Qantas’s proposed alliance with China Eastern looks set for takeoff, with Australia’s competition regulator approving the partnership with conditions attached and reversing an earlier draft ruling to reject the tie-up.
The Australian Competition and Consumer Commission (ACCC) says the two airlines have to report their average fares, month by month, on each route that they operate between Australia and China as part of their partnership.
Moreover, the ACCC’s authorisation also required Qantas and China Eastern to increase their combined capacity on routes between Shanghai and Australia by a compound annual growth rate of four per cent. This represented a 21.67 per cent increase in capacity across these routes over the next five years.
ACCC chairman Rod Sims said the two carriers had provided significant commitments to add extra flights and launch new routes since it handed down a draft determination in March that proposed denying authorisation.
This included more flights from Shanghai to Melbourne, Sydney and Cairns during peak periods, as well as a new year-round service that has not been made public. There were also more destinations that would be covered by the two carriers’ existing codeshare agreement.
As part of the alliance, Qantas would move into Terminal One at Shanghai Pudong Airport, facilitating quicker transfers as part of making Shanghai the gateway into greater China.
“The ACCC considers that the addition of a significant number of new services, and expanded range of destinations, reflecting this gateway strategy, would constitute a significant public benefit” ACCC chairman Rod Sims said in a statement on Friday.
Sims said the capacity conditions imposed on Qantas and China Eastern as part of the five-year authorisation ensured coordination between the two carriers would not result in a reduction in the frequency of services provided below that which could be expected if the alliance was not in place and they continued to compete strongly with each other for passengers.
However, Sims said the ACCC believed the alliance would encourage additional new capacity above what was required under the five-year authorisation.
“The ACCC does not consider that capacity additions that simply keep pace with historical levels of growth are sufficient to demonstrate that the alliance will result in significant public benefits,” Sims said.
“The ACCC accepts that Qantas and China Eastern do not want to commit to additional capacity expansion until closer to the time that capacity will be added. However, the ACCC expects that successful implementation of the gateway strategy underpinning their public benefit arguments should result in significant additional growth in capacity above that required by the conditions the ACCC has imposed over the term of the authorisation.
“If this were to prove not to be the case, it may be difficult for the ACCC to accept that the alliance facilitates the addition of new frequencies and destinations, and the development of Shanghai as a gateway to greater China for Qantas and China Eastern, in any application for re-authorisation.”
While the ACCC acknowledged that “on balance” the tie-up would have public benefits, it also remained “of the view that the alliance could result in significant public detriment”.
This related to the dominance of Qantas and China Eastern on the Syndey-Shanghai route, which is the only route on which the two carriers overlap.
In its draft ruling published in March, the ACCC raised concerns with the market power of Qantas and China Eastern on the Sydney-Shanghai route, noting the pair operated about 83 per cent of all nonstop seats between the two cities, with Air China the only other airline on the route.
The ACCC said at the time such dominance on the route would give the two carriers the ability to limit capacity and lift fares for travellers between Sydney and Shanghai.
On Friday, the ACCC noted that competition between Qantas and China Eastern for passengers on the route would be greatly reduced under the alliance and “may provide them with the opportunity to increase prices for passengers traveling directly between Sydney and Shanghai”.
As a result, the ACCC said it would monitor Qantas and China Eastern’s ticket prices for travel between Australia and China.
“It is not uncommon for airlines to charge higher fares for passengers on a point-to-point route, where competition is limited, than for passengers travelling on the same flight who have an onward connection to a destination that is serviced by a variety of carriers,” Sims said.
“The ACCC considers that Qantas and China Eastern would have an incentive to adopt this strategy on the Sydney-Shanghai route if the alliance proceeds.
“To enable the ACCC to monitor such behaviour conditions have been imposed requiring Qantas and China Eastern to report to the ACCC their average fares, month by month, on each route between Australia and China on which they offer services.”
The draft determination was met with a strong response from both the Australian government (through a submission from the Department of Infrastructure and Regional Development) as well as the Chinese, whose ambassador to Australia wrote a letter to the ACCC arguing the benefits of the alliance. Tourism bodies also wrote to the ACCC to express their wish the tie-up was approved.
Qantas chief executive Alan Joyce said the airlines put a strong case to the ACCC about the benefits of the partnership.
“The joint venture with China Eastern allows us to increase capacity between the two countries by linking to key hubs and offer connectivity to each carrier’s behind and beyond networks,” Joyce said in a statement on Friday.
“By working with China Eastern we are able to maximise Qantas’ presence throughout China and build a more sustainable platform for future growth such as opening up new routes from Australia to Shanghai.
“We cannot fly to every destination in China. However our deepened relationship with China Eastern supports our successful strategy to work with key partners around the world to offer the most comprehensive network and world class travel experiences for our customers.”
China Eastern chairman Liu Shaoyong said he was happy with ACCC decision.
“Through this partnership we are helping to generate more tourism and trade opportunities with Australia and provide more convenient travel options for the many customers who travel between our two countries,” Liu said.
“We are excited by the possibilities ahead and look forward to helping our customers enjoy all that Australia and China have to offer.”