A Slow Revolution

Highlighting those contrasts, and noting the fact that Qantas mainline operations would not have been profitable in the year’s second half, serves to illustrate the then outgoing Qantas CEO’s assertion in an interview with AA last year that Jetstar was the “saviour” for Qantas.

Of course, Qantas branded operations will survive and thrive again. Economic downturns like the one the airline industry is currently experiencing come and, thankfully, go, and the full service airline business model will endure. All the world’s best full service airlines, like Cathay Pacific and Singapore Airlines, are equally struggling at the moment, but what the success of Jetstar does illustrate is the prescience in Qantas’s decision early this decade to launch a low cost carrier, and the success of implementing that strategy. The CEOs of other ‘legacy’ airlines must look on in envy at the Qantas result and the balance that Jetstar provides against the full service parent.

Certainly Jetstar’s figures are very much a result of the economic times. The numbers of high yielding, predominantly business travellers in premium class cabins has collapsed by a fifth to a quarter for many airlines, knocking the knees out from under them. In turn, what business travellers are flying have moved to the back of the plane, joining the backpackers and mums and dads in economy class, where the profit margins are always thin.

A look at the profit results for Qantas/Jetstar, Virgin Blue/V Australia and Regional Express also illustrates how much more robust the domestic air travel market has been than international travel, as Australia has fared much better in this global recession than practically every other developed country. Virgin Blue would have been profitable if not for start-up costs and on-going losses at V Australia, while Rex (with almost no exposure to international travel) posted a remarkable profit result, a fall of just five per cent.

The Jetstar, and Virgin Blue, results also demonstrate the comparative nimbleness of low cost carriers versus full service international airlines. It’s much easier to redeploy an A320 or a 737-800 than it is an A380 or 777-300.

But the longer term question is, as good times return do passengers return to the full service airlines, or do they stick with the Jetstars and Virgin Blues, the Ryanairs and AirAsias? It is likely that the ‘flight to value’ that the low cost carriers have enjoyed at the expense of their full service brethren will stick to some degree (it will be fascinating to see how Qantas mainline Sydney-Melbourne traffic fares in the wake of the Tiger Airways’s assault and the Qantas Group’s response with putting Jetstar on that most prized route). But how far is the question. Certainly on long haul travel it’s hard to see there not always being demand for a premium travel experience, but on short haul routes of only an hour or two, that’s less obvious.

In the meantime though, it is interesting to note the work Qantas is quietly going about to restore its tarnished image from the maintenance dispute and reliability issues of 18 months ago – an image that was very damaging to the airline’s positioning as a full service, business friendly carrier. Qantas’s on-time performance has improved dramatically in that time, spare parts holdings have been increased, and there is a greater emphasis on inhouse maintenance.

So when recovery comes the profitability of Qantas mainline services should rebound dramatically.

Still, there’s no question that where it is more profitable to do so, the Qantas Group will deploy Jetstar services in preference to, or at least alongside of, Qantas mainline services, and Jetstar will continue to grow in relative size compared to Qantas.

It’s a slow revolution in the structure of the Qantas Group business, but a revolution nonetheless.