Qantas Empire Airlines?

The government’s Green Paper was heralded by the industry and one of the key platforms was an easing of the single foreign airline cap of 25% – and group of airlines of 35% – to 49%.

The rumours of the lifting of the cap, which surfaced earlier in the year, effectively lifted the floodgates of opportunities for outgoing Qantas CEO Geoff Dixon to intensify, and realize on his mantra of “bigger is better” – despite all the evidence to the contrary.

As soon as the news broke, many scribes trotted out the usual synergy cost savings and passenger benefit arguments, seemingly oblivious to the fact that both airlines were cornerstone founders of the oneworld alliance, which was supposed to deliver all of those and much more. One even detailed how British Airways’ strong European network would benefit Qantas.

Another – in justifying the need for consolidation – told his readers that there were “2,000 airlines flying around the world with the top 10 controlling less than 10 per cent market share.” The real number is about 500 “significant” airlines and the top 10 control 35% of the world passenger traffic. The top 20 control 53% and the top 50 about 75%.

Yet another scribe reasoned that an equity merger with British Airways would pave the way for Qantas to be able to do an equity deal with American Airlines but overlooked that Qantas has had an extremely close relationship with American for decades and it was in fact that close relationship that paved the way for British Airways and American to join hands in oneworld.

The oneworld alliance – and the Star Alliance as well – was supposed to deliver all these benefits along with joint fleet specifications and aircraft orders plus joint maintenance. After nearly nine years, none of those touted benefits have been acted on in any meaningful way. In fact, Qantas is furious that American Airlines was recently able to order 40 787s and obtain 2012 delivery slots – hardly the stuff of co-operation.

Some suggested that airlines need to merge to withstand the savage economic downturn, a call that is trotted out every couple of years as the industry battles seemingly endless shocks such as the Asian Currency Crisis, 911, SARS the fuel spike and now the economic downturn. But the fact is most countries righty judge their national airlines more important than their air force and you will never see air forces being merged.

Others greeted the deal suggesting that British Airways was a saviour of Qantas and would bring stability – obviously unaware that the airline had purchased a 25 per cent stake in Qantas in early 1993 for $665million as part of the Qantas float. That stake was subsequently diluted to 18.25 per cent in a 2002 rights issue and then dumped in 2004 for $1.1 billion and used to pay down British Airways’ $13 billion debt burden.

In fact, the association with British Airways – and missed by all commentators – goes back even further to 1934, when the forerunner of British Airways, Imperial Airways, formed a joint venture with Qantas to form Qantas Empire Airways, each with 49 percent with 2 percent being held by an independent arbitrator. British Airways, by then BOAC, held that stake till 1946 when Qantas was nationalized by Prime Minister Ben Chifley. The Australian government purchased both the Qantas Limited and BOAC shares.

However, the association with the British Airways and the British government has not been rosy, particularly through the 1940s and 1950s when Qantas came under intense pressure to buy British equipment such as the Tudor 1 instead of the Constellation and the Comet 1 and 4 instead of the Super Constellation and 707.

However it wasn’t too many days into the latest marriage proposal that some commentators started to see some negatives in the deal for Qantas. Respected business analysts for The Age newspaper Stephen Bartholomeusz rightly asked whether the deal “should be done.”

He pointed out that most of the synergies of such a merger are already in place through the joint services agreement (JSA) on the “Kangaroo” route between Australia and the UK and also with the oneworld alliance.

And sensing growing public backlash was Australia’s Minister for Infrastructure, Transport, Regional Development and Local Government Anthony Albanese who was quick to tell ABC radio listeners that a 51 per cent stake holding must remain in Australian hands. He added: “Whilst Qantas and BA have put out a statement confirming these talks, they’re far from reaching a conclusion and the outcome far from certain and any arrangements the Government has made clear to Qantas would need to satisfy both the Qantas Act and the Qantas Sale Act.”

“Most of the synergies of such a merger are already in place through the joint services agreement on the ‘Kangaroo’ route.”

Any sale would also need the approval of the Australian government. Treasurer Wayne Swan, under the provisions of the Foreign Investment Review Board, with the catastrophic Airline Partners Australia (APA) deal still fresh was also watering down expectations.

Adding to the “doubting Thomases”, the opposition transport spokesman Warren Truss told the ABC’s The World Today program that he was not convinced the deal was a good move. “If one company owns up to 49% of Qantas then they would have effective control, indeed they would achieve effective control at a level much lower than that and Australians would want to be certain that they still had an airline that would put the interests of this country first and that their capacity to serve Australia was not compromised.” Clearly, and thankfully, the Liberal Party had changed spots since it gave the green light to the APA bid to buy Qantas outright in early 2007.

And affecting the political will, a viewer poll for Channel Seven’s top rating Sunrise morning program gave the thumbs down to the deal with nearly 80 per cent voting no.

While the prospect of British Airways eloping with Qantas was a surprise to Australians, who thought that after the APA deal Qantas would be more wary, Spain’s Iberia, which was almost to the alter with British Airways having consummated their proposed marriage with a limited share swap, was shell-shocked.

Two days after the deal was announced Iberia CEO Fernando Conte told a UK Aviation Club meeting in London that he only learnt about the Qantas/BA talks just one hour before the public announcement, although those talks had been going on since June.
“I knew about it one hour before it was published, when Willie Walsh called me and informed me they were having discussions,” he told ATW’s Cathy Buyck. “I don’t have too much information about what has happened between BA and Qantas since August, and we have it on our agenda to clarify [the situation].”

Insiders tell Australian Aviation that Iberia is understandably furious with British Airways, after it [Iberia] rejected overtures from both Lufthansa and Air France/KLM to pursue the British Airways option.

During the first week of December came revelations from across the world that Qantas, in what would appear to be a fit of merger desperation – perhaps to crown Geoff Dixon’s final year – had been talking to a host of airlines. Cathay Pacific, Emirates, Singapore Airlines and Malaysian Airlines were all floated as merger partners but all had rejected Qantas’s overtures for a variety of reasons.

Several airlines that spoke to Australian Aviation off the record cited a lack of cultural fit and Qantas’s desire for too much control.

And cultural fit was about the only positive in the Qantas/British Airways deal with Willie Walsh and Alan Joyce not only related by marriage but also starting their careers at Aer Lingus. However, as many failed mergers attest, it is one thing for two airlines CEOs to get on but it is another entirely for the layers of management down the ladder – and downunder – to sing from the same hymn book.

History shows that there has not been one successful “equal” merger and the “success record of equity stakes has been more like the accident record of a third world airline flying Russian turboprops,” quipped one airline chief to Australian Aviation.

That hard reality was not lost on airline analysts such as Credit Suisse’s Anthony Moulder and David Bailey who told clients in a briefing note: “With little network rationalisation, and hence cost savings or fleet utilisation benefits, we cannot understand the logic for the merger by Qantas management.”

While some touted the lopsided Air France/ KLM deal and the Lufthansa rescue of Swiss as examples of successful mergers, others rightly pointed out that those deals were essentially regional between airlines that actually – well almost – shared borders.

“With little network rationalisation, and hence cost savings or fleet utilisation benefits, we cannot understand the logic for the merger.”

After the euphoria of the possible deal settled, analysts also started to take a long hard look at the British Airways numbers and realized that Qantas was in far better shape citing the fact that Qantas’s pre-tax earnings margin was 3.5 per cent, compared to British Airways 0.8 per cent, while Qantas’s gearing was a far more robust – 41 percent compared to British Airways’ sickening 79 percent.

At the root of the deal was Dixon’s mantra that the industry had to consolidate to survive and certainly some mid size, average service airlines such as Alitalia fit that mould well but not the world’s most respected and consistently profitable airline, operating from possibly one of the world’s strongest economies, with a population whose yen for travel and discovery and adventure rivals that of Marco Polo and Captain James Cook.

A quick scan of the world most profitable (by net margin) and successful airlines (by Skytrax and Air Transport World awards) will show that bigger is certainly not better. The shining lights are: Cathay Pacific (15th), Singapore Airlines (16th), Emirates (18th), Air New Zealand (46th) and Asiana (50th).

And broadly they all have one thing in common: the philosophy made famous by former CEO of Air New Zealand and now head of the Commonwealth Bank, Ralph Norris who said: “I don’t care about my shareholders, I care about my staff, my staff look after my passengers and my passengers look after my shareholders.”

The turnaround at Air New Zealand crafted by Norris and built on by his successor Rob Fyfe is one of the airline industry’s greatest turnaround stories and one that Qantas’s new management should ponder at length and then embrace.

Qantas staff morale is at a very low ebb after the Dixon years, and incredibly the airline’s last passenger innovation was the introduction of business class in 1979. Since then Qantas has been more than often a lamentable last when it comes to passenger comforts or in-flight technology. Even route innovation has disappeared.

Dixon often argued that the threat of liberalization and open skies drove the need to merge yet if the airline’s staff was inspired by management that actually walked the walk, and the airline led the world in product innovation, open skies would be an opportunity to grow organically without any bilateral impediments.

Just as the APA deal derailed and even paralysed management of Qantas for over six months so the seemingly endless pursuit of marriage – of convenience – partners is a constant distraction to what should be the main game – getting back to basics of lifting Qantas’s lamentable on-time record and re-engaging with staff to lift flagging morale and launching leading edge marketing and product initiatives.

As business commentator Alan Kohler said, getting a mega merger such as oneworld Inc through would be “more complicated than the Doha round of GATT. That failed, and so will Oneworld Inc.”

The only ones to benefit are the consultants and advisors, Macquarie Group Ltd., Greenhill & Co. and UBS AG. And airline history shows – countless times – that merging to survive is a flawed strategy with failed Ansett Airlines, for instance, the result of 67 mergers or takeovers between the 1920 and 2001.

The reality is that British Airways deal offers Qantas nothing. It has higher costs, its home base is one of the world’s most congested, the incumbent UK government is anti aviation using airlines as a blatant revenue raising tools, while the UK is a hot bed of extreme and irrational environmental pressure in the airline industry.

The UK airline’s European network is of utterly no use to Qantas as passengers must backtrack into Europe, making any destination two stops from Australia. British Airways, like Qantas has serious staff morale problems, a grossly unfunded pension fund and it faces intense competition from US carriers with the new Open Skies not to mention the very well established LCCs in Europe.

When the Australian Government launched its aviation Green Paper Qantas CEO Alan Joyce lauded the document stating that “perhaps more than any other country, Australia’s economic prosperity is closely tied to the viability and competitiveness of its aviation sector.” Slinging the Union Jack over the Flying Kangaroo is not the way to viability and competitiveness it will just blur the management’s focus and destabilize staff.
Joyce should well remember that the success of LCC Jetstar is because of the single minded marketing focus and its independence from Qantas.

The stark reality is that no major airline, which has as its primary focus safety, staff and passengers, has failed but there are thousands that have collapsed because they only focused on shareholders and management interests.