Emirates Airline tie-up revives fortunes of Australia's Qantas

Three months into the Qantas-Emirates pact the airline nicknamed The Flying Kangaroo is being steered back to health.

Qantas chief executive Alan Joyce (C) and Emirates president Tim Clark (R) walk past a Qantas aircraft at Sydney Airport. Greg Wood / AFP

Three months into the Qantas-Emirates pact, the Irish-born chief executive of Australia's flag carrier is steering the airline nicknamed The Flying Kangaroo back to health.

Qantas shares have also rallied 44 per cent since June 11, 2012, when it was first revealed Qantas and Emirates Airline were discussing a "commercial arrangement".

Under the deal with the Dubai carrier the pair have aligned loyalty programmes, booking systems, and flight codes. Emirates now operates more flights from Australia to Europe than Qantas.

While the Australian airline's stock is still down 40 per cent since Alan Joyce took over as chief executive in November 2008, the share price, at 36 times its forecast earnings for the year ended June 30, gives it the highest valuation of any airline worldwide.

It is one of just two carriers worldwide, with California's Southwest Airlines, whose debt is judged investment grade by more than one ratings company.

However, the groundbreaking Qantas-Emirates alliance was far from an easy sell when talks began.

Mr Joyce's visit to the posh Wolgan Valley spa in New South Wales on a crisp day in May last year was no holiday. The exclusive resort, in a wilderness west of Sydney once explored by Charles Darwin, was hostile territory.

Wolgan Valley belongs to Emirates, a company that the former Qantas chairman Margaret Jackson once called aggressive and unfair.

Over the past decade, the Dubai carrier had increased its share of traffic to and from Australia by a factor of more than 20, helping to push Qantas into a A$450 million (Dh1.49 billion at current conversion rates) loss on international routes in the year ended June 2012.

Ready to call a truce, Mr Joyce was meeting with the Emirates president Tim Clark to discuss a tie-up finally implemented in March.

"We really didn't have anybody else that was willing to engage with us," Mr Joyce said, of a deal his predecessors had spurned.

With the Emirates link, he turned his back on British Airways, Qantas's partner since 1935, shifted its hub for European flights from Hong Kong and Singapore to Emirates' home base, and attracted the opposition of his predecessor in the job, Geoff Dixon.

Investors supported Mr Joyce. In November, 99 per cent of voting shareholders backed a pay package giving him the highest salary of any airline chief executive, even as Qantas slipped to its first-ever annual loss.

"Do we think he's making the right decisions? The answer is yes," said Andrew Sisson, the managing director of Franklin Resources' Balanced Equity Management, the third-largest shareholder in Qantas. The Emirates alliance "was a better deal than would have been obtained via the alternatives", he said.

Not everyone welcomed the change. Mr Dixon formed an investor group "committed to unravelling Qantas's structure and direction", including changing the Emirates alliance, the Australian carrier said in November. Joining Mr Dixon was Peter Gregg, Qantas's former chief financial officer, who announced his departure a month after Mr Joyce was appointed to the top job.

Airlines worldwide have struggled since 2007 as carriers were hit first by rising oil prices, then weak demand as consumers recovered from the 2008 financial crisis.

Jet fuel costs, which never topped US$50 a barrel before 2004, have not dipped below $100 since 2010.

Emirates has been one of Qantas's most aggressive competitors. In 2002, it carried 0.4 per cent of the 17 million passengers who flew to and from Australia; by 2012 its share had grown to 8.4 per cent, government data showed.

That expansion was enough to drive Qantas's international operations, already hit by high fuel costs, into losses, said Tony Webber, a former chief economist at Qantas and managing director of Webber Quantitative Consulting.

In his five years as chief executive, Mr Joyce has also faced union opposition to his efforts to limit labour costs, which made up 28 per cent of revenue in 2012. After pilots, engineers and baggage handlers staged strikes in 2011, Mr Joyce grounded the carrier's entire global fleet, stranding about 80,000 passengers for two days and costing Qantas A$194m.

"Qantas is not growing, the subsidiaries are growing," said Richard Woodward, a vice-president of the Australian International Pilots' Association, which represents about 1,700 long-haul pilots. Jetstar was set up to serve a different market from Qantas and stimulated new demand that has strengthened the company as a whole, said the Qantas spokesman Andrew McGinnes.

Net income for the fiscal year ending June 2014 will rise to its highest under Mr Joyce's tenure, according to the average of eight analyst estimates compiled by Bloomberg.

Mr Joyce is confident about the direction Qantas is heading. "This is the best job I will ever have," he said. "I'm a very lucky guy."