Turbulence ahead for Qantas, China Eastern

It’s going to be a bumpy ride for Qantas and China Eastern to expand their alliance with the competition watchdog concerned it may result in higher airfares for travellers.

The Australian Competition and Consumer Commission (ACCC) this morning said it proposes to reject plans by the airlines to co-ordinate operations between Australia and China under a proposed Joint Coordination Agreement.

ACCC said its draft decision to deny authorisation is based on concerns the JV is “likely to result in significant public detriment”, and will give the carriers “increased ability and incentive to limit capacity and or increase airfares on flights between Sydney and Shanghai”.

Qantas and China Eastern already have a code-sharing agreement, but revealed plans last November to embark on a new deal that would see it open up new routes between Australia and China.

Under the new deal, which had to be approved by regulators in both countries, the two carriers planned a five-year JV to start mid-2015 to bring together operations at Shanghai International Airport that would cut transit times and increase connections to a wider range of destinations.

ACCC chairman Rod Sims said while understandable for Qantas to want to form an alliance with a Chinese airline to establish a gateway to North East Asia, the concern is that “they have chosen to do so with their main competitor on the one route between Australia and China on which Qantas operates direct flights”.

Qantas and China Eastern already have more than 80% of capacity on direct services between Sydney and Shanghai.

“They are the two major airlines on the route and the only airlines offering daily flights, and so the major competitive constraint on each other,” Sims said.

“Competition between them will be greatly reduced under the proposed agreement.”

Sims conceded there would be some limited public benefits from the deal, such as Qantas’ ability to co-locate at China Eastern’s terminal in Shanghai thereby improving connectivity and convenience for QF passengers transferring to a China Eastern flight in Shanghai, as well as cost savings in processing passengers and freight for the airlines.

However, the ACCC considers that the travel options for passengers to travel beyond Shanghai would not automatically be increased.

“Passengers who value this connectivity and convenience are already able to fly with China Eastern directly,” Sims said.

“Therefore, this public benefit will only be likely to arise for passengers who have a preference to fly with Qantas.”

The watchdog is seeking submissions from interested parties in relation to its draft determination by April 8 2015 before making its final decision.