Growth vehicle

Jetstar CEO Bruce Buchanan on the drive for efficiency and scale

In the noise surrounding Qantas’s big profit fall for the first half of the current financial year, the startling financial success of its Jetstar subsidiary became a little lost.

“It’s about that continuous virtuous circle of lower costs leads to lower fares which leads to greater growth which leads to lower costs.”

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The low cost carrier was not only the stand-out performer in the Qantas Group’s recently reported results (see Newsdesk), but its profit result, a record ‘underlying’ EBIT (earnings before interest and tax) of $121 million for the half, up a remarkable 185 per cent, bests that of a resurgent Virgin Blue, and makes it one of the world’s most profitable airlines today.

Remarkably, the Jetstar profit came on revenue of $1. 18 billion (itself up 18 per cent), whereas the Qantas Group as a whole struggled to post an underlying profit before tax of $267 million – which includes Jetstar’s contribution, plus $157 million from Qantas Frequent Flyer – on revenue of $6. 9 billion.

Clearly Jetstar is the star performer of the Qantas Group at present, and with passenger numbers up 22 per cent in the half (excluding Jetstar Asia passengers, whose figures are for the first time consolidated in Jetstar’s results), it is clearly Qantas’s main growth vehicle.

“We were able to deliver,” Jetstar CEO Bruce Buchanan told Australian Aviation in a recent interview.

“We’re pleased that we’ve made the progress that we have over the last 12 to 18 months, it builds on all the work that we’ve been doing for four or five years and continues that trend at an even more rapid pace in making this businesses more effective and getting the scale up even greater.

And with the combination of scale and efficiency we can get more innovative about the way we do things. ” Buchanan attributes Jetstar’s financial performance to continuing a focus on cutting costs, and achieving efficiencies through economies of scale right throughout the Jetstar operation in Australia, New Zealand, Singapore and Vietnam.

“I think one of the single greatest insights into how well this business is going is how we took our controllable cost base down by 8. 3 per cent – that’s normalising for foreign exchange, that’s normalising for sector length. That’s a very credible result, it shows that the work going on internally is making the business more efficient and more effective, and it’s about that continuous virtuous circle of lower costs leads to lower fares which leads to greater growth which leads to lower costs.

“Our business is about keeping that virtuous circle going and if you’re in a business where you have real yield declines of one or two per cent every single year, just to stay with the pack, you’ve got to be taking down your controllable costs by near on four per cent in real terms,” Buchanan said. “So taking down costs by 8. 3 per cent means you’re really pushing the edge of the curve. ” Adding new aircraft to the fleet is the most obvious way of reducing unit costs by adding scale – since the beginning of 2009 Jetstar has added 10 A320s and one A330 to its fleet, taking the total fleet to 60 aircraft (48 A320s/A321s, seven A330-200s and five 737-400s). But more than that, Jetstar has been working hard on a range of areas, from airports to crewing, to maintenance, to implement efficiencies.

“It’s a whole swag of things,” Buchanan explained. “We did a lot of competitive sourcing at our airports, we walked through every single airport and we changed some of our staffing models to get a more productive workforce. ” Jetstar also aims to keep a tight rein on airport landing and terminal fees – a few days after AA’s interview Jetstar announced it was withdrawing from Rockhampton, citing the inability to secure a “competitive pricing agreement”, and Buchanan has publicly threatened to shift services from Hobart to Launceston after Hobart Airport indicated it was seeking a 50 per cent increase in charges.

Where crews are located and how they are utilised also receives close attention.

“We’ve done a lot of work getting our crews located close to our flying, so ensuring we’re minimising unproductive crewhours and minimising unproductive flying, we’ve done a lot of work in optimising our flying patterns to make sure they meet the seasonal demands and we organise the business much more around those peaks and troughs, which gives you much more resilience with demand changes whether they be economic demand changes or seasonal ones, which are extreme. ” Other efficiencies come through IT systems and processes, Buchanan detailed, from the new ‘New Skies’ reservation system to self check-in kiosks and passengers ‘self bag tagging’ at airports, to SMS boarding passes. Indeed, Jetstar aims for its Australian and New Zealand domestic terminals to move towards a “100 per cent self service model”.

Then there has been the focus on aircraft maintenance costs, with the recent deal with engine manufacturer IAE a good example.

“We did the US$3. 5 billion IAE engine deal, which is a big cost reduction for us,” Buchanan said. “Before we had more of an ad hoc relationship and we didn’t have the scale locked in and what we did was we joined all the different Jetstar elements together and did a joint tender, locked in all our future engine deliveries, and said we want to ensure that we’ve got stable maintenance requirements for this business going forward. ” That deal, covering the acquisition of V2500 Select One engines for new A320 Family aircraft on order, worth US$1. 5bn (A$1. 65bn), and US$2bn (A$2. 2bn) for the long term service agreement for all Jetstar V2500 engines, “takes out a huge amount of costs but also gives us a big competitive advantage, it locks in sustainable costs for us over a very long period of time. ” Buchanan explained that engine maintenance “is half of the narrowbody maintenance cost base for a low cost carrier, so it is one of bigger single line items. So that’s a big deal for us, getting that locked away and getting it worked out. ” Said Buchanan, “there are about four or five fronts that you’re working on always, some of the projects are long term, some are shorter term, but they are all paying dividends, so that’s been really quite good in getting the cost base down. ” That drive to get the cost base down further is also behind the unique alliance Jetstar has formed with fellow low cost carrier AirAsia, otherwise a major competitor in Asia.

“We thought this was a great way for us to give us a real boost on scale on the operational side, and that’s why the first low cost alliance that’s been done has been done on operational grounds, it’s about giving us scope for changing costs which is what this business is predicated on – lower costs deliver lower fares. ” The alliance was announced by Qantas CEO Alan Joyce, AirAsia CEO Tony Fernandes, and Bruce Buchanan in Sydney on January 6. Longer term, that alliance will seek to influence the development of, and jointly procure, the next generation of narrowbody airliners, allowing AirAsia and Jetstar to influence the follow-on designs to the 737NG and A320 Family, and then jointly procure a single type. But more immediately, the alliance focuses on joint procurement of spares, aircraft parts pooling, and working together at airports they both serve.

“It’s already delivering cost savings now, we’re already sharing parts, we’ve done our first engineering deals, we’re looking out for ports now to do joint handling, we’re talking on the fleet deal, we’re starting to get thoughts together in terms of what a joint fleet procurement spec would look like,” Buchanan detailed.

The potential, if fully realised, is enormous.

“We are targeting $40 or 50 million a year in savings over the next few years, and then we want to get it up to $200-300 million a year, as we get later through this decade. ” But, at least for now, the alliance will be restricted to operational aspects.

“This is purely an operational alliance at the moment, it’s very much focused on where can we get costs savings between the two businesses. Asia is a highly complex regulatory environment, trying to do anything else is incredibly tough, so the best thing you can do is take the opportunities that are there now, and this is all focused on operational costs savings. ” “We’re still going to be very competitive.

We compete on a whole lot of markets, such as in and out of Singapore. ” Evidence of that continuing competition came not long after the alliance announcement, with AirAsia in February revealing it was starting a joint venture low cost carrier in Vietnam, which in time will likely provide stiff competition for Jetstar’s own troubled Vietnamese operation, Jetstar Pacific (of which the Qantas Group owns 27 per cent). Jetstar Pacific has been in the headlines for all the wrong reasons of late, with the news that two Australian Jetstar executives seconded to Jetstar Pacific, Tristan Freeman and Daniella Marsilli, had been prevented from leaving Vietnam before Christmas while authorities investigate fuel hedging losses at the airline, then the subsequent reporting of details of a Civil Aviation Authority of Vietnam report that found that the airline had violated maintenance regulations.

“We always knew it was a tough road that we were walking in getting Pacific Airlines transformed into Jetstar Pacific,” Buchanan said of the Qantas Group’s investment in the Vietnamese airline, and its transformation into a low cost carrier. “We are still committed to the investment, we think it is a long term important strategic asset to hold, but it is a long term path that we need to walk. ” Understandably, Buchanan wouldn’t be drawn on the possible political aspects to Jetstar Pacific’s problems, which also includes a dispute over the use of the Jetstar brand in Vietnam, instead preferring to praise the efforts of Freeman and Marsilli – who at press time were still unable to leave Vietnam.

“The underlying business is doing really well and those guys have been instrumental in that turnaround, so hats off to them and all the good work they’ve done. I think the number that resonates with me is that while the operational improvements and cost reductions are great, but in the middle of the GFC, they were able to grow the Vietnamese traffic market by 30 per cent. ” Publicly at least, then, Jetstar continues to see Jetstar Pacific as an integral part of its ‘pan Asian’ growth strategy.

“It’s a long term play,” Buchanan said, noting “there’s lots of benefits that flow from that business not just directly in the business itself, but we also get strong distribution gains, . . . lower cost access to a whole raft of things, and we get our brand well established in Vietnam. So there are a lot of benefits in being in that market. ” Jetstar’s other strong Asian market presence is in Singapore, where Jetstar Asia, which is being integrated operationally into Jetstar, is beginning to perform strongly, and where Jetstar will establish its long haul Asian hub.

Buchanan announced in February that Singapore would be Jetstar’s Asian hub, a seemingly logical decision given the network and feed Jetstar Asia could provide into those long haul services. But, says Buchanan, “We seriously looked at a whole raft of other markets. To their credit the Singaporeans are very commercial in their dealings – we tried in some of the other ports and didn’t get anywhere near the same level of traction.

For instance, Bangkok operationally is much better located in terms of geographical reach into Asia, so there were some merits for some of those ports like that, but we just couldn’t get them developed as far as we wanted them to go.

“In the end when you look at it across cost and network opportunities, geographical positioning, feed and a whole raft of other things, Singapore came up on top on most of the categories. And they were veryaggressive in going after the business, they wanted a strong Jetstar presence and hub.

Interestingly enough it wasn’t just focused on the network options, it was also focused on building a centre of expertise and capability, they wanted Singapore to be hub a for us in the region as much as a network hub as well. ” When long haul flights through Singapore begin, and to where, hasn’t been decided, Buchanan said.

“Could be anywhere,” Buchanan said of where Jetstar would fly long haul from Singapore. “Singapore has great prospects into northern Asia – there is no secret that we were bidding for the (Tokyo) Haneda slots for Singapore – and if we got those we would have put aircraft straight into Singapore. So we’re still out there trying to compete for long haul access out of Singapore, and when we get that we will be putting aircraft in there.

“Asia is our focus in the long run though. That doesn’t mean we’re not going to serve the other jurisdictions (like southern Europe), but the bulk of our capacity in revenue is going to come from intra Asia. ” Also undecided as yet is whether or not those long haul services would be operated by Australian or Jetstar Asia crews.

“We haven’t determined that yet. ” But already Jetstar will use New Zealand based aircraft and crew for its new Sydney- Fiji services (due to begin on March 29), demonstrating how the airline can seek to take advantage of its lower cost operations outside of Australia.

“There’s different opportunities to leverage (different parts of the Jetstar operation) out,” explained Buchanan. “The key to this game is productivity, it’s not about (pay) rates, there’s a bit of a misunderstanding that cost reduction is about taking money off people in terms of rates. It’s about better utilisation, better scale, better processes, ensuring you’re optimising any other areas. ” That drive to more efficient processes across the organisation is seeing Jetstar creating a common engineering structure across the different elements of the airline, including ‘insourcing’ Jetstar Asia maintenance to a new maintenance facility in Singapore.

“Likewise we are building up capability in our line maintenance operations in Australia, we have also created out first maintenance facilities in Christchurch with our Air New Zealand partnership, and we have also done some work in Australia building up capability in Melbourne through a partnership with John Holland. ” With Jetstar’s Newcastle maintenance facility operating close to capacity, “the next piece of the puzzle is working out where our next base maintenance facility is and when we need our next set of facilities to come online. ” A final decision on the location of this second Australian maintenance base could be made during the life of this issue.

While Buchanan continues to drive efforts to improve efficiency across Jetstar, it is not his only focus.

“The two (areas) that I’d love us to do better on is the customer dimension – better advocacy and better customer experience – and staff engagement. The two are linked – staff engagement means better customer service outcomes. And that’s largely our doing. We need to get better at getting a strongly empowered workforce that’s engaged, that’s well motivated, that’s going to deliver better customer outcomes. ” The public face of these efforts is Jetstar’s new customer guarantee, announced in February. Often criticised by the media for its poor handling of certain scenarios, the airline’s 10 point ‘Jetstar Customer Guarantee’ will apply across its Australian, New Zealand and Singaporean operations.

It includes commitments to safety, low fares, privacy, informing passengers of operational changes and promises to deal promptly with issues and refunds. Specifically, the airline has promised to acknowledge customer complaints within 24 hours and have a maximum 15 day turnaround for complaint responses and processing of refunds. Breaching its customer guarantee will result in the airline providing travel vouchers in local currency as compensation.

Buchanan said much work has been done to allow the guarantee to be made.

“Over the last 18 months we’ve reduced our complaint times down from 90 days to 10, we’ve put online complaint forms in place, we’ve put an escalation team in the call centre, and automated information flows for delays and disruptions, so you get SMS updates. There’s been lots and lots of work in different areas in empowerment and training in frontline staff. Every single one of our frontline employees has gone through retraining on customer service, we’re going through changing the structure and incentives and the performance management of all our employees over the next few months. ” For an airline often pilloried in the media over customer services issues, improvements in these areas certainly seems to have good scope, as do the benefits from efficiency gains across other areas of the airline.