A real deal for Qantas - Malaysian Airlines

As I indicated in my previous article, there are strong rumours of a "merger" or "tie-up" between Australian carrier Qantas and Malaysian Airlines (MAS). Given the regulatory stranglehold and national politics involved in Asia, a full merger is next to impossible.

Not only do I feel that this tie-up will happen, I strongly believe that it will result in positive results for all the players, not just the airlines.

The future for Qantas is Asia, but either due to a difference in business culture, or national ego, or economic and/or market positions, Qantas really has no serious potential partners in Asia, other than Malaysian. A tie-up with either Singapore Airlines or Cathay Pacific or Japan Airlines and can be written off due to culture or ego reasons. Garuda, Thai, Philippines, Eva, China Air, Air China, or any of the Taiwanese or Chinese airlines are too small or do not offer adequate economic benefits to Qantas.

Qantas CEO, Alan Joyce, had said that Qantas was looking to be the senior partner in any merger or similar relationship that the carrier entered into. The recent failure of the merger talks with British Airways highlights Joyce's desires.

Under the able stewardship of Idris Jala, Malaysian has staged a phenomenal comeback. After years of losses, government intervention and its resultant inefficiencies, Jala has moved MAS in to profitability, for the last 3 years. Even until the third quarter of 2008, despite the economic crises, he has delivered profits. Driven by its formidable low cost carrier (LCC) competitor AirAsia, and Jala, MAS has undertaken ruthless cost cutting and route rationalisation. Despite this, Jala recognises, MAS will never meet the cost base of AirAsia, and has moved the airline up the value chain, focusing on the higher end of the market, instead.

Financially, Qantas has been in good profit for many years, thanks to the "Kangaroo Run", and has a decent cash balance sitting ready, should a deal with MAS come about.


At the same time, liberalisation is spreading through the region, may be in fits and starts. On December 1, the 70 year old duopoly of Malaysian Airlines and Singapore Airlines on the lucrative Singapore-Kuala Lumpur sector was opened up, after 5 years of lobbying by the LCCs of both countries, but Malaysia predominantly. Capacity has trebled virtually instantly.

Kuala Lumpur International Airport (KLIA) has much to offer. The airport was built and promoted by former Malaysian Prime Minister Dr. Mahathir Mohammed, as a competitor to Singapore's famous Changi Airport, a base for many international airlines, including Qantas.

Despite trying as hard as they could, KLIA could never match the economies of scale, and frequencies of Changi, which brought in increasing numbers of passengers. For many years, KLIA lagged, almost becoming a colossal white elephant. The poor situation at KLIA was further aggravated by its own government. For years, Malaysia resisted liberalisation of the KL-Singapore route. Apart from being one of Malaysian Airlines' most profitable routes, there was a constant fear of the undermining of KLIA as a hub, since Changi is easily the more preferred hub by both airlines and passengers.

Thanks to the fast growing AirAsia, KLIA is now making a comeback, as a low cost hub, but we should keep in mind, the airport still has high end facilities as well. KLIA is also a spacious airport, and with its planned expansion, will offer considerable growth opportunities to any global scale airline.

This low cost positioning is important. While Qantas withdrew from KLIA, due to low yields, and preferring to build economies of scale at Singapore, it has two low cost subsidiaries JetStar and Singapore based JetStar Asia. Jetstar Asia already flies to KLIA, and Jetstar used to fly the Sydney-KL route, but has withdrawn temporarily during the economic slow down.

Jetstar Asia has only a narrow body fleet, but is already reaping benefits from the recent KL-Singapore route liberalisation. Jetstar has a fleet of six Airbus A330's, two of which fly Australia to Japan (service due to terminate in December 2008), and can easily use KLIA as a base to expand the Qantas brand in to India, south-east Asia, the middle east, Europe, and especially the United Kingdom, in response to the challenges of the ever busy AirAsia who is making KLIA as a low cost hub for Australians, with its upcoming UK service. Once Jetstar receives its Boeing 787 Dreamliners, hopefully in 2010, the KLIA base will blossom as an alternate "Kangaroo run" route.

A well established base in the backyard of arch-rival Singapore Airlines, while still maintaining its presence at Changi will suit the Qantas/Jetstar group just nicely, affording them and potential partner, Malaysian Airlines, more options, with Qantas still maintaining presence at Changi.

Unlike the talks with British Airways, in case of Malaysian Airlines, the Malaysian government are serious and any deal will have their blessing. So it will behoove Qantas to proceed. In the near future, Qantas and Malaysian can extend their Oneworld alliance membership further with code sharing and various joint strategies. In the medium term, to overcome the restrictive regulatory framework in South-East Asia, I expect that Qantas and Malaysian Airlines will have to enter in to some time of cross-holding and also for Qantas buy a significant minority share in Malaysian.

A deal, if consummated, with help re-define the south-east Asian skies, and benefit not just the airlines, but also KLIA.