To the future

Qantas CEO Alan Joyce warned that Qantas International faced grave challenges and possible oblivion if it wasn’t restructured as only “18 out of every 100 passengers leaving Australia flew on Qantas.”

Joyce blamed in part government deregulation of inbound traffic rights which has seen a 29 per cent increase in international capacity since 2007.

“Today Qantas International absorbs large amounts of capital that could arguably be better invested in profitable, growing parts of our business,” Joyce said in Sydney on August 16. “We don’t have the option of pretending that things will change if we stay the same. They won’t.”

However, Joyce acknowledged the importance of the international division.

“Qantas International is an important part of the Qantas Group and it is part of our national Australian story.”

“It represents a core element of our appeal to valuable corporate clients, leisure customers and Frequent Flyers so the economic sustainability of Qantas International matters to the whole Qantas Group.”

However Joyce warned that “it is a steadily fading business, suffering big financial losses and a substantial decline in market share.”

But what is not declining is the union rhetoric which was unleashed with the news that Qantas will lay off 1000 of its 35,000 staff from the engineer, pilot and flight attendant ranks.

While Joyce believes that most of the 1000 job losses will be covered by voluntary redundancies the union movement was quick to pour cold water on the grand plan labeling it as a sell-out.

Joyce said that overall the Qantas group is a “large, stable and profitable enterprise with the core domestic operations “performing very strongly and generating good profits.”

“We have a bed-rock of 65 per cent market share in the domestic market, driven by the combination of our two-brand flying model and Australia’s favourite loyalty program.”

Joyce said that the Qantas brand is at the heart of our powerful domestic business.

“The Qantas Frequent Flyer program is the world’s best and most profitable loyalty program, with high potential while Jetstar is one of the world’s fastest growing and most profitable low-fares airlines, set for significant future growth.”

Joyce said that the changes were just the first phase of a “new strategy to build a truly modern, customer-focused and competitive global aviation business.

“Qantas International is a great airline with a proud history,” said Joyce.

“But it is suffering big financial losses and a substantial decline in market share. To reverse that decline we need fundamental change.”

“Qantas International takes up enormous amounts of capital, and our cost base is around 20 per cent higher than that of our key competitors. To do nothing, or tinker around the edges, is not an option.”

International woes

The stark reality is that Qantas International has only returned its cost of capital three rimes in the past 15 years.

To lift the international airline out of the sea of red ink Qantas is dropping a number of services and relying more on its international partners such as British Airways, American Airlines and new oneworld ally Malaysia Airlines.

Joyce termed this his gateway strategy based on an expanded network of alliance relationships.

“We are choosing the world’s leading airlines to help us take our customers to their favourite places around the world and to their key business destinations, Joyce said.

That is despite problems with the launch of the first phase to Dallas/Fort Worth in place of San Francisco, with high profile diversions to Noumea for fuel. Nonetheless, the Dallas gateway links to 52 destinations in north and central America with American Airlines, without the horror of transiting LAX.

Joyce said that both airlines are now working on “joint commercial planning, joint sales and marketing, and more Frequent Flyer benefits.”

“We’re also looking at new opportunities to work with oneworld member elect, Malaysia Airlines particularly given its services to continental Europe including Istanbul, Rome and Amsterdam.”
Ironically those serves are operated by Boeing 777s, an aircraft Qantas has steadfastly, to its cost, refused to embrace.

In a minor tweak Qantas is dumping Buenos Aires for Santiago, the home of oneworld partner LAN as Qantas struggles to get its South America strategy right flip flopping from destination to destination. From April Qantas will make the swap with three nonstop services per week.

However, it is the JSA with British Airways where the greatest changes – for the moment – are being made, with from April, Qantas to expand its partnership with British Airways which will see a consolidation of Qantas flights to London through Singapore on the A380.

Qantas will ditch Bangkok-London and Hong Kong-London and instead codeshare with British Airways on those sectors, and leasing its precious two vacated daily Heathrow slots to its partner for three years.

“This is part of our strategy to reduce loss-making, asset intensive flying, while continuing to provide great connections and Frequent Flyer points for travellers to the UK, and other destinations in Europe,” Joyce.

But other existing Qantas international destinations are safe, at least for now, with Joyce dismissing as “rumours” reports that Qantas would drop ports like Frankfurt, New York and Johannesburg from its network.

Qantas is also negotiating what it terms as “further opportunities” to advance its gateway strategy but the Qantas boss wouldn’t elaborate.

“We cannot fly our own aircraft to every port, but we will get our passengers wherever they want to go across the globe, in comfort, style and ease, with the best frequencies and connections, and with more opportunities to earn and redeem Frequent Flyer points than ever before,” Joyce pleaded.

To right size the international division Qantas deferred for five years to the 2018-2021 timeframe its last six A380s. But insiders at Qantas tell Australian Aviation that in fact it’s a cancellation and the airline wanted to “defer” eight but penalties were too high.

At the same time the airline will start the retirement of all but nine of its 26 747-400s with the first four going this year reflecting the cutback in international services.

The nine remaining 747-400s (the six -400ERs and the three youngest RR engined -400s) are being put through a $400 million cabin upgrade and first re-configured 747 will rejoin the fleet next month.

Plans for the 50 787s orders remain, for now, at least, unchanged, with first delivery, to Jetstar, due in late 2012, or possible early 2013.

Asian expansion

Joyce said that the second pillar of the airline’s resurgence was growth in Asia.

“As a nation we used to fly over or via Asia, on our way to Europe and now we fly to Asia, both for business and relaxation,” said Joyce.

Our customers [now] want to do business in Asia and so do we said Joyce.

“Whatever happens in financial markets over the coming weeks and months, one thing we know is that Asia will continue to play a larger part in the global economy and a bigger role in the world.”

“It is already the world’s largest, fastest growing and most profitable aviation market and there is nowhere like it. It has massive untapped potential,” he said.

“We have an historic opportunity to position Australia’s two great airline brands, Qantas and Jetstar, in Asia and create a platform for the future of our business.”

But Qantas needs to act now says Joyce as “competitors are circling the opportunities.”

Joyce added that Qantas’s board and management wants to be growing with Asia and the success of Jetstar proved the airline has what it takes to succeed.

The first plank of that strategy is a joint venture with Japan Airlines and Mitsubishi Corporation to launch a low cost airline based on Jetstar.

Jetstar Japan or ‘JJ’ as it has already been dubbed will have 24 aircraft within two years of launch last next year.

“It is, we think, the first joint venture partnership of its kind between an Australian company and two iconic Japanese brands,” said Joyce.

International operations will commence within the first year, targeting destinations in China and South East Asia.

Joyce highlighted that Qantas and Jetstar fly to Tokyo and Osaka and Jetstar Japan, will provide a major feeder network across the whole country, boosting Japanese tourism potential to Australia and particularly Queensland.

On the flip side of the low cost strategy Joyce said that it is absolutely clear that the future of Asia is not just about low-fares airline travel.

“I asked the Lowy Institute to take a look at the future shape of Asia and within 20 years 16 per cent of the world’s middle class will be in East Asia.”

China may already have the world’s fourth largest population of millionaires; and India the twelfth largest.”

Joyce maintains that there are “many, many millions of premium travellers in-waiting.”

To tap that market Joyce confirmed that Qantas will invest in a new premium airline based in Asia.

“This joint venture airline will have a new name, a new brand, new aircraft and an exciting new look and feel, he promised.

He assured unions that the airline will not be called Qantas “but it will leverage all our Qantas know-how, making the most of our excellence in brand management, aviation safety, customer experience, finance, marketing, and our valuable corporate customer relationships.”

Joyce would not identify a base but most pundits suggest Singapore or Kuala Lumpur although a mainland China location is not out of the question.

“KL has been mentioned because of what Tony Fernandes is now doing with Malaysian and that creates interesting opportunities for us,” Joyce noted of the AirAsia founder buying a 20 per cent stake in Malaysia Airlines. “We want to talk to – once that beds down we want to talk to Malaysian Air Asia about what that opportunity could look like and for a wider ranging partnership. So we have a number of different options which is great for the establishment of this carrier.”

The new airline will start with 11 A320s, although many suggest those aircraft will only be a scene setter for widebody equipment such as 787s.

“For the first time in our history Qantas intends to fully participate in the benefits of an Asian aviation hub,” said Joyce.

Joyce added that the new premium airline will offer same day services to and within Asia while overall frequencies to Asia from Australia will grow.

“We will be able to feed traffic into the new hub from Europe and Australia, and Asian ports,” said Joyce.

He said that he saw the new premium airline feeding significant growth potential to the Qantas domestic and regional businesses, and for the Australian tourism sector.

The change was characterised as turning Qantas from a “home and away’ business” to a regional and global business.

Noted business writer Stephen Bartholomeusz in an analysis on the businessspecator.com.au website, “The ambition is to staunch the haemorrhaging of shareholder value in the business by reshaping it and growing it profitably to the point where it does recover its cost of capital, which would facilitate further investment in it.

“There are a lot of moving parts to the strategy and some elements that are entrepreneurial and therefore have an element of risk. The execution of the strategy won’t be easy, particularly given the industrial climate in the business.”

Said Joyce of the strategy, “This is how we will find new sources of revenue and profit and protect our interests at home, including many thousands of jobs.”

Union thumbs down

But claims about preserving thousands of jobs didn’t wash with the airline’s sceptical unions.

Australian and International Pilots Association president Captain Barry Jackson said that the package marked a sad day in the airline’s proud 90 year history.

“The announcement proves we have a Qantas CEO with no belief in the iconic brand,” Captain Jackson said after the press conference.

“The federal government needs to look very carefully at the implications of Alan Joyce’s announcement today for the Australian public.”

“Strip away the spin and the eye-watering amount spent on advertising and what’s left is exactly what Qantas pilots have been warning of for months: a shift of Australian Qantas operations into Asia to start employing people working to Asian conditions and standards.”

The AIPA drew parallels with Telstra.

“We have seen this management style of an Australian icon before, when Sol Trujillo took the reins at Telstra. It didn’t work then and it won’t work now.”

“Until we get an assurance from Alan Joyce that future Qantas flights will be operated by Qantas pilots – instead of outsourced and offshored alternatives – we will be doing everything we can to stop this destructive strategy for Qantas’s future.

The TWU was no less kind labelling the initiatives as destroying jobs.

TWU national secretary, Tony Sheldon, said in a statement that the Qantas board had laid the groundwork for the announcement ever since Geoff Dixon departed, by devaluing the brand and demoralizing the workforce by destroying job security.

“What has been announced is a five-year plan to kill Qantas international as we know it. No kiddies choir or celebrity can convince us otherwise,” mused Sheldon.

“If ever there was a strategy to cause a loss of confidence in Qantas employees and customers, this is it. We all know the panda is endangered and so are the Qantas workers who have laboured under a board that has greater faith in Asian carriers than its own people,” warned Sheldon.

TWU pointed out that while the market share of Qantas international may have reduced the airline had actually increased the number of passengers by three per cent in the two years to March 2011.

“There is no way that the Qantas brand is not drawing in customers, but the growth of the market has shown some weaknesses in the management of the world’s best brand, and the world’s most profitable airline.”

Citing growth of 15 per cent in freight over the past two years Sheldon said that “any suggestion Qantas international is in trouble should be taken with a grain of salt. They are shifting costs from one group to another in order to drive down wages and standards, however, at the same time they are selling short the premium brand.”

However, what is shifting are the market dynamics with Qantas International – for a raft of reasons – struggling to compete with the onslaught of lower costs and better equipped airlines Asian and Middle East based airlines.

Breakout box

Comment – Mission impossible?

The restructure of the Qantas Group is long overdue and essential for its long term viability as an aviation business.

And that is the key, for Qantas is not an airline any more but an aviation business that seeks out opportunities wherever they may be.

But with only 18 out of every 100 travellers in and out of Australia choosing what is one of the world’s best airline brands the flying kangaroo is in more trouble than the A380 which suffered an engine explosion last November.

And the airline’s market share into Asia is even worse at a paltry 14 per cent.

Joyce has announced a raft of changes with more to come in a five-year journey to turn the international operation around while tapping into the world’s fastest growing travel market – Asia.

The challenge for Alan Joyce, however, is not to make the changes or set up the airlines it is to take the staff with him on the journey.

If some of the unions don’t have an epiphany on their stated stance on job security then there is going to be serious turbulence and grief.

And circling Qantas are airlines such as Singapore Airlines and Emirates with costs up to 20 per cent lower just waiting to lure more passengers.

But staff are understandably leery. They have seen so many missed marketing and product opportunities through the 1990s and last decade, where Qantas has seemingly always found a reason not to do the obvious.

And the staff also witnessed the botch Airline Partners Australia buyout in 2007 that would have seen Qantas bankrupted if it had succeeded.

Unless Alan Joyce can convince the staff of his vision and secure their trust the airline, as we know it today, is doomed and will go the way of Ansett.

We wish him luck – Australia’s great icon depends on it.