Strategy man

Buchanan was Jetstar’s group general manager commercial before assuming the CEO position on October 1. At just 35 years of age, he is a highly regarded tireless worker who has played an integral role in developing Jetstar’s business model and growth plans since the airline’s inception, even if he has had a lower profile than those responsibilities would suggest.

“We all come from slightly different backgrounds, and we all deal with things slightly differently, and can’t all be charismatic Irish mathematicians!” Buchanan joked in an interview with Australian Aviation.

“I think I’m a little bit more introverted, we each have our different styles of dealing with people. For me that’s a challenge, it’s something that I’m continuously working on in terms of how I interact with people, you need to find your own style.

I’m much more comfortable behind the scenes and much more comfortable working in a team and letting the team take credit for the things that they deliver. And so I like to focus on putting in place a very strong team and letting them deliver.

I think the great thing is we’ve got a very strong team in Jetstar. ” The new Jetstar head grew up on the Central Coast of NSW and studied civil engineering at the University of NSW.

From there he spent several years running his own firm which worked with manufacturing companies, before heading back to university to study for an MBA.

“Half way through business school, I was offered a job by the Boston Consulting Group (BCG), where I spent my first summer working for Qantas, working in catering of all places, on a snap fresh project designing frozen meal products. ” After that project Buchanan completed his MBA at the University of California, Los Angeles (UCLA)’s Anderson School, spent some time travelling, then rejoined BCG where he spent the next few years working in Boston, Malaysia and Australia on a variety of projects, from the steel industry and IT in the US to airlines in Malaysia.

“I spent a variety of time in different airline businesses working on network strategies, frequent flyer programs, marketing programs, and then came back into Australia and did a piece of work on restructuring Qantas’s sales and distribution. ” From there, Buchanan “went into writing the business case for Jetstar. That’s how I started with Alan, I was working as the BCG manager, leading the BCG team to write the business case. ” Like few others then, Buchanan has been intimately involved with Jetstar since its very beginnings, which gives him a background of experiences and a depth of understanding of the business that no external candidate for the Jetstar CEO’s position would have had. So Jetstar is very much Buchanan’s baby, and the achievements of Joyce, Buchanan and the early management team are very real, given Jetstar’s successful growth and its avoidance of the pitfalls that beset other ‘legacy’ airlines in establishing a low cost subsidiary, such as British Airways with Go and United with Ted.

“We clearly laid out this model for the board which said ‘there are companies that have failed because they have cannibalised the core airline and there had been no coordination’,” Buchanan explained. “We came up with this structure that said you need independence on just about every decision except probably one or two, primarily network and capacity. If you coordinate network and capacity, then you should otherwise let the business be completely independent in running its agenda because

“I’m much more comfortable behind the scenes and much more comfortable working in a team and letting the team take credit for the things that they deliver. ”

you need it to be at the other end of the market, you need the brand to be different and the pricing to be much more agressive. ” The result was an airline that had branding completely separate to its Qantas parent, and an adherence to the low cost airline template in areas such as short turnaround times, non-allocated seating, strict check-in cutoff times, a single aircraft type, and no connecting flights.

“It was really a fast pace, we spent the first four or five months getting the concept ready, it was very late nights, pizza and beer in a windowless office in Mascot, trying to get a team of people to get all the numbers to work,” Buchanan recalls of the birth of Jetstar. “We really pressure tested each of the ideas and concepts around what this business should look like, where it should sit, what the brand should mean, and what the product should look like. ” Since then the core Jetstar operation hasn’t evolved too far from the original business model, but there have been some changes along the way, most notably the long haul operation, the business case for which Buchanan was responsible for developing.

“We’ve refined it, we’ve taken costs out and we’ve become a lot more effective and efficient in what we do, but the basic business model is pretty much the same. ” Since Jetstar’s establishment Buchanan’s responsibilities as the head of commercial have included network planning, marketing, pricing, sales and distribution, and strategy, among others. Working under Alan Joyce the pair have seen Jetstar grow from a business plan on paper to an airline with a fleet of 29 A320s, two A321s and six A330-200s serving 20 Australian and 10 international destinations. Despite some hiccups along the way and various tweaks to the business plan, until now Jetstar has been an unqualified success, contributing $118 million in pretax profit to the Qantas Group’s bottom line in the last financial year, not bad for an airline that has grown rapidly.

But there’s no doubt the economic environment of the last few years has suited Jetstar too, with relentless economic growth seeing more and more consumers having the spare income to spend on interstate and international holidays. Arguably now, Jetstar faces a new set of challenges as the economy slows and possibly enters recession.

Where does that leave Jetstar’s growth plans and its role within the Qantas Group as primarily a leisure carrier? “I think the market’s tough,” Buchanan observed of the current situation for airlines.

“It’s a pretty bizarre environment when you see foreign exchange rates jump 30 or 40 per cent in a matter of weeks, and fuel drop from US$147 to US$70 a barrel in a couple of weeks. How do you forward plan when each dollar of movement has a $35 million impact to the group? It’s a real challenge to manage a business in such a volatile market and I honestly think that people who haven’t worked in the airlines understand the volatility that we deal with. ” But Buchanan is confident that the Qantas Group as a whole is well positioned to deal with this volatility, particularly because of the flexibility the ‘two brand’ strategy of Qantas mainline and Jetstar allows.

“Clearly we have two fantastic business models that sit at very different ends of the spectrum, and so if you’re sitting there as a management team or a board member, you’re sitting there going, ‘well, this is good.

I know there is great degree of uncertainty’ – and uncertainty I think is the key word – ‘but if I’ve got options on my plate that will help me deal with that uncertainty, I’ve got a great team, got great treasury skills in terms of dealing with some of these market risks, I’ve got two business brains that are ideally positioned to deal with the changing market conditions, and I’ve got a fleet profile that allows me to adjust capacity growth to whatever level I want’. ” Buchanan says the group is spending a lot of time “scenario planning of how you deal with different types of outcomes, which will deliver more Jetstar growth or more Qantas growth, or more overall group growth, or less overall group growth, depending on the market environment. ” An example of the need for that planning was the Australian dollar’s sharp fall compared to the Japanese yen. “Four or five months ago, the Japanese yen was at 100 to the Australian dollar, and almost all our revenue out of Japan is yen denominated, so you get to this point where the Australian dollar is very strong, outbound routes are booming, and everyone wants to go to Phuket, Bali, Honolulu, even out of Australia into Japan, and you get all the inbound markets suffering because Australia is such an expensive destination. Then it all flips around, suddenly Honolulu looks expensive to holiday in, Japan suddenly looks a hell of a lot more expensive for Australians, but for someone in Japan, Australia looks cheap again. ” Nonetheless, Buchanan says much of the realignment of Jetstar’s network has already taken place, following the fuel price spike earlier this year.

“I think we’ve done a lot of that already,” Buchanan said of aggressive changes to the network, “but I need to also recognise that we’ve got an economic environment that’s going to drive a levelling off of travel, so I’ve got demand issues, I’ve got movements in the network, and I’ve got potentially some down trading with economic woes happening. So you put all those into the mixing pot and say ‘what does that mean?’ we need to be able to adjust for it. ”

“It’s a pretty bizarre environment when you see foreign exchange rates jump 30 or 40 per cent in a matter of weeks, and fuel drop from US$147 to US$70 a barrel in a couple of weeks. ”

But, he says, “The group is well positioned – you can deploy more capacity in Jetstar, more capacity in Qantas, more capacity internationally, or more capacity domestically. That’s what’s fantastic, you’ve got two brands, you’ve got a domestic market, you’ve got an international market, you’ve got outbound and inbound markets, and you sit there working out, out of your portfolio businesses, which one you want to invest in at any point in time. ” Certainly Buchanan is confident that investment in Jetstar will continue, with no slowing of plans to introduce the Boeing 787 into service (now likely from early 2010), a renewed focus on New Zealand, and the growth of hubbing to near Asian international destinations from Darwin and Perth.

“I think there are always growth opportunities for Jetstar,” Buchanan observed.

“You go through the different scenarios and you think, is there an opportunity for us to re-weight certain areas of the Qantas Group portfolio, and you want to think even in the downturn Jetstar’s one you’re going to want to reweight upwards.

“We would be very keen, I think, in going into this downturn to be wanting to pump Jetstar capacity more than anything.

Two or three months ago, we should have been flying the 787s. We’ve used the delay to push forward international 320 growth, so the Darwin hub, additional trans-Tasman flying, Perth international flying. ” All those developments in fact take Jetstar away from the classical low cost airline model, but that’s not do say that keeping costs as low as possible no longer remains a driving priority.

The Perth, Darwin and New Zealand growth has been made possible by the coming on stream of the first of up to 65 A320 Family aircraft the group ordered for Jetstar late last year. But that order comprised a mix of aircraft from Airbus and operating leases, giving flexibility if not all the capacity is needed.

“There is lots of opportunity for us to retire leases as they come up and steady our growth profile,” Buchanan noted. “One of the things we do is build in risk mitigation measures where, if we need, we can actually take capacity growth to zero. Or we can grow up to 100 aircraft if we want to, we’ve built that flexibility into the delivery stream. So I think flexibility is key, the ability to react quickly in response to the market is key, but I’m actually quite bullish and think that we’ll actually continue to need to grow Jetstar quite aggressively. ” Certainly the 787 delays mean Jetstar Internationl has been growing slower than originally planned. But even with the current economic outlook, Buchanan doesn’t see the delayed arrival of this new capacity as a blessing in disguise.

“I think the 787 will be game changing, so you’ve got this opportunity cost in terms of not being able to lower your cost base in a higher fuel environment. I’d love to be getting my hands on this aircraft and it’s not coming in. ” Buchanan says rather than waiting passively, Jetstar has instead moved forward the use of A320s to grow short haul international flying.

“I think the organisation hasn’t sat back and said ‘oh well, the aircraft won’t come in, we can’t do anything’. We’ve said let’s back fill, we’ve got a lot of 320s coming in, and we’ve done what we can to bridge the gap. ” The most obvious example of the airline’s use of A320s for international services is its new Darwin hub, through which Jetstar can offer connections to Singapore, Kuala Lumpur, Denpasar in Bali and Ho Chi Minh City/Saigon.

“The Darwin hub enables us to operate to a place like Saigon, which would traditionally have been a long haul, widebody market. Singapore, likewise Bali, they are all traditional 330 or 787 markets, and we’re now substituting with 320s. So the organisation’s been fairly nimble and innovative and responding to challenges where we don’t have the widebody aircraft. ” A Qantas Group strategic decision to transfer Tokyo-Cairns services to Jetstar, in

“I’m actually quite bullish and think that we’ll actually continue to need to grow Jetstar quite aggressively. ”

part to utilise precious landing slots at Tokyo’s Narita Airport, meant Jetstar had to pull out of direct A330 services to Ho Chi Minh City and Kuala Lumpur, and instead serves those two destinations via Darwin.

While having to connect flights in Darwin – where passengers have to deplane, clear customs and then reboard their appropriate flight – sounds less than ideal, Buchanan does point to a number of benefits from the arrangement, not the least per seat operating costs in fact being slightly lower than for direct flights due to “nice little efficiency gains” such as low airport charges in Darwin (compared to operating out of the Sydney international terminal) and lower crew costs because crews don’t have to overnight offshore (ie they’d fly Darwin- Singapore-Darwin in a single day).

Plus, Buchanan contends that the Darwin connection is “pretty easy I think, and in fact what we’re hearing from most customers is, it’s either a great way to spend a day or two in Darwin, or if I’m on an eight hour trip, I get to break it up and have an hour to stretch my legs and get a drink. ” Another airport Jetstar is effectively developing into a hub is the Gold Coast, which it serves from Melbourne, Sydney, Newcastle and Adelaide domestically, and now flies international long haul to Japan (firstly Tokyo, then from December 18 Osaka and Nagoya), and soon will be linked by A320s to Auckland.

“I think the opportunity to continue to build that presence there and get that network effect really humming and bring Japanese tourists through the Gold Coast into NZ and New Zealanders up to Cairns, that opportunity for the Gold Coast to be much more for us is quite exciting, and I think you’ll really see a transformation of the business as we move forward. ” New Zealand meanwhile is gaining renewed attention. For some time Jetstar has operated flights from a Christchurch base to Australia, but with new A320s coming on stream services from Auckland to Sydney and the Gold Coast will soon launch.

“We got sidetracked into setting up just our long haul international operations,” Buchanan said of the delays to further expanding in New Zealand. “And then we had the Jetstar Pacific business in Vietnam, then the Darwin hub and Perth international services. There’s been a myriad of different expansions and things going on, but we’ve come back now and said ‘no, we really want to make a success out of trans- Tasman operations’. We’re very happy with Christchurch, let’s invest in Auckland, let’s get our NZ AOC up and running, and that will open up a huge amount of possibilities for us in New Zealand. ” In fact, the long term vision for New Zealand is quite substantial. “We would see the equivalent on a population basis of what we were doing in Australia we want to be able to do in New Zealand, so scale that down for population, I think that’s a presence we want to have in NZ. ” Then there is the continuing project of expansion in Asia, an area that is still somewhat problematic but one with potentially enormous payoffs long term.

“We’re learning this market, we’re learning how to do business, we’re learning how to get the airlines up and running.

It’s still early days for us, but we’ve got great ambitions for the pan-Asian strategy. I don’t know how the final picture will unfold, but we’re working on it, spending a lot of time and energy trying to make sure that we are well positioned to participate in Asia. ” The Darwin hub, New Zealand expansion, the introduction of the 787s, the partnerships with Jetstar Asia and Jetstar Pacific – it’s a big strategy for Buchanan to roll out, but he doesn’t expect his predecessor Alan Joyce as the new Qantas CEO to be to interfering in his old baby.

“I would hope Alan stays involved in the business,” Buchanan remarked. “But I think if anything Jetstar’s in a pretty good position at the moment and the strategy is pretty well defined going into a downturn in the economy. Everything tells us Jetstar will be well positioned to weather that storm, I think if anything the focus for him is more likely to be on the other businesses. I don’t think he’s going to take pressure off me, but I think he recognises he will be absolutely focused on where he needs to drive the greatest amount of change now. ”

“I’d love to be getting my hands on this aircraft and it’s not coming in. ”

Of his elevation to the Jetstar CEO role Buchanan said, “It’s very much a message of continuity. We stand for the same things, we debated all the concepts that have come up over the last five years, and we’ve come to an alignment on everything. ”

“I think Alan and I manage differently, we have different styles, but the core business strategy and what Jetstar stands for – the brand, the promise, the product proposition – is very much the same. ”

It’s just that now, as Buchanan himself identifies, the challenges facing the airline have changed. “I think Alan and I manage differently, we have different styles, but the core business strategy and what Jetstar stands for is very much the same. ”