Australia's struggling Qantas Airways confirmed on Thursday that it is in talks with Dubai's Emirates about a potential alliance, as fast-growing Gulf carriers expand their passenger base.
The Australian Financial Review reported earlier 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 to a more global revenue-sharing deal, the report said, citing unidentified sources.
Qantas confirmed talks with "Emirates, among others" while the Dubai government-owned carrier declined to comment.
Gulf-based industry sources said that the talks were limited to code-share agreement and that an equity stake in Qantas or any capital injection by Emirates was not on the agenda.
Emirates, which is reaching the limits of a fast-paced expansion plan, has long said that it would not take equity positions in other airlines but was open to code-sharing agreements that could see passengers ferried through Dubai.
The airline's president said in June that it may discuss a code-sharing agreement with Qantas.
With a focus on organic growth, Emirates risks being outpaced by its main state-backed Abu Dhabi rivals Etihad Airways and Qatar Airways, both of which are making moves on the Australian market.
Etihad doubled its stake in Qantas rival Virgin Australia to 10 percent last month and Qatar Airways launched its first service to Perth this month, saying that it also wanted to partner with Australian carriers.
"Gulf carriers are moving down the list... they have target destinations and are putting together a list of hubbing connections," said Peter Morris, chief economist at aviation consultancy Ascend. "Emirates can never be an Asia-Pacific hub carrier by itself, so it has to reach out to other elements."
QANTAS INTERNATIONAL LOSSES MOUNT
Increasingly, hub carriers are joining hands with so-called "end-of-line" carriers such as Qantas, and analysts said a tie-up would provide much needed clarity to the Australian airline's international operations.
"The business is very challenged on a standalone basis and they need to get a tie-up," said David Liu, head of research at ATI Asset Management.
"The sooner that's done, the sooner people get some sort of certainty about how they are going to reduce losses in the international division."
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 in 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 Asia-based, hub carrier could alleviate some of the strategic disadvantages that Qantas faces as an end-of-line carrier," it said.
The Australian Financial Review said that a deal between Qantas and Emirates would see Qantas pull out of its Frankfurt base, leaving London as its only port in mainland Europe and bringing a likely end to its existing relationship with British Airways.
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 (hub carriers), particularly as we are seeing more competition from China carriers," Shaw said, adding that Qantas would save up to AUD$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 Malaysia Airlines was quoted as saying that the company 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-to-Britain route, it said. More than 20 airlines operate the route.