A proposed joint venture agreement between Qantas and Japan Airlines is hanging by a thread as Australia’s competition regulator flags disallowing the deal. That news saw both airlines revisit their proposal. Their response to the adverse draft determination includes several sweeteners, notably a new service between Cairns and Tokyo.
Qantas & Japan Airlines want to expand a longstanding codeshare agreement
Both oneworld members, Qantas and Japan Airlines (JAL) have long worked in tandem, with a limited arms-length codeshare agreement. Under that agreement, Qantas codeshared on certain JAL-operated services from Singapore to Tokyo. JAL codeshares on certain Qantas-operated services from Australia to Singapore and on Jetstar services from the Gold Coast and Cairns to Japan. JAL also codes on Qantas’ Sydney – Auckland service.
Late last year, Qantas and JAL applied to Australia’s competition regulator, the Australian Competition and Consumer Commission (ACCC), to deepen the working relationship. The airlines wanted approval for a joint venture that they said would provide substantial benefits for customers and help accelerate the recovery of the tourism, trade, and corporate travel links between Australia and Japan.
The joint venture would initially run for five years and cover an expanded codeshare relationship and optimize schedules on flights between Australia and New Zealand and Japan, enhance frequent flyer benefits for Qantas and JAL passengers, see improvements in the customer experience, more premium travel opportunities, and the coordination of pricing, schedules, sales, and tourism marketing to develop new and improved travel products, delivering more choice for customers.
The ACCC is unenthusiastic about the joint venture
With similar joint ventures with Emirates, American Airlines, and China Eastern under their belt, perhaps no one was more surprised than Qantas and JAL when the ACCC said it was likely to block the application. The ACCC thought the proposal lessened competition and would prove detrimental to passengers.
The ACCC gave Qantas and JAL a couple of months to digest the news before coming back with a final determination. That final determination is due in the next month or two. In the meantime, the airlines have sought to address issues of potential competitive detriment and emphasize the “meaningful and immediate” benefits to passengers.
The airlines have also offered an interesting sweetener – a new Qantas service between Cairns and Tokyo. The flights would be the first Qantas international services from Cairns since 2009. Initially running four times a week, the flights are contingent on joint venture approval and international travel beginning to normalize.
Proposed Qantas flights a welcome boost for Cairns
Until Qantas suspended most of its international flying, its low-cost subsidiary Jetstar operated daily Cairns – Tokyo and Cairns – Osaka flights. Under the proposed joint venture agreement, the full-service Qantas product is on offer.
Qantas argues one of the important benefits of the joint venture agreement would be new city pairs between the two countries. In the 1990s, you could sit in your hotel room in Cairns and watch a congo line of Boeing 747s out of Japan, bringing in passengers every morning. But those days are long gone. Japanese visitor numbers to Cairns slumped to 65,000 per annum in 2010. But by 2019, Japanese visitor numbers to Cairns slowly rebuilt to 155,000.
After the Chinese, Japanese visitors were the second largest foreign visitor group to Cairns in 2019. But geopolitical tensions between China and Australia mean Chinese travelers may not return to Cairns in the numbers they once did. Once again, tourist-dependent Cairns is eyeing Japan and swinging in behind the proposed joint venture.
Industry group Tourism Tropical North Queensland (TTNQ) welcomes the proposed Cairns flights. They say the joint venture would bring major benefits to tourism in North Queensland and the 20,000 Cairns locals the tourism sector employs.
The operator of Cairns Airport, North Queensland Airports, says a return of direct air connectivity between Japan and Cairns, with full-service carriers such as Qantas and JAL, is critical to accelerate the recovery of international tourism and boost the local economy.
Aside from Qantas and JAL, ten organizations, mostly tourism lobby groups, have lined up to support the joint venture bid since the ACCC flagged rejecting it.
“Australia’s international tourism sector certainly needs help post-COVID, and it appears the proposed joint venture agreement helps deliver that,” says the Australian Chamber of Commerce and Industry. “It allows the tourism industry to work with airline partners to leverage opportunities that flow from Japan with increased certainty and build back this critical inbound market.”
Market dominance remains a big hurdle for Qantas and JAL
The problem for Qantas and JAL is that they normally dominate the airline market between Australia and Japan. Until the travel downturn, Qantas flew to Tokyo daily from Sydney, Melbourne, and Brisbane. In addition, Qantas flew Sydney – Osaka four times a week and Sydney – Sapporo on a seasonal basis. In addition to their Cairns flights, Jetstar operated daily Gold Coast – Tokyo flights. JAL operated to Tokyo from both Sydney and Melbourne daily.
Jetstar is included in the joint venture application. But given the compatibility between the full-service carrier offerings and network connectivity, the “primary focus” is Qantas and JAL.
Typically, Japan is Australia’s fifth biggest inbound market. In 2019, there were 6,698 nonstop flights between the two countries. Australian Government statistics reveal 1,562,465 passengers flew nonstop between the two countries in 2019. Between them, Qantas, Jetstar, and JAL handled 87.6% of those passengers. All Nippon Airways had the remainder of the market. In proposing the block the joint venture, the ACCC said;
“The ACCC considers that the proposed coordination is likely to give Qantas and Japan Airlines an increased ability and incentive to unilaterally reduce capacity or limit growth in capacity.
“As passenger numbers return to pre-COVID-19 levels, the elimination of competition between Qantas and Japan Airlines is likely to result in significant public detriment.”
Qantas & JAL rebut the ACCC’s talk of anti-competitive behavior & fare hikes
Qantas and JAL argue they have no ability to artificially restrict growth or increase fares. They say in the current weakened demand environment, the suggestion is “fanciful.” Around three-quarters of passengers flying between the two countries are price-sensitive leisure passengers. The two airlines say any anti-competitive conduct would be quickly detected and called out. Qantas and JAL say suggestions they would engage in anti-competitive behavior have no basis and are entirely rejected.
The fate of the joint venture between Qantas and JAL is worth keeping an eye on. On the one hand, beneficiaries of the agreement – cities like Cairns and its hotels and tourism operators, want to see the joint venture approved. Competitor airlines like ANA, Singapore Airlines, and Cathay Pacific (both the latter airlines usually do significant Australia-Japan business via their hubs) would like the agreement knocked back. The ACCC is trying to predict a short to medium-term flying environment and how the joint venture would work within that.
A final decision is expected by the end of September.
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