SYDNEY -- Qantas Airways' (ASX: QAN.AX) shares have taken off in morning trade on reports that the company is set to establish an alliance with the world's largest airline, Emirates, which could boost Qantas' international business. In 2011 alone, the international business reported losses of more than AU$200 million on capital invested of over AU$5 billion.
At lunchtime, Qantas shares were up 7.7% to AU$1.067.
According to the report in today's Australian Financial Review, Emirates and Qantas are working on a code-sharing deal which would see Qantas fly to Dubai and rely on Emirates to transfer passengers to destinations across Europe, the Middle East, and Africa.
Emirates has the largest international network of any carrier in the world, with 30 destinations in Europe and 18 in Africa, and the agreement would give Qantas passengers easier access to all those destinations. The fact that Emirates planes are younger on average and more luxuriously appointed suggests that most Australians wouldn't have a problem transferring to an Emirates flight after landing in Dubai.
Qantas currently flies to only two destinations in Europe -- London and Frankfurt -- and is set to pull out of Frankfurt, due to the region's economic woes and worsening outlook, which would leave London as its lone European destination.
The report also suggests that the new deal would almost certainly mean the end of Qantas' long association with British Airways. More than 25% of Qantas passengers flying into London transfer to British Airways to head back into continental Europe. That traffic would likely dry up instantly with the Emirates deal.
Merrill Lynch analysts liked the deal, suggesting it "could be the key catalyst to turn around Qantas's international business," and adding, "By removing unprofitable European long-haul flights, Qantas can quickly remove costs from the international business and at the same time, Qantas can then either accelerate the retirement of its ageing fleet, or increase its services into Asia."
With Qantas' fuel bill of more than AU$4.4 billion per year, the deal appears to make sense.
For Emirates, the deal would deliver Qantas' dominant share of domestic traffic away from rivals such as Singapore Airlines, which has formed an alliance with Virgin Australia (ASX: VAH.AX).
Despite the reports of a deal, there's a long way to go before it becomes concrete. Should it fall through, Qantas' options for its international operations could be limited. As a worst-case scenario, we could see Qantas stop flying to Europe altogether, concentrating on Asia and its domestic operations.
One wonders how long it will be before Qantas turns its attention to its underperforming 29% stake in Jetset Travelworld Limited (ASX: JET.AX), especially since Qantas launched the Hooroo online accommodation site, which appears to be a competitor to TripAdvisor. Jetset shares have lost more than 50% of their value over the last 12 months.
Foolish takeaway
Airlines are notoriously bad investments. In aggregate, airlines globally lose billions most years. These moves by Qantas may be well-intentioned, but the results are unlikely to be a spectacular turnaround in its fortunes.
In my opinion, investors would be better off considering investments in Sydney Airports (ASX: SYD.AX), which offers many of the airlines' benefits with far less risk.
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