Fax f r o m
: 6 1 2 9691 4817
14 November 2007
Mr Michael Bird
Executive Director
InternationalAir Services Commission
GPO Box 630
CANBERRA ACT 2601
Re: ACCC Comments on ~ a n t a sCode Share w'ithSouth African Airways
I refer to the ACCC's letter of 5 November 2007 to the Commission, which provided
comments on Qantas' application of 3 October for the extension of authorisation to
permit South African Airways (SAA) to code share on Qantas services between
Sydney and Johannesburg for a further three years.
Qantas would like to take this opportunity to respond to various points raised by the
ACCC in its letter.
Indirect competitors
The ACCC notes that although Singapore Airlines (SIA) offers a comparably priced
one-stop service on the Australia-South Africa route, the travel time is not
comparable with those of the code share partners. However, this clearly does not
deter all travellers from purchasing these services, as SIA has increased its market
share by 3.5 percentage points since 2002f03 to 12.7 percent in 2006107.
The ACCC acknowledges that Emirates' market share has increased, but questions
whether this is at the expense of other indirect carriers on the route, rather than
Qantas and SAA. While some redistribution of traffic associated with Emirates'
growth cannot be ruled out, given that the market shares of established third country
players on the route such as SIA, Cathay Pacific, Air New Zealand and Air Mauritius
have also risen since 2002103, it is difficult to attribute Emirates' market share gain of
4.2 percentage points over the period totally to this.
While the price of the Emirates service in the table set out in the ACCC's letter is
higher than fares available on the same days on these city pairs offered by Qantas
QantasAirways Limited ABN 16 W9 661 901
Qantas Centre 203 Coward Street Mascot NSW 2020 Australia
Telephone 61 (2) 9691 3636
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and SAA, fares on Emirates originating in South Africa for travel to Australia in
February 2008 are lower than those of the code share partners. This reflects a
consistently more aggressive focus by Emirates on the inbound market .from South
Africa than for travel ex Australia.
The overall market share of carriers offering one-stop services on the route has
increased by 10.3 percentage points since 2002103, with a corresponding decrease
in Qantas and SAA's combined share.
The growth in indirect carrier share points to the fact that many passengers travelling
between Australia and South Africa are willing to undertake longer journeys, and that
these carriers are providing meaningful competition to Qantas and SAA.
Routings via Asia and the Middle East enable leisure traffic to enjoy a multidestinational holiday, as indirect carriers routinely encourage stopovers with free or
heavily discounted accommodation.
Indirect carriers have also been successful at attracting business travellers to their
services, aided by the increasing frequency they can offer over their hubs. SIA,
Emirates and Cathay Pacific all operate a frequency of service to South Africa higher
than Qantas, and have a significant presence on routes between their hubs and
Australia's major gateways.
This network reach enables these carriers to fill otherwise empty seats on services
via their hubs by marginally priang their through-product in the Australian and South
African markets. These carriers' operations to multiple Australian ports also have the
effect of reducing the advantage that Qantas and SAA may have at Sydney and
Perth, as passengers travelling totfrom other cities are required to make one-stop
journeys.
The table below sets out the services operated by these three competitors in the
Northern Winter 2007 scheduling season.
Major hub competitors AustraIiaSouth Africa route NW07
Carrier
Singapore Airlines
Emirates
Cathay Pacific
Australia-Hub
services pw
21 x SYD-SIN w
21 x MEL-SIN vv
21 x PER-SIN w
14 x BNE-SIN w
7 x ADL-SIN w
14 x SYD-DXB w
14 x MEL-DXB w
14 x PER-DXB w
7 x BNE-DXB w
21 x SYD-HKG w
14 x MEL-HKG w
7 x BNE-HKG w
5 x PER-HKG w
*Increases to 21 pw from IFebruary 2008.
Hub-South Afrlca
services pw
7 x SIN-JNB w
3 x SIN-CPT w
18* x DXB-JNB w
7 x HKG-JNB w
Pg:
Z
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Qantas would expect Emirates to grow its market share further when it increases its
Dubai-Johannesburg services to triple daily in February 2008. Etihad Airways now
offers a daily Abu Dhabi-Johannesburg service and serves both Sydney and
Brisbane. Under the Australia-UAE air services arrangements, Err~iratesand Etihad
have the ability to add up to 53 new flights per week to Australia collectively by March
2011.
It is also important to note that although Qantas and SAA have a significant
combined market share on the Australia-South Africa route, the carriers' share of the
Australia-Africa market is considerably lower, at approximately 54 percent ex
Australia and 57 percent ex Africa. As a number of indirect competitors serve
multiple destinations in Africa, they have an advantage in travelling times to some
locations. In contrast, Qantas' Johannesburg services underpin its access to the
entire Africa market.
Effective competition
The ACCC expresses the view that while the code share remains in place, it is less
likely that Qantas or SAA would operate in a way which might have a negative impact
on their partner, for example by engaging in price discounting.
Qantas contends that the hard block nature of the code share arrangements with
SAA maintains competition between the carriers as well as their incentives for price
discounting.
As the Commission is aware, under a hard block code share arrangement, the
operating carrier sells a block of seats to the marketing carrier, who assumes sole
financial responsibility for those seats. The marketing carrier manages that block of
seats by putting them into its own reservations system, as if it operated a virtuaI
aircraft on that route. As a result, the marketing and operating carriers each hold
independent inventories for the same aircraft, as if two smaller aircraft were flying
instead of one large aircraft.
'The fact that Qantas and SAA set prices independently is supported by the
information contained in the table included in the ACCC's submission, which
highlights the different fares offered by the carriers on each city pair.
In addition to competition with SAA, the fare levels and market penetration of indirect
carriers on the route ensure competitive pricing by Qantas.
Absent approval
The ACCC states that consideration must be given to whether either or both Qantas
or SAA would re-enter the route they are currently not operating on, absent the code
share arrangements.
As the Commission is aware, Qantas has announced plans to introduce a sixth
weekly Sydney-Johannesburg service in November 2008, growing to seven by the
end of 2009. This will see Qantas' capacity on the route increase by 40 percent on
current levels.
A daily service will provide considerably enhanced benefits for tourists, consumers
and exporters, and continued competition through the code share arrangements with
SAA. It will also be important in enabling Qantas to compete effectively with third
country carriers, particularly those offering a high frequency of one-stop service.
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The code share arrangements have been a key factor in the success of the South
Africa route for Qantas since 2000, which has supported our ability to expand
services. Their continuation will also have a significant bearing on the medium term
sustainability of both a daily Qantas frequency and the 12 non-stop services to be
operated by Qantas and SAA in combination.
Yours sincerely
Jane McKeon
General Manager
Government and International Relations