Why a Qantas and British Airways merger is good (and why Qantas + Cathay Pacific will be even better!)

By Shashank Nigam

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British Airways 747-136 G-AWNF
Image by pchavali via Flickrllkl

There’s been ton of chatter that Qantas is looking for a bedmate even since the new CEO Alan Joyce took over. Finally, British Airways CEO announced that the airline is in talks with Qantas regarding a potential merger. On the surface, it may look like a good deal, since there are so many synergies to tap on the famed Kangaroo route. But dig a little deeper and you will realize that Qantas may just become a concubine for BA, rather than a trusted mate, and it might just make sense to keep the options open towards airlines like Cathay Pacific.

But before I get into that, let me share my thoughts on why a Qantas and British Airways is still good for both the airlines.

Why QF and BA make a good couple

The goal of mergers is to generally extract value by streamlining operations. But Qantas and British Airways (BA) can probably hope for much more than that, if the merger goes ahead. Both airlines are not only part of the OneWorld Alliance, but also already operate like a single airline on the Kangaroo route between London and Sydney. Their frequent flier programs are in sync and both have similar corporate structures.

The marriage may work with the blessings of the Australian government, which currently has a cap on foreign ownership of Qantas. Importantly for BA, it can tap on Qantas’ low-cost carrier, JetStar, to expand its reach in Asia Pacific as well as leisure destinations in Australia.

There are a number of downsides for this tie-up too, but they have been discussed elsewhere. So, I shall focus on other alternatives Qantas should explore, specifically, Cathay Pacific.

Cathay Pacific may make a better bed mate for Qantas

Reason 1: Complementary routes in growing markets. Just like BA, Cathay Pacific is also an integral part of the OneWorld alliance. But unlike BA, Cathay Pacific has  much better presence in China, one of the world’s fastest growing aviation markets. Also, tying up with Cathay Pacific will give Qantas a much better access to lucrative Asia Pacific – US routes as well – again a growing market. This, as opposed to British Airways’ better access to Africa and Europe, which are mature markets, but the growth rate is much lower than Asia. Also, Qantas’ interest in Africa is bound to be much lower than in China.

Simply put, a merger with Cathay Pacific will allow them to rule Asia-Pacific together. Just look at their existing route maps and you’ll understand what I mean.

Qantas Route map

Qantas Route map

Cathay Pacific Route map

Cathay Pacific Route map

Reason 2: More focused attention, resulting greater chances of success. BA is already trying to tie up with Iberia and American Airlines. Moreover, there will always be tough competition with AirFrance-KLM and Lufthansa (+Swiss, BMI, Austrian…) to keep BA’s hands full. Hence, Qantas may just become a concubine, rather than a bed-mate.

In Cathay Pacific’s case, it only has the subsidiary DragonAir, just like Qantas’ JetStar. Hence, there are much lesser distractions, which will allow both the airlines to focus on leveraging their merger. This focus may very well result in a successful, long-lasting marriage.

I hope Singapore Airlines and Emirates are watching these developments closely and coming up with their own strategies!

What do you think? Is BA good for Qantas or Cathay Pacific? Or someone else like AirFrance-KLM or even LAN Airlines? I’d love to hear your thoughts in the comments.

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  • Styne

    Good perspectives. Do you think a JAL-Qantas merger makes more sense than Cathay-Qantas, if Asia-Pacific domination is what you’re looking for?

  • http://simpliflying.com Shashank Nigam

    @Styne: Very interesting thought. JAL-Qantas is something I didn’t originally think of, but now that you mention it, I think it might be worthy of some analysis too. I’m curious if you’re familiar with JAL’s growth strategy? Does it make sense for them to have a South Pacific partner?

  • http://airliners.net! shaq

    First of all , Congratulations for your milestone.
    Ok , I really understand your point, something they can also do , is make extensive code-sharing ( a la Continental with UA ) , because mergers aren’t easy for employees neither for shareholder , etc etc .
    Cathay make a loss in the last quarter due to high fuel prices and the recession , but both are really profitable.
    CX and QF can make a nice tie-up , a very succesful merger , or just stand alone

  • http://aviation.deveshagarwal.com Devesh Agarwal

    Cathay and Qantas do not have the cultural or business goal fit. Added to this, as the recently failed BA merger talks demonstrate, Qantas wants to be the dominant partner, which Cathay will not accept. I have written an article, http://aviation.deveshagarwal.com/2008/12/real-deal-for-qantas-malaysian-airlines.html about an Asian airline that is exploring talks, one with whom there can be real possibilities. Malaysian.

  • Vincent HWS

    I enjoy reading your discussion.

    I think co-operation between Cathay and Qantas will strengthen our hub Hong Kong and One World Alliance.

    Nevertheless, merger is a bit difficult, I would suggest some of the many factors including the prudence practice of Swire (Cathay’s main shareholder) and any potential political influence from Beijing (We can see Cathay’s shareholding changes in the last decade in order to re-enter China’s market, although Swire is the one controlling). In addition, Swire is very commited to China.

    I would be curious to know more if there is any cultural or business goal fit between Cathay and Qantas. I would appreciate if Devesh Agarwal or anyone can suggest some examples or further elaborate.

    As for Styne’s suggestion about JAL and Qantas, I personally think this is not so likely. JAL may perform better in area like Europe and Pacific in terms of frequency, but Asia, China and Middle East, as well as India, seem Cathay is doing better. I think JAL has just recovered from the problems from their merger with JAS in 2002 and JAL seems not so open to external investment. If there is no business fit between Cathay and Qantas, I would guess the gap between JAL and Qantas would be even larger.

    Please feel free to correct me if there is anything wrong as I am still very at the beginning stage in learning more about the industry. Thank you very much.

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