tenth airline to settle in these proceedings.

“This settlement with Emirates brings the total penalties ordered in Australia against international airlines involved in the cartel to $68 million. These are the highest penalties to have ever been ordered in an ACCC investigation,” Rod Sims, Chairman, ACCC. “This result sends a strong message that the ACCC and the Australian courts will not tolerate any business – regardless of size or country of origin – engaging in cartel conduct that harms competition in Australia. Cartel conduct is illegal and often results in increased prices for consumers.”

The ACCC commenced the proceedings against Emirates in 2009, alleging that the airline, in conjunction with other airlines, fixed prices relating to fuel and other surcharges. As part of the settlement, Emirates has admitted to arriving and giving effect to illegal understandings relating to a fuel surcharge, a security surcharge and a customs fee on air freight carried from Indonesia to Australia and other countries between October 2001 and May 2006. This resulted in a $7 million penalty. The airline also admitted to attempting to arrive at an understanding with DAS Air Cargo relating to rates charged for the supply of air freight services from Australia, which resulted in a $3 million penalty.

Additional ACCC proceedings against Singapore Airlines, Cathay Pacific, Air New Zealand and Thai Airways International are due to be heard in the Federal Court in Sydney from October 22, 2012. The ACCC is also proceeding against Garuda Indonesia following a High Court decision last month declaring that the airline was not eligible for foreign state immunity.