Qantas at 90

Today the Qantas Group is a $14 billion company employing 35,700 staff and operating 250 aircraft across three airline ‘brands’ (Qantas, QantasLink and Jetstar), a far cry from the airline’s earliest days of joyflights and air taxi services in two surplus WW1 biplanes (an Avro 504 and a BE2E). But since that time, observes Joyce, Qantas has been characterised by a culture of pioneering and innovation, a history he intends to build upon.

“We’re very proud of our history in Qantas, all of the employees are,” Joyce told Australian Aviation in a recent inerview to discuss the state of Qantas at its 90th anniversary. “That 90 years of history represents a lot in terms of pride and in terms of [employee] engagement with the company, and it defines I think where your brand is, that history develops your brand over a long period of time, and it is the core of what people recognise Qantas for.

“So your history I think is a very important part of who you are as a company and I think as a company we are very proud of that history and it something we are very keen to celebrate.”

The highlight of those celebrations was due to be a gala dinner held at the airline’s Sydney Jet Base in November, a time to reflect on the airline’s growth and achievements, and the Qantas brand’s place in the national psyche.

So after 90 years often pioneering history, where does Joyce see the Qantas brand today, and how would he like it to be perceived?
“You look at Qantas’s history and I think people will look at our history and say Qantas has experience, [it is] the most experienced airline in the world with 90 years of continuous operation. We’re calling it the wisdom of experience. It’s something that people travel on Qantas because they know we have the best trained crew, best trained engineers, the best trained people in every profession you can imagine to run an airline. Having that wisdom of experience, really promoting it, is a key part of our core brand today and will be a key part of our brand going forward.”

“Caring I think is a another part that we think is there today, it’s probably more represented in the safety of the organisation – you know that famous Rain Man scene? – now that’s something that’s invaluable and we think its broader than that its more about how we care for our passengers, not just in safety but customer service and how we treat passengers through the entire experience. So we want to dial that up a bit further but in other areas, not just in the safety context.

“We want it [the brand] to mean more forward thinking, Qantas has invented a huge amount of product innovation, technical innovation, helped design aircraft work with the manufacturers, so we’ve always been a forward thinking airline. We were the first airline to fly the 707 outside the United States and we flew it across the Pacific, the first airline to create business class, the first airline to successfully create a low cost carrier, the first airline to create its frequent flyer business as a really diverse revenue stream from its core business to help protect its business from the worst of the economic cycles.

“So we’ve been at the lead of innovation of forward thinking, [we’re] probably not as associated with it today as we may have been in the past, so again we want to make sure we dial that one up and have a better view of where that one stands.

“And of course we’re Australian, and we want to represent the best of contemporary Australia and people would regard Qantas as Australian today. Would they regard it as contemporary Australian in the ways that we would like that to be enhanced would be something we think we need to do a bit more work on, and I think the organisation always has to feel contemporary and I think that’s the thing that will be different over the 90 years, you need to keep your organisation modern and relevant and making it contemporary is a key part of that plan.”

There’s no doubt that restoring the lustre to the Qantas brand has been one of Alan Joyce’s key goals since taking over as CEO from Geoff Dixon two years ago in November 2008, a time when Qantas had posted a record profit but was reeling from high profile air safety incidents (even if, such as the exploding oxygen bottle that caused a flight to divert to Manila with a hole in the fuselage, were due to bad luck rather than any fault of the airline’s), the failed APA private equity takeover bid, a poor on-time performance record in part due industrial action by its maintenance engineers, and a patchy service record.

“We’ve been at the lead of innovation of forward thinking, [we’re] probably not as associated with it today as we may have been in the past, so again we want to make sure we dial that one up.”

In that time both Qantas and the environment it operates in have changed significantly. Already before Joyce took on the top job Qantas was placing a renewed focus on its service standards, ironically under the stewardship of then executive general manager of Qantas John Borghetti, now CEO of Virgin Blue, but that is seeing fruition in areas like new lounges and inseat inflight entertainment on new domestic and trans Tasman A330s and 737s. And on-time performance has also improved dramatically, which is of critical importance to Qantas’s renewed push as a ‘premium’.

“Like any premium product it’s a product that people associate as above the norm, it’s a product that people know has elements of luxury, has elements of superior service and delivery, and it’s across spectrum in what you deliver to the customer,” Joyce explained of what Qantas as a premium airline should deliver.

“It means delivering on the hard product and the soft product in a premium way and it means delivering on things like on top performance and it means delivering on the entire promise that we are giving to our customer and as a consequence for that your customers will pay a premium for the product, because they know the product delivers above the norm compared to your competitors. And that’s what Qantas finds, it demands and gets a premium because it delivers a far superior product compared to a lot of its competitors.”

That premium focus and ability to generate premium yields then is a critical element of Qantas’s two brand strategy, particularly now in light of the new competitive focus on premium traffic at Virgin Blue under Borghetti. The battle of the Qantas Group v Virgin Blue Group strategies will be fascinating to watch over the coming years.

“We’re still very comfortable and confident in our position in both segments of the market,” said Joyce of the emerging competitive dynamic.

“John has decided to pick a direction of which he has going, he has decided that the best way for Virgin is to go after the premium market which is in the Qantas territory. That creates challenges and opportunities for us, and it means that Qantas has to continue to be on the top of its game. [But] I think Qantas has a huge amount of advantages. It doesn’t matter what Virgin will do, the vast majority of the premium market will stay with Qantas. And the reason why I’m confident on that is I think it’s not just one aspect of delivery of product enhancement that will move the traffic to you, it’s not a widebody aircraft on Perth, it’s more than that and it’s a lot more comprehensive.
“It is on the basics of on time performance and lower level cancellations. And for last year we had the best year in 15 years domestically [for on time performance] but it was [also] the biggest gap we have ever had against our competitor. So on time performance and the delivery of that is the key to the corporate market.

“The frequent flyer program, we’re going to grow to eight million members this year, one in every two households in Australia is represented in that program, it’s an amazing way to reward people’s loyalty to Qantas on an individual basis, and we’re continually enhancing that.”

And, “We have the product, you know think of the amount of money we are spending on the product, despite us cutting back on unit costs for the last two years, we have spent hundreds of millions of dollars on the product, I think we have the best lounge network and it’s getting better,” Joyce continued.

“We’re continuing to open up new lounges around the country, Perth opened a few months ago, we’ve got a new lounge in Hong Kong that’s opened up so we’ll continue to invest in that. We’ve got huge investment in the inflight product, Neil Perry is helping us with the inflight meals, the lounge meals which are rolling out progressively over the next few months, and we’ve got the next generation of check-in. So that’s going to involve hundreds of millions of dollars in investment just to catch up with Qantas and we’re not staying still, we’re taking it to the next level every day.

“Then there is the network, we’re committed to keeping 65 per cent domestic market share, and why is that important? Because it means the depth and the breadth of the network is unrivalled in Qantas compared to our competition, so you want the frequency or the destinations you’ll get that on Qantas. And if you look at it internationally, we fly to six continents worldwide, we fly in our own metal to where the business market wants to travel, 80 per cent of the destinations can be flown on Qantas’s own metal that the bulk of the business market wants to travel to. So the network is there in terms of what Qantas is going to deliver on.

“And then finally you know the market is with us, the corporate market travels with Qantas today, so they have to have a reason to move, and if you keep on delivering on all of that and enhancing it then the market will stay with you I believe… And we’ve had the best customer satisfaction rating that we’ve had in our history this year and that’s a good sign that the market is comfortable with Qantas.”

Then there is the other key weapon in the Qantas Group’s armoury, Jetstar, where Joyce made his name as the Qantas low cost carrier subsidiary’s founding chief executive.

“The opportunity at the other end is quite huge, I mean Jetstar is going to grow its capacity of 25 per cent of the domestic market this year and why, because we see an opportunity that has been left by Virgin making that move upmarket. Jetstar has been having a great year, its performance keeps on going from strength to strength. Jetstar is a lot more profitable than Virgin and [yet] it is three quarters the size of Virgin, and as I’ve said [publicly before that] within five years it will be bigger than Virgin in terms of size. So we see that as a great opportunity being created by that little upmarket move.”

“The corporate market travels with Qantas today, so they have to have a reason to move, and if you keep on delivering on all of that and enhancing it then the market will stay with you.”

Jetstar’s original creation as counter to Virgin Blue – which Joyce characterised as a “great brand” and a “competitor that you can’t take for granted” – has “created a very strategic, strong position that Qantas has been in today and I think we are going to leverage that going forward. And competition is great for the consumer because it means the carriers have to continue to drive innovation through their businesses, and that is what Qantas has done over the decade.”

And Joyce downplays the notion that Virgin Blue’s recruitment of John Borghetti, with his 30 year career at and intimate knowledge of Qantas, gives Australia’s number 2 airline a competitive advantage over Qantas.

“There are no secrets in the aviation industry and after a while there are a lot of people that interchange between both companies and people get to know that knowledge, so I don’t think there is a special piece of knowledge that people will have that you can say that is going to be devastating for either organisation,” he noted.

“I think what ends up happening is that no matter who is in charge of this company, or who is in charge of Virgin, it goes back to your strategic advantages, and you have to say ‘is your strategy, is your position and is your team capable of taking on all challenges?’ and I fundamentally believe that it doesn’t matter who is in charge of Virgin, we have the best management team – look at the strength and depth of all levels in Qantas – and then I look at the strategic position and I look at our strategy and I think we have a very robust position to be able to compete against Virgin, whoever leads them.”

Certainly the robustness of that position was demonstrated by the Qantas Group’s navigation through the global financial crisis, which had just taken hold when Joyce took the reins as CEO.

The airline’s profitability has certainly slumped since the peak profit before tax result of $1.4 billion for the 2007-08 year to an ‘underlying’ PBT for 2008-09 of just $100 million and $377 million for the 2009-10 year. But Qantas has been able to remain profitable despite revenue slumping by almost $2 billion from 2007-08 to 2009-10, as international traffic in particular was savaged, and the airline group cut capacity and parked older aircraft.

“For the last two years we’ve have phenomenal cost improvement,” noted Joyce. Despite the airline shrinking, which was fairly hard, the cost position of Qantas has actually improved and our unit cost has come down, and that’s despite us spending hundreds of millions of dollars on customer product in addition. You know last year we spent over $100 million on new lounges and terminal facilities, this year $40 million we’re spending tens of millions of dollars on ‘Next Generation Check-in’ and we’ve managed to get unit costs down.”

One factor in bringing costs down was Joyce’s elimination of 20 per cent of the company’s management positions.

“We took 20 per cent off our management ranks out of the organisation, which saved us over $100 million, and that was 500 managers or so that left the organisation fairly rapidly and that’s helped, the organisation is leaner meaner as a consequence.”

That such a large number of managers could leave was in part a function of Joyce’s strategy of reintegrating previously separate divisions of Qantas back into the main airline, such as the engineering, airports and catering businesses.

Continued Joyce, “I think when you go through a process like that the stress there is you’re going to have colleagues leaving you that have done a good job, that have been part of the organisation for a while, but has the organisation been able to cope with those people gone, yes it has, and why is that, because we’re doing things a lot more efficiently and we’ve gotten rid of these internal structures where people have been debating inter-company charges and have been focused on the external world rather than the internal world. I don’t think we’ve missed a heartbeat as a consequence of doing that, but was it the easiest thing to do? No, letting 500 people leave the organisation is never easy and a lot of good colleagues did leave the business.”

In early 2009 Joyce foreshadowed further more widespread redundancies at Qantas, with the airline planning to shed 1250 full time equivalent positions as a cost cutting response to the GFC.

“We managed through that period without having to make big redundancies because each of the individual areas did very well and leave management, so we have long service leave and annual leave that we really were managing during that period,” Joyce said. “For example we had a surplus of around 70-80 pilots, we managed that surplus through using those leave entitlements, we didn’t have to make any of our pilots redundant, and now were growing again.

“That was absolutely the right decision, because I think domestically we going to add six per cent capacity growth this year, if we had to make many people redundant we would have ended up having to recruit again which would have been crazy.”

Improving the airline’s on-time performance, as well as being key to Qantas’s premium positioning, has also had a positive impact on costs.

“I think it’s just doing things more sensibly,” Joyce said of improving on-time performance. “A lot of this dates back to our QFutures [cost cutting program] work as well, because what we thought was when the aircraft actually performs on time all of your costs actually perform really well as a consequence, and that makes sense because it means you have less disruptions, you have less need to call people out and to put them on different shifts. If you have a disruptive schedule you’re going to have to reschedule your pilots, your cabin crew, your engineers you’re going to have to people on overtime, you’re going to have disruption costs to your customers, so performing on a precision schedule actually has huge benefits across the organisation.”

Improving on-time performance, Joyce said, is “hard work”, which involves “looking at every part of how you deliver in the organisation, and it means the teams working together as an overall team on that delivery.

“Take engineering as an example, a key component on engineering is getting the MELs (minimum equipment list), the amount of defects on the aircraft down, and corresponding to the best ontime performance in our history, we have had the lowest levels of MELs in our history on our aircraft, and that’s been a core delivery point of our whole engineering team.”

Critical to achieving the reduction in MELs has been a better relationship between Qantas management and its maintenance engineers. Qantas and the Australian Licensed Aircraft Engineers Association (ALAEA) have just begun negotiations over a new EBA (enterprise bargaining agreement) for Qantas’s maintenance engineers. This will prove a critical test for Joyce and his team, given the acrimonious negotiations in 2008 that led to the current EBA saw the ALAEA take industrial action in which led to a significant spike in MELs and hence a big drop in on-time performance.

Airports are another key factor in on-time performance.

“It’s important that you get people around the aircraft, everybody delivering on time and you can see in terms of performance of airports a real coordination of what we call the precision turnaround schedule – the PTS – which is determining who where and when and how they can actually get the aircraft out on time, and that means making sure we have the right manpower also dedicated to the airports at the right times in order to facilitate that.”

At its airport terminals Qantas is also expecting further efficiencies to flow from its ‘Next Generation Check-in’ program, which Joyce cites as a “great example” of innovation at Qantas. The technology, which has been trialled in Perth and will soon be rolled out at Sydney, promises to both eliminate queues for passengers checking in and increase airport terminal efficiency and throughput. Frequents flyers with new cards embedded with a radio frequency identification (RFID) chip, which acts as a permanent boarding pass. Passengers with the new cards will simply swipe their card over a dedicated ‘Q Card’ reader to complete check-in, and drop their bags with an RFID bagtag at automated bag drops.

“Components of [Next Gen Check-in] people have done around the world but nobody has pulled it together in one complete new system, [we’ ve] had to radically overhaul what we are doing across the entire airport experience with this new leading technology, we’re at the forefront of it, all of our partners would tell you absolutely at the forefront of delivering on this.”

Another delivery area where the Qantas Group is at the forefront of is aircraft deliveries. The fleet strategy has been in place for some time – Qantas A380s, upgraded 747-400s, A330s, 737-800s, QantasLink Q400s and Jetstar A320/321s and A330s, and the retirement of the 767-300 and 737-400 fleets plus the older 747-400s, with around 100 A320s, 737s, 787s, A330s and A380s on order, equating to on average one aircraft delivery a month for the next eight years.

Beyond those acquisitions, Joyce says Qantas continues to keep a watching brief on new types in the narrowbody segment in terms of keeping abreast of Boeing’s and Airbus’s plans for 737/A320 developments and replacements, and studying aircraft such as the Bombardier CSeries as a potential 717 replacement.

“The narrowbodied space as potential replacements for the 717 and even replacements for the A320s and 738s is something that you need to keep an eye on because it is developing quite rapidly.”

And another aircraft Qantas is keeping an eye on its Boeing’s plans for the 787-10.

“The 787-10 would be a great aircraft if Boeing develops it, [with the 787] we always wanted something that could be a bit bigger and could have longer range that’s why we pushed for the -9. Boeing will tell you that the specs of the -9 were defined by what Qantas wanted and that aircraft looks like a great aircraft. But if there was something that filled a gap between the 787-9 in terms of size and the 747-400 Extended Range aircraft which we have had for a while we would be very keen to look at that. Boeing is also looking at potential a replacement for the 777, [and Airbus has the A350, but] we wouldn’t go for another type for a small amount and that is our issue so the 777 and 350 were never really a real go for us because of the small amount of aircraft needed for that space. If there was a 787 version then it is just subtype and then you could go for it and that’s why we’re keen on it, so it will be an interesting space to watch what happens in that development. But we are certainly not going to go for a new type just to fill that gap.”

In the meantime Jetstar is ramping up for the delivery of the Qantas Groups first 12 787s from mid 2012. The first eight of those 787s will be 787-8s configured in a two class, 313-seat configuration (with nine abreast at 3+3+3 in economy). As Jetstar begins to take deliveries of the larger 787-9 the -8 will transfer across to Qantas, and Joyce confirmed that Qantas will operate the -8s in the same seating configuration.

“We thought it’s a very interesting design because the Jetstar international configuration of the 787 which they will only fly internationally is the exact same configuration that Qantas will be flying domestically, so the aircraft are still interchangeable and we can still repaint and take the orange out of them or put the Qantas colours out and put orange into them and move them between the two airlines. So it gives us real flexibility in the same way the 330s can be mixed and have been mixed between both carriers.”

That high density 313-seat configuration (Boeing’s website quotes the -8 as seating 250 in two classes) should give the aircraft terrific seat-mile operating costs.

“The seat-mile costs look fantastic, I’m pretty excited at what it does for Jetstar and for Qantas, I mean for the domestic network they will be phenomenal flying transcontinental, and the international network for Jetstar opens up a range of routes that you economically we couldn’t serve today.”

Interestingly, two other new types, the Fokker 100 and Embraer E-120, could soon be joining the Qantas Group fleet, if a reported deal to acquire Perth based mining charter operator Network Aviation comes off.

At the time of his interview with AA Joyce couldn’t confirm the deal, but, “What I will say to you at this stage is that what we think we need to do is look at the range of businesses that we are involved in and then enhance them. Because [airline industry] consolidation in this region is going to be some time off, can we use our strength to build up in markets either adjacent to us or complimentary to what we are doing today? So we are looking at those range of opportunities and we think there is a range of them, not just potentially in this sector but in other areas as well.

“So we are very keen to keep our eye out for business opportunities and expansion opportunities going forward. I can’t comment about that [Network] transaction because we don’t have a transaction today, we are not in a position that we can announce it, but irrespective of what happens we will be keeping a range of alternatives open across a wide range of different parts of our business.”

Any Network deal has come out of Joyce’s instructions to each Qantas Group business segment to evaluate potential growth opportunities.

“We have asked each of the business segments to generate [plans for] how can they continue to grow? How can they continue to enhance what we have as a core business and how to do that effectively and profitably. Jetstar has a huge amount of growth expansion [opportunities] in Asia in New Zealand and in Australia, Qantas has a huge amount of expansion [opportunities] in how it services its premium customers in other ways and the growth of both businesses is quite exciting.”

But while the Qantas Group is looking to growth opportunities beyond its main operations today, its core Qantas and Jetstar operations today are experiencing better economic conditions with rising traffic figures, both domestically and internationally.
“Traffics up and yield’s up…we have been talking about for sometime was that the premium market would start to return, we always knew that that would occur, and we always knew that we had faith in the Qantas brand to get back to the profitability that it had in the past.

Now that’s happening, its still a good deal away from where it needs to be and where it was in the past.

“So [for example] take international [traffic] – August last year international yields were down by about 24 per cent, this year our international yields are between 12 and 14 per cent, so we are halfway back still a long way away from the peak yields that we had before the GFC.

“And I have to say also we have seen a competitive dynamic under the domestic market that still is quite aggressive. This year we are going to have probably a 10 per cent plus growth in domestic capacity which we haven’t seen before, even go back to 2000 we haven’t seen that level of capacity growth. So the domestic market is still a watching brief, so it will be interesting to see how it develops, and a lot of the ability for the domestic market to digest that capacity growth will be dependent on how the economy [performs}.

And looking further into the future?

“I think Qantas will continue to enhance its premium standards as a brand, and I think Jetstar will continue to enhance its standards as the largest in revenue terms low cost carrier in the region. Our aim is to have within the next five years, by 2020 certainly to have the world’s best premium and low fares airlines, we are very keen on that vision, we want to have both in the one stable which will make us unique because there is no other airline group that is aiming to have both 100 per cent owned by the same airline group – everybody’s specialising in the best premium carrier, or the best low cost carrier we have the real chance of actually having the best in each category and having category killers. We are very excited about that.

“Our aim is to have the world’s best premium and low fares airlines.”

Today’s reality of Qantas and Joyce’s vision of the Qantas of tomorrow would have certainly been beyond the wildest visions that Fysh and McGinness had for their fledgling operation in 1920. n