American and Qantas Try to Hook Up Again, Warn of Doom and Gloom If Shot Down

Back in 2015, American and Qantas tried to gain US government approval to expand a joint venture to include anti-trust immunity for flights between the US and Australia/New Zealand. This seemed like a fairly standard request at the time, but the Department of Transportation (DOT) surprisingly shot it down. Now, the airlines are trying again, armed with more data showing the public benefits of joint ventures. (There is a study in the appendix of the application that is a worthwhile read.) The application itself is long-winded and sounds, at times, like a teenage girl threatening that the world will end if she can’t go out with her friends this weekend. The thing is, they may not be that far off.

If you have the time, the application is actually an interesting read. You can tell American and Qantas have put a great deal of effort into mounting one last attempt to get this pushed through. Though with a new administration in place, I’m not quite sure why they didn’t just do this the easy way…

The basics of this application are mostly the same as the old one with one significant change:

Qantas has interline relationships with United, Air Canada, Hawaiian, Alaska Airlines, WestJet, Fiji Airways and Air Tahiti Nui. These relationships will continue and can even expand, as the Parties have amended the Proposed JBA to remove the exclusivity provisions that were present when the Parties originally applied for ATI in 2015.

Of course, this doesn’t require that Qantas keep those relationships, but it’s still a nice concession. The arguments showing the benefits of the joint venture are compelling, particularly since American effectively didn’t serve the Australia/New Zealand market at all until recently. When American did start, that service was predicated on a joint venture helping to support it. So I don’t see this particular effort as a way of reducing competition. I see it as a way of giving American a way to actually serve the market on its own without bleeding a ton of red ink. Without this, it’s hard to see how American can become a long-term competitor in the market. (Then again, American does like to lose money on Transpacific flights from LA….)

What makes this market so hard for American? Australia and New Zealand are uniquely challenging for airlines in the US. Though Americans travel there in the peak northern winter, the rest of the year sees upward of 70 percent of traffic originating down under. That’s opposite the usual pattern, and it requires having a strong point-of-sale in those countries. It explains why airlines in the US have scrambled to find good partners down there while at the same time using smaller airplanes when possible.

Delta’s flight from to LA to Sydney would be a bloodbath without the connections and local sales presence it gets from its joint venture with Virgin Australia. United benefits tremendously from its joint venture with Air New Zealand even though that only covers New Zealand and not Australia. (United has a bit of an advantage in that it’s far more established in the region than any other US player thanks to longevity.) And American, well, without a joint venture, it’s hard for American to justify serving the market at all. We already got a glimpse of that when the original deal was turned down.

Soon after the DOT shot American and Qantas down last time, American’s Auckland flight was cut back to only operate during the peak northern winter when there are Americans looking to travel to New Zealand. And the Sydney flight was downgauged from a 777-300ER to a 787-9. Despite those changes to shore up the business, the filing notes that “American’s Los Angeles to Sydney service has consistently been unprofitable.”

American and Qantas also cut back codesharing and mileage earning when this was denied the first time around. Some say this was done out of spite, but really, it’s because without a joint venture, each airline has the incentive to keep people on its own airplanes instead of those of a competitor. That’s why American doesn’t codeshare on the LA – Sydney flight on Qantas any more. It wants to keep those people on American’s airplane to give it half a chance of staying afloat.

American and Qantas built their service patterns based on the idea that they’d be able to work together closely. Would American have ever been able to start Sydney without Qantas? Probably not. And would Qantas have ever been able to fly an A380 to DFW without American? Nope. Without a joint venture, these start to die on the vine.

In the application, American notes that 24 percent of the people on its LA – Sydney flight connect beyond Sydney. That means Qantas has a lot of leverage over the viability of that already-money-losing flight. If these airlines are competing, then wouldn’t Qantas prefer to pull that plug and try to get American out of the Sydney market altogether? At the same time, that Sydney – DFW flight on Qantas relies heavily on American’s feed in the US. Wouldn’t American rather route those passengers over LA on to its own flight and hope that the Qantas flight dies (or at the very least gets downgauged to a 787)? It sure would.

The filing makes it sound ominous. It says that without a joint venture, “Qantas will have significantly less incentive to allow American to codeshare.” And “without Qantas support, [American’s Sydney] flight becomes economically unsustainable.” Those are somewhat theoretical, but it’s far more concrete on the reverse.

When it comes to Qantas codesharing on domestic American flights, without the joint venture things get ugly quickly.

American plans to eliminate codesharing on all 53 destinations from Los Angeles and all 8 destinations from San Francisco. American will remove over half of the codeshare connections from Dallas (37 of 64). The choice of codeshare cuts is limited to where American can flow the affected passengers over LAX and onto its own LAX-SYD service.

Some may say that with no joint venture today, these ties should have already been cut. What gives? You have to remember that American and Qantas have been hoping that they can finally get this thing approved. They cut back just enough to show that there was a real negative impact, but they didn’t cut back as far as they would have if they had given up completely. They want to try to some extent to keep the existing service viable, so that it’ll be much easier to ramp up the joint venture when approved. That means they have to think in the long term. But if that hope is dead, then it’s time to cut back even further.

Then it becomes a race to see who fails first. If American blinks and cancels its Sydney flight (or makes it seasonal), then maybe it will decide to keep codesharing on Qantas since it would otherwise have no presence in the market. Qantas may also decide to pull its DFW flight. Either way, the end result will be fewer options for travelers. Not all joint ventures have as clear of a benefit as this one, so it’s particularly perplexing why this was singled out for denial. On any rational basis, it shouldn’t have been. Let’s see if DOT gets it right this time.

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