Qantas in Emirates tie-up talks, shares soar

SYDNEY Thu Jul 26, 2012 1:53am EDT

A ground crew member cleans the windshield of a Qantas passenger plane at Adelaide airport in this February 13, 2012 file photo. REUTERS/Tim Wimborne/Files

A ground crew member cleans the windshield of a Qantas passenger plane at Adelaide airport in this February 13, 2012 file photo.

Credit: Reuters/Tim Wimborne/Files

SYDNEY (Reuters) - Australia's struggling Qantas Airways (QAN.AX) said on Thursday it is in talks with Dubai's flagship carrier Emirates EMIRA.UL about a potential alliance, sending its shares surging more than 9 percent.

The Australian Financial Review reported earlier in the day that Qantas was in talks with Emirates on a deal to help its loss-making international division by giving the carrier access to greater numbers of passengers from Emirates' hub in the Middle East.

A final form of any deal could vary from a straightforward code-share arrangement -- where airlines share some flights -- to a more global revenue-sharing deal, the report said, citing unidentified sources. There was no mention of a capital alliance.

Qantas said that making alliance deals, which could also cut aircraft and other costs, was always on the agenda.

"At any one time, Qantas may be in contact with a wide range of companies about potential commercial cooperation," it said in a statement. "These airlines include Emirates, among others."

Emirates said it would not comment any dialogue it may have with other carriers.

Hub carriers are increasingly joining hands with so-called "end-of-line" carriers like Qantas and analysts said a tie-up would provide much needed clarity to the international business.

"The business is very challenged on a stand-alone basis and they need to get a tie-up," said David Liu, head of research at ATI Asset Management which sold Qantas shares after a loss warning in June.

"The sooner that's done, the sooner people get some sort of certainty with regards to how they are going to reduce losses in the international division," he said.

Qantas shares were trading 9.6 percent higher at A$1.09 in afternoon trade. They slumped to an all-time low of A$0.96 last month after the company warned of mounting losses from its international operations.

Credit ratings agency Moody's added to pressure on the airline, saying in a statement that sustainable and profitable international business was a major factor for the airline's ability to maintain an investment-grade rating over time.

"A scenario involving a major tie-up with a Middle East or Southeast Asian based, hub carrier could alleviate some of the strategic disadvantages that Qantas faces as an end-of-line carrier," it said.

Other examples of tie-ups between hub and end-of-the-line carries include the recent doubling of Abu Dhabi's Etihad Airways stake in Qantas rival Virgin Australia (VAH.AX) to 10 percent.

AFR said if a deal is reached, Qantas will route many of its international flights through Dubai rather than Singapore, and will rely on its new partner to ferry customers to some European destinations, as well as the Middle East and parts of Africa.

Qantas would also pull out of its Frankfurt base, leaving London as its only port in mainland Europe, with the proposed deal likely to see an end to Qantas's existing relationship with British Airways (ICAG.L), it said.

Macquarie Equities aviation analyst Russell Shaw said there was growing acknowledgement that hub carriers can service Europe to Australia routes better, picking up passengers from multiple European, Asian and Middle Eastern departure points.

"When you look at growth plans, it makes sense to partner with them, particularly as we are seeing more competition from China carriers coming in to the market," Shaw said.

Shaw added that Qantas would likely save $A5-6 million in capital expenditure by using Emirates aircraft to fly from the Middle East to Europe.

In a separate report by Malaysian business weekly The Edge, an executive at Malaysian Airline System Bhd (MAS) (MASM.KL) was quoted as saying it may revisit a joint venture plan with Qantas after the Malaysian carrier becomes an official member of the OneWorld Alliance in 2013.

MAS was interested in teaming up with Qantas and British Airways to tap the Australia-Britain route, it said. More than 20 airlines operate the route.

(Additional reporting by Lincoln Feast, Colin Packham, Miranda Maxwell and Praveen Menon; Editing by Edwina Gibbs)

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