Qatar’s Virgin Australia deal makes business sense

Alamy via Reuters

Qatar Airways’ recent purchase of a 25 percent share in Virgin Australia could be seen as a bold move.

At first glance, the Doha-based carrier’s motives for the deal are not clear.

For example, despite Qatar Airways being a decade-long member of Oneworld, an alliance which brings together the likes of British Airways, American Airlines and Qantas, the same can’t be said for its down-under purchase. Virgin Australia is a low-cost carrier, which is a far cry from Qatar Airways’ full-service segment.

But if we dig a little deeper, the purchase does make strategic sense for Qatar. 

Australia is the seventh most important market for Qatar Airways, with nearly 900,000 seats sold to the country each year. Because less than 5 percent of all Qatar Airways passengers travel purely to its home capital Doha, the value of connecting traffic is higher for this airline than most. 

In this context, a strategic investment that protects access to a reliable partner seems reasonable for an airline that doesn’t seem to be short of cash. 

Overall, Australia has proven to be a challenging aviation market in recent years. The country’s largest carrier Qantas and its low-cost Jetstar associate continue to be highly profitable, but the same can’t be said for the other locally based carriers. 

In the last two years there have been domestic airline collapses: Bonza was never the bonanza that its backers hoped for, while local carrier Rex has returned to purely regional services after abandoning its B737 operations. 

Australia is a huge country with relatively small city sizes. This means the power of Qantas and its frequent flyer programme contribute to a market where two’s great and three’s a crowd for airlines. Virgin Australia is the country’s second-most established carrier and, therefore, unlikely to fail.

Oneworld, but different agendas

It might appear odd that Oneworld alliance member Qatar Airways has invested in non-Oneworld Virgin Australia.

But we can also look at this another way: Australia’s Qantas is a Oneworld member but it also has a long-standing relationship with Dubai’s Emirates.

The concept of airline alliances may generally work well, except when a supposed partner maintains a close, long-established relationship with one of your biggest competitors. 

The Emirates-Qantas partnership has been in place for decades, long before Qatar Airways grew into the carrier it is today. This relationship is so strong that Qantas is unlikely to abandon it for a similar deal with Qatar Airways.

The fact that Qatar Airways has codeshare agreements with Virgin Australia, but not with Qantas, highlights the lack of kinship between these competing Oneworld partners.

Qatar Airways has long invested in global airlines but its strategic interest for doing so has not always been obvious. 

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For example, one of Qatar’s earliest investments was the purchase of 10 percent of IAG, which became the ultimate owner of British Airways, Iberia and Aer Lingus.

Since the deal in 2015, Qatar’s share in the network has increased to 25 percent, making it one of the largest shareholders in the company. The now-profitable IAG has numerous touchpoints of network connectivity with Qatar Airways, Today the deal makes perfect sense.

In 2016, Qatar Airways acquired a 10 percent share of LATAM, the region’s largest scheduled airline with multiple operations in countries across the continent.

At the time, LATAM was a Oneworld member, which provided the strategic case for Qatar Airways. Since then, LATAM has left Oneworld, but the investment remains in place as does a range of codeshare flights. Again, this deal makes some sense.

In 2017, Qatar Airways splurged $662 million to buy 10 percent of Cathay Pacific and access its extensive Chinese network.

A combination of politics and the pandemic have since set Cathay back, but the Hong Kong-based carrier is finally showing signs of recovery. This deal also looks solid for Qatar Airways.

While Qatar’s investments may be considered risky by the wider investment community, they fulfil several strategic requirements. In truth, the deals have been carefully selected.

IAG and LATAM are unlikely to fail. Similarly, Cathay Pacific is well placed whatever happens in China, while Virgin Australia protects Qatar Airways’ widest interest in that market.

John Grant is partner at UK consultancy Midas Aviation