Qantas flying high

New deal with Emirates breathes life into struggling international operations

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 6, 2012 1:39 pm AEST

The Kangaroo Route is officially no more, after Qantas announced today that Emirates will fly Qantas customers around Europe.

Qantas Airways Limited (ASX: QAN) has today announced a ten-year partnership with Emirates, which is aimed at turning around its loss-making international division.

It will also see the Flying Kangaroo end its joint business with British Airways. Instead, Qantas will be flying to London through Dubai, and using Emirates to ferry passengers from Dubai to other destinations in North Africa, the Middle East and Europe. Qantas and Emirates will be the only two airlines sharing a terminal in Dubai, which will make it much easier for Qantas travellers, going on to other destinations with Emirates.

This appears to be a game changer, not just for Qantas but for Australia. Not only does it give international travellers a much more cohesive travel experience, travelling to Europe and beyond, but is likely to see an increase in outbound customers as well as bringing more tourists to Australia.

For Emirates and its customers, access to Qantas' domestic network of more than 50 destinations, and 5,000 flights a week is attractive.

Qantas has also said that it enables the company to restructure its Asian operations. Much of its European flights used to fly through Asia; instead, they will now be flying through Dubai, allowing Qantas to dedicate its Asian flights to that region. It also allows Qantas to increase capacity to Asia, and enable more 'same-day' connections across Asia.

It has already announced plans to cease flying into Frankfurt, and will withdraw from the Singapore-Frankfurt route.

The move is likely to provoke similar moves by other airlines. Etihad has taken an equity stake in Virgin Australia Holdings (ASX: VAH), and the two airlines are likely to strengthen their relationship, in order to compete effectively with Qantas.

The impact on local operator Air New Zealand (ASX: AIZ) is yet to be fully understood, while travel agents like Webjet Limited (ASX: WEB) will be rubbing their hands with glee.

The Foolish bottom line

Despite the positive news for Qantas, and likely Australia as a whole, investors should heed some words of wisdom from my colleague Scott Philips, "Qantas hopes to deliver returns that are greater than its cost of capital within five years of August 2011." In other words, "Qantas is going to spend most of the next 5 years making less money than it costs to fund the airline's operations. If you ever wanted proof that investing in airlines is a mug's game, you have it right there."

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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