A new spirit?

The reality has been that virtually every aspect of the airline’s operations is changing which highlighted the fact that change was needed to meet the rapidly changing market conditions.

And as the airline looks forward to the next 90 years staff and passengers will be struck by a more responsive, flexible and innovative airline.

The changing conditions are many and varied; increased competition from Middle East giants, Tiger Airways attacking the bottom of the market and a born again Virgin Blue threatening to eat a bigger chunk Qantas’s domestic business class pie.

Fleet wise the airline is badly hobbled by the late deliveries of both the A380 and more importantly the 787. The latter was originally supposed to be delivered at the rate of one a month from August 2008 for 65 months. At Qantas 90th birthday bash the airline group should have had 25 787s in service.

While those issues are all significant challenges one of the greatest strengths for Qantas, aside from its awesome reputation for safety, is its portfolio of businesses. As Joyce rightly sums up; “They all go through cycles and one will outperform the other in cycles.”

That portfolio is made up of Qantas, regional airline QantasLink, low cost subsidiary Jetstar with its 49 percent stake in Singapore-based Jetstar Asia, 35 percent of Pacific Jetstar based in Vietnam and the groups’ frequent flyer program.

Joyce is well on his way to getting the group’s businesses better matched to the market. He explains that there are three major stakeholders – customers, employees and shareholders. “We want to offer the best customer proposition, engage the staff and produce shareholder returns that enable further investment,” says Joyce.

And Joyce freely acknowledges that one of the biggest challenges is in the area of staff. Qantas’ industrial relations through the middle of the decade were confrontational with devastating effects on its image in Australia where the airline has become the butt of jokes around the BBQ.

In 2008 contract negotiations turned sour with the engineers who then waged a very effective campaign alerting the media to every daily maintenance problem that affected Qantas. A short strike and work to rule campaign resulted in Qantas’ on-time record slumping to a paltry 54 percent.

But that has bounced back with Qantas now achieving the best record in Australia and the best for 20 years.

In fact surveys show that Qantas’s staff is immensely proud of the airline, although Joyce notes – with concern – that the majority would not recommend their family or friends work at the airline. “They know it’s a tough environment to work in,” he concedes.

However the public have also recovered their confidence in the airline with a new survey showing that FILL IN DETAILS.

Since Joyce took the reins at Qantas change has been swift and positive to make the airline more responsive and innovative. The years “add layers” Joyce maintains..

That bureaucracy has hindered Qantas with previous CEOs responding to the urging of Australian Aviation at varying times over the past 15 years that the airline’s management could not make the business case for either the 777-200ER or seatback videos for economy passengers in 1995, premium economy in 1996 or the 777-300ER/200LR in 2005. However some claim the fault was at board level particularly with the 777 and premium economy.

This is not hindsight with Australian Aviation and the author even presenting the business case for premium economy as early as 1996 arguing that Qantas had the world’s longest routes and the second tallest passengers – perfect ingredients for more legroom for a price.

On the 777 the case was compelling. In interviews, before his departure in late 2008 last year former CEO Geoff Dixon conceded the airline had “missed opportunities”, such as premium economy, and admitted at the time that the 777-300ER “would be handy right now.”
There is also no doubt that the airline has been too focused on business and first class in both seating configurations and product, although in the good times these brought record profits that kept shareholders happy.

But with the airline’s focus on that market segment other areas were neglected allowing competitors to make significant inroads such as Singapore Airlines and Emirates with their seat back videos for all passengers.

Last year Joyce conceded that during the worst of the GFC if the airline group was “relying solely on Qantas’s international premium traffic, the situation would certainly be more dire,” with substantial losses.

Two brands.

The cornerstone of Qantas’ recent success has been its two brand strategy which is without doubt Dixon’s “finest hour” as CEO of Qantas. Jetstar was launched in 2004 – with Joyce at the helm – and now operates over a 1000 flights a week and accounts for over 30 per cent of the Qantas groups’ domestic market traffic.

Innovation is the mantra at Jetstar, which has defied the experience at every other airline that tried a similar experiment. Joyce says that Jetstar is “the fastest growing airline operating to and from Australia and is also now the major Australian carrier serving the Japanese, Thai and Indonesian markets.”

Jetstar is taking over more markets where Qantas has struggled to make money and assumed Qantas’s New Zealand domestic routes in July 2009.

However there have been concerns expressed that Joyce will strip more Qantas routes and hand them to Jetstar. That suggestion is met with a sharp rebuke with Joyce pleading that Jetstar will “grow aggressively but in harmony” with Qantas and he denied that the takeover by Jetstar of the NZ domestic routes was a portent of things to come.

Australia is very different explains Joyce and Qantas “made money on domestic routes even in the tough times of 2009.” While Joyce concedes there will be tweaks Qantas has in fact returned to some routes abandoned to Jetstar as the market makes its demands for a full service offering known.

While the growth in Australia will be in harmony with Qantas it will likely be far more aggressive in Asia where the airline group has streamlined the ownership the structure for Singapore-based Jetstar Asia and Valuair to provide a growth platform in line with its pan-Asian strategy.

Jetstar CEO Bruce Buchanan told Australian Aviation that “coordination of Jetstar Asia, Valuair and Jetstar operations will provide better opportunities for passengers by aligning their product offerings while ensuring the Jetstar business model is applied across each business. That realignment was followed by a back of office alliance with AirAsia to co-ordinate operational functions including long term fleet replacement.

Domestically Jetstar is now operating on most Qantas trunk routes to meet the competitive threat from Tiger Airways and this has not impacted on Qantas’ traffic.

And while the Jetstar brand goes from strength to strength Joyce has been working the premier product at Qantas to shore up its domestic stranglehold on premium traffic, while refining the international offering.

Qantas is adding more A330s with IFE throughout to the domestic fleet and operating them on transcontinental routes and will gradually retire the 767-300ERs. That upgrade will accelerate with the delivery of the first 787s to Jetstar in 2012 releasing A330s back to the Qantas domestic fleet.

The A330 is a major weapon in Qantas’s battle with Virgin Blue for the premium market with frequent flyers attracted to the wide body comfort and greater opportunity to upgrade using FF points. While Virgin will add A330 capability in February the initial two aircraft, announced this far, will have limited impact.

On international routes Qantas is refining its long-haul configurations taking out first class on all but 8 A380s (CHECK) to used on London and Los Angeles routes. At the same time the enhanced business product on the A380 is being fitted to some 747-400s

QF finally took the plunge into premium economy in 2008 adding the product to its 747-400s and then A380s. It now gets rave reviews and full cabins with executives scratching their heads and asking why the airline didn’t install the product decades ago.

Importantly there has been no dilution of business traffic with the seats being filled by economy passengers upgrading.

But the airline is only playing catch up. Air New Zealand’s recent innovation to be delivered in December on its first 777-300ERs will redefine premium economy and economy.

Air New Zealand’s product is outstanding giving “back of the bus” passengers a range of choices only dreamt of up till now. Qantas executives who suggest that the new product offerings are simply a gimmick ought to take a closer look.

Joyce is also spending money on lounges and streamlining the domestic boarding with what is described as the world’s most advanced system check-in and baggage drop. This is achieved by a chip encoded FF card and an RFID baggage tag. Australia wide roll out started in Perth in mid year and Sydney and Melbourne should be online by Christmas.

Competitor.

The Qantas group faces a unique mix of competitive challenges. On one hand, since the demise of Ansett it has enjoyed a lucrative monopoly on domestic premium travel, yet it must also compete with foreign-owned LCCs on domestic routes. On the international front, it faces lower-cost legacy giants such as Singapore Airlines and Cathay Pacific and these airlines are being joined by the squadrons of aircraft from Middle-East carriers that have quickly carved out sizable market share.

While it has international seat share out of Sydney of around 30 percent in other cities it struggles to hold the number one position, some say because the airline has been too Sydney-centric, forcing its interstate passengers to hub through Sydney.

In Perth it has barely 20 percent the same as Singapore Airlines with Emirates closing in with 17 per cent, while in Brisbane Qantas only commands 17 percent and in Melbourne 25 percent.

In Adelaide, it only holds 17 percent behind Cathay with 19 per cent, Malaysia Airlines with 18 percent and Singapore Airlines a massive 36 percent.

The low market share in all cities except for Sydney is a reflection of that previous Sydney focus and it should be remembered that the airline only started a Los Angeles to Melbourne non-stop because United Airlines announced a nonstop. An airline with Qantas’ safety record should command a higher percentage

Going forward Qantas faces significant challenges on routes to the US. Those challenges come from Air New Zealand, V Australia, Delta Air Lines and what will be a far more robust United Airlines after its merger with Continental.
Air New Zealand has been taking market share from Melbourne and Adelaide with straight through connections to Los Angeles and San Francisco via Auckland.

Off the agenda for the time being at least is any kind of international merger or acquisition. The highly-publicized fling with British Airways that flared briefly in 2008 stirred bitter public memories of the failed $11.1 billion takeover bid by Airline Partners Australia in 2007 that was widely opposed by mom-and-pop investors and the populace at large.

The collapse of the private equity markets later that year and the subsequent financial problems of Allco Finance Group, the lead participant in the bid suggest that Qantas may have gotten off extremely lightly. Politicians are now more focused on such issues rather than the fate of their FF points which was the main focus of some politicians during the APA buyout attempt.

Joyce is adamant that the airline cannot be distracted by mergers and the like and wants to tap into the intense loyalty of the staff at Qantas. The trick is to build an intense loyalty from the Australian travelling public, who are without doubt are amongst the world’s most prolific and adventurous travelers

Today that loyalty is building not so much through the latest IFE but the frequent flyer program which has over 7 million members and is one of world’s most successful per capita.

Qantas has managed to weave its FF program into the fabric of Australian life so much so that the program was the airline biggest dollar earner this year. And further enhancements are planned.

The oneworld alliance is also a major asset, although like most alliances the co-operation between airlines is not always rosy with Cathay Pacific and Qantas competing not co-operating on many routes from Australia.

In fact when the oneworld alliance was announced in 1999 (CHECK) executives at Qantas and Cathay Pacific were stunned that the two adversaries were to be partners. Some still are!

Joyce has also turned his back – for the time being – on the British Airways led International Airlines Group. The IAG group is the holding company for the BA / Iberia merger and plans call for up to 12 airlines to be merger partners.

Historically Qantas has close ties with American Airlines and it was the association that brought British Airways and American together for oneworld. Qantas has also worked well with Japan Airlines for years and the reconstruction and downsizing of that airline may provide Qantas and Jetstar more opportunities to provide the lift for JAL into Australia and possibly beyond Japan.

Clearly the 787 is the major platform for Qantas and Jetstar for the next two decades and gives the airline group enormous flexibility something it has lacked for the past 30 years by turning its back on first the DC-10-30 and later the 777-200ER.

Thirty years ago – before it took the plunge into the 767 – Qantas boasted it was the world’s only all 747 airline. It remains today the only major long range airline without a similarly capable 300-seater. The world’s most profitable airlines – Singapore Airlines, Cathay Pacific and Emirates – have one thing in common – substantial fleets of 777s.

The 787 will give the ability – by virtue of its size and range – to move to greater point to point opportunities and launch new services from cities other Sydney and Melbourne such as Perth to the UAE, Brisbane to San Francisco and Cairns to Los Angeles. This capability will reduce the airline’s reliance on alliances by freeing it from total dependence of flying into hubs.

As Qantas readies for takeoff towards its 100th birthday it is in great shape and good hands. The management embraces the critical importance of the staff and is arming them with the technology required to deliver to an unforgiving public.

However management must embrace real consumer innovation aggressively something that has been lacking for decades. The last industry wide innovation that Qantas introduced was business class in 1979. There has been nothing since. The airline was amongst the last major international airline to fit IFE to economy and followed others into flat beds for first and then business. The economy cabin has just languished.

Joyce has argued that the Qantas interior for the A380 designed entirely by Marc Newson is a first. It may well be the first time an industrial designer has taken on an aircraft but it is not an industry changing move and delivers nothing extra for passengers.

It’s time for Qantas to be an industry leader not just in operational and safety issues but in the cabin. With perfect airline safety now taken for granted on mainstream airlines the safety advantage that Qantas could once demand a premium for has long gone. Passengers demand far more.

Joyce is on the right flightpath to achieve innovation this and we wish him and the 37,000 Qantas staff well.