A tail of three airlines

Qantas posted a net profit of $249 million for its financial year ended June 30, more than doubling last year’s profit of $116 million, but second half profit slumped 83 per cent to just $9 million as an unprecedented series of natural disasters in Queensland, New Zealand and Japan, plus the Chilean volcanic ash cloud, cost the airline $244 million.

And then there was a fuel hike of 12 per cent to $3.73 billion.

But off-setting the bad news was an increase in full-year revenue of eight per cent to $14.9 billion with operating costs – with the fuel jump – increasing seven per cent to $12.43 billion.
Once again the stellar performer was Qantas’s Frequent Flyer program, contributing an EBIT of $342 million, with Qantas delivering $228 million, low-cost subsidiary Jetstar $169 million and Qantas Freight $62 million.

However, the Qantas mainline result was affected by a $216 million loss on international route, a figure which infuriated unions who were still digesting the restructuring including the loss of a 1000 jobs announced a week earlier.

Unions claimed that Qantas is cross subsidising Jetstar at the cost of its international operations.

While it is clear that Qantas International is losing significant sums, because of its inefficient fleet and higher labour costs compared to its competitors, some cross over between Qantas and Jetstar is inevitable. There is also crossover between Qantas domestic and international operations with for instance 747-400s operating on transcontinental domestic routes.

Qantas CEO Alan Joyce however described the union claims as a ‘‘ludicrous suggestion.’’

“This is line with the moon landing conspiracy theory that we didn’t land on the moon and that Elvis is alive and well and serving in a McDonald’s somewhere in Manly.”

However, the other major intangible is the value of Qantas International operations to the Group’s FF program. In fact it would be fair to say that the international operations are pivotal to the success of the FF program but that is not a reason to keep it operating inefficiently.

Another of the long haul pilot union’s arguments is that while Qantas is losing overall market share on international services passenger numbers are actually growing. Those claims were borne out in the numbers but the international division only saw a 1.3 per cent increase to 5.97 million.

The group’s numbers were far more impressive. Passenger numbers rose 7.3 per cent to 44.4 million while RPKs increased 6 per cent to 106.7 billion and ASKs were up 6.9 per cent to 133.21 billion, easing load factor 0.7 points to 80.1 per cent. One of the biggest increases was Jetstar’s domestic operations which increased 16.6 per cent to 9.75 million passengers. Yield increased 5.8 per cent to 10.9 cents.

Missed by all commentators – and not raised by Qantas itself – is the massive impact the late delivery of the 787 has had on the airline’s result.

Some estimates suggest a fuel saving of $300 million plus if 787s were in the fleet as per the original schedule, while others suggest that figure is conservative. Qantas should have had 34 787s in its fleet by June 30 2011, per the original schedule.

If the late 787 delivery is one lingering headache from the past, so too is the suggestion that there was a $3 billion equity buy-out of Qantas in the wind – or perhaps that is an ill-wind?

Federal transport minister Anthony Albanese was quick to say that the government was adamant that Qantas would remain Australian-owned although that of course would not preclude an equity buyout with majority Australian control.

In 2007, the Macquarie Bank and the Allco Finance Group led an international consortium in an unsuccessful $11.1 billion bid to take over the airline.

At the result’s announcement Joyce said Qantas had received “no private equity take-over bid.”

Meanwhile, Joyce is bullish on Qantas’s future and became quite heated in arguing the unions were responsible for the “trashing of Qantas.”

“Australia ranks 51st in the world by population but we have the 11th largest airline based on passengers and distance flown,” Joyce said. “We punch above our weight and we have made a profit in every year since privatisation.”

“The result reflects the strength of the Qantas Group’s portfolio and is our best performance since the global financial crisis,” he added.

“We achieved the result while overcoming significant external and operational factors, including a series of natural disasters, a 28 per cent increase in average fuel prices and an underperforming international business.

“Given the aviation sector’s inherent volatility, the flexibility to generate revenue from different parts of the business and different market sectors is a major strength for the Group.

But Joyce signalled out the international business.

“Qantas International reported a loss of over $200 million in FY11 on invested capital of over $5 billion, an unacceptable return. Continuing down this path would be unsustainable.”

Joyce told media that the airline’s intention “is that in five years time Qantas Airlines – domestic and international combined – will exceed its cost of capital on a sustainable basis.”

While the result was certainly good there was a void in the vision.

There was no mention of re-inventing travel, no mention of creating the world’s finest airline, nothing to rally the dispirited staff and the relationship between the engineer’s and pilots’ union and the airline management declined further.

It is clear to even the most disinterested observer that unless Qantas management can inspire its staff then all the accountant driven shareholder value graphics will come to nothing, for never in its history has Qantas faced such formidable competition.

Joyce alluded to this in his outlook statements saying that “the general operating environment is challenging and extremely volatile.”

Virgin’s blues

While Virgin Australia’s profit gained headlines for the wrong reasons with a loss of $66.6 million for its fiscal year ended June 30, the underlying fundamentals are all robust.

Clearly having its headquarters and the majority of its domestic traffic severely affected by the natural disasters in its home state of Queensland was a massive challenge.

Combined with the speed and scope of its repositioning plus the introduction of new aircraft a loss was inevitable.

The result also includes a $36 million unrealised foreign exchange loss due to the rising Australian dollar.

CEO John Borghetti emphasised – as if any was necessary – that 2011 was a year of enormous challenge and significant change.

“Today’s financial results reflect the impact of an unprecedented series of external events and reinforce the importance of our game change program strategy to increase our share of the more resilient corporate and government markets,” he said.

“Despite the tough operating conditions, we kept our focus on repositioning the airline. Thanks to the outstanding dedication and efforts of our staff and management, over the past 12 months we have redesigned the inflight and ground guest experience, secured a single strong global brand for the entire Group, established a global network with little additional capital expenditure through alliances and integrated our airline operations to drive efficiencies.”

Borghetti told Australia Aviation that the Game Change Program is already delivering positive results, with an increase in Virgin Australia’s corporate and government market revenues of 29 per cent year-on-year.

“We expect to see further gains in 2012 as we complete the roll-out of our new product offering “.

Just one month after the re-branding was unveiled the airline’s yield was on the way up by 4.3 per cent.

For the full year revenue was up 9.7 per cent to $3.27 billion, while ASKs rose 8.8 per cent to 37.1 billion and RPKs were up 10 per cent to 29.6 billion.

The higher yield will also help the airline insulate itself from the volatile fuel prices, although Borghetti has put other strategies in place.

“Going forward, the combination of fuel surcharges, more active hedging policies and a continued strong cost focus will ensure that Virgin Australia is well placed to operate in a high fuel cost environment.”

Borghetti is bullish on the airline’s progress over the past 12 months.

“We remain firmly on track with our strategy. We have relaunched our product, secured one unified brand, created a global network and have announced the re-launch of Virgin Australia’s frequent flyer program, Velocity. The feedback on these changes from corporate, government and leisure guests has been overwhelmingly positive,” he said.

“Our progress in repositioning the airline has already seen us make significant gains in the high yield corporate and government business market. This important segment now makes up 13 per cent of our total revenue, up from 10 per cent in the 2010 financial year.”

Borghetti explains that much of this growth came through in the second half of the year following the introduction of some of the Game Change Program initiatives.

“The benefits from our network review in 2010 are also starting to flow through. We have exited non profitable routes and made changes to flight schedules to boost margins”.

The airline is also keeping the lid on costs with CASK excluding fuel below inflation.

And there is plenty of cash in the bank.

“The Group’s closing cash position of $731 million leaves it well positioned to execute on our strategy into financial year 2012 and beyond. A sale and leaseback transaction post the closing date has contributed an additional $70 million to our cash position.”

“Furthermore, all aircraft deliveries scheduled up to the end of calendar year 2012 have committed funding”, he said.

Contrasting the winter of discontent at Qantas Borghetti was singing ‘Spring is in Air’ on the airline’s staff relationship record – even though its staff are not as highly paid as Qantas’s.
“We have put significant work into strengthening our execution capabilities and a focus on maintaining engaged, motivated employees. This is demonstrated by our recent annual engagement survey which shows a greater level of engagement of our staff this year, Borghetti said.

“We want to ensure our staff is rewarded fairly for their hard work and dedication and we have recently reached an agreement with our international long haul pilots and cabin crew that reflects this philosophy. The agreements achieve improvements in terms and conditions whilst maintaining operational flexibility and the ability to deliver a competitive and sustainable long haul international operation.”

Borghetti also makes smart play highlighting the airline’s commitment to Australia.

“Over the year we have confirmed our commitment to keeping as many jobs in Australia as possible and we have conducted reviews of our off-shore commercial operations. We have [also] made the decision to move up to 100 full time and part time Guest Contact Centre positions from an off-shore, outsourced provider to our in-house operation in Brisbane.”

Borghetti reminded media of the massive network changes that had been undertaken during the previous 12 months, which were now bearing fruit.

“In 2010, we conducted a network-wide review in order to maximise the performance of our routes both domestically and internationally. This ultimately resulted in the decision to consolidate our long-haul international network to two strategic hubs in Abu Dhabi and Los Angeles, exit from our least profitable routes, embark on an international alliance strategy and expand our regional presence in Australia through our partnership with Skywest”, Borghetti said.

“Internationally, the company withdrew its V Australia Boeing 777 aircraft from the unprofitable Johannesburg route to focus on the trans Pacific Los Angeles route and to service its new Abu Dhabi route that acts as a gateway to Europe, Africa and the Middle East. These two routes enable us to service two of the most important outbound and inbound markets for Australia supported by our strategic alliances with Etihad Airways and Delta Air Lines.”

Schedules have been improved across the Pacific to enable morning arrivals into LAX and onward connections to appeal to the corporate traveller.

“We also exited from the New Zealand domestic market, enabling us to boost our trans-Tasman capacity and to increase our Pacific Blue services to popular destinations in South East Asia and the Pacific Islands,” Borghetti said.

“Additionally, we have seen improved performance on our Phuket and Fiji services as a result of the change from the Boeing 777 to the Boeing 737 aircraft.”

The airline’s domestic network came in for re-work, withdrawing from underperforming routes and adjusting frequency and timing to better match demand while at the same time improving aircraft utilisation.

“The addition of the A330 to our domestic fleet and the replacement of Embraer 170s with ATR 72-500 and 72-600 turboprop aircraft will also enhance our ability to align fit-for-purpose aircraft to each market.”

Borghetti made a big play of the global alliances the airline has secured in the past 12 months.

“Etihad Airways, Air New Zealand, Delta Air Lines and Singapore Airlines are four of the best airlines in the world and together they provide access to over 400 destinations worldwide and cover Australia’s key aviation markets: North America, Europe, Asia and New Zealand.”

“Our domestic business is already seeing benefits from these new alliances; with interline and codeshare traffic onto the Virgin Australia domestic network significantly increasing year on year.”
First alliance to bear fruit has been Etihad Airways launched during the financial year and Borghetti said that it has been a key contributor to this improved performance.

“Further growth opportunities exist as our alliances with Air New Zealand, Delta Air Lines and Singapore Airlines come online during the course of Financial Year 2012.”

Air New Zealand

While Qantas grapples with its unions and Virgin Australia gains altitude, Air New Zealand is reaping the rewards for engaging staff, being innovative and first to market with a net profit of NZ$81 million, down just 1 per cent compared to the year-ago period despite the severe impacts of natural disasters both at home and in its key markets.

In normalised profit terms Air New Zealand said the Christchurch earthquake in February, soaring fuel prices and foreign exchange losses caused a decline in normalised profit, which excludes movements in fuel hedges, to NZ$75 million for the year ended June 30, compared with NZ$90 million the previous year.

Air New Zealand CEO Rob Fyfe said that operating conditions in the past six months were the most difficult the airline has faced in a decade.

“The combination of reduced demand for travel as a result of the devastating Christchurch and Japan earthquakes, additional capacity into Christchurch to assist the relief effort and compassionate fares for those affected by the Christchurch earthquakes resulted in an estimated NZ$70 million negative impact on earnings,” Fyfe said.

Despite the impact of these events operating revenue was up seven per cent to NZ$4.34 billion with a 4.3 per cent lift in yield on international routes to 9.8 cents as the airline’s new economy seating and in-flight product gained traction.

Passenger numbers increased 6.3 per cent to 13.1 million.

Air New Zealand increased capacity, reporting a 2.5 per cent year-over-year lift in ASKs to 32.35 billion, while RPKs climbed 4.5 per cent to 26.99 billion and load factor was up 1.6 points to 83.4 per cent.

Overall yield increased two per cent, while fuel soared 28 per cent driving costs up 10.1 per cent to NZ$3.67 billion.

Commenting on the result chairman John Palmer said that the natural disasters and sustained high fuel prices dramatically altered what was shaping up to be a very positive full year result.
“Nevertheless, this backdrop of adversity has again highlighted the resilience of Air New Zealand in the most challenging of times. That’s a tribute to the hard work, innovation and adaptability our nation’s airline has shown over the past decade,” Palmer said.

Fyfe noted that despite the challenging environment Air New Zealand delivered “more game changing initiatives that have caught the attention of customers and competitors.”

“In November we introduced our Seats-to-Suit product into the highly competitive trans-Tasman and Pacific routes which has been a great success. While we have increased capacity by 6.4 per cent it has been with a minimal increase to costs. We have gained market share and grown the market, with demand up 10.2 per cent and load factors increasing 2.9 percentage points to 83.3 per cent, compared to the 2010 financial year.”

However, according to Fyfe the airline’s international long haul network “continues to struggle” against the backdrop of high jet fuel prices and a rising Kiwi dollar stifling inbound tourism demand from key markets like the US and UK, which also continue to experience tough economic conditions post the global financial crisis.

“International markets remain volatile and this has an impact on the demand for New Zealand as a destination. This has seen long haul routes in our network lose more than $1m a week in the first six months of this calendar year,” warned Fyfe.

However, that loss will reduce significantly as more 777-300ERs are delivered, replacing the 747-400s. The airline is also looking at moving capacity from depressed or reduced markets to new destinations with some announcements due by December.

Talking with Australian Aviation Fyfe said the airline had some “very exciting and innovative” new products to unveil in October, where once again the airline will be leading the world.
Air New Zealand is also in negotiations with some of the world’s leading airlines on licensing the economy Skycouch product which has been a runaway success.

According to the airline bookings for the Skycouch are running 50 per cent ahead of the standard economy seating the airline is looking to increase the number of Skycouch seats available.

Currently the airline offers 10 rows of Skycouch seats on either side of its 777-300ERs in the zone behind premium economy for a total of 20 seat sets of three.

There are eight more rows of three on either side of the rear cabin, excluding the exit row.

If the airline was to convert these it would bring the total Skycouch seating to 108.

Another option would be to convert the current standard four-across seating in the current Skycouch zone to that standard to cater for taller passengers or larger families.

At every touch point Air New Zealand is in positive territory and last year won 30 national and international awards for its products and marketing.

Some of those awards include: 2011 Skytrax World Airline Awards Best Airline Australia/Pacific; Skytrax World’s Best Premium Economy Class and Conde Nast Traveller’s 2011 Innovation and Design Awards: Aviation for its SkyCouch .

It is now the most admired company in New Zealand and incredibly the seventh most admired brand in Australia!

Not surprisingly 27,000 people applied for a handful of jobs with the airline last year.

Some of the most telling numbers relate to market share.

Whereas Qantas’s share of the outbound/inbound traffic to Australia has slumped to just 18 per cent Air New Zealand’s share for its home market is 42 per cent.

In fact it is the dominate airline on every route it operates with the exception of Auckland-Hong Kong.

Since it introduced the upgraded premium economy and new Skycouch, revenue in those cabins has jumped by 20 per cent.

In the Star Alliance Customer Satisfaction Survey Air New Zealand has been placed first, ahead of Singapore Airlines, for “Overall Satisfaction” for six consecutive quarters.

But possibly nothing underscores the rise and rise of Air New Zealand than its social media and Grabaseat.

The airline, despite being 48th in size by passengers carried ranks fourth in Facebook followers and eleventh in overall social media engagement.

Grabaseat, which has become a fare type itself and clears distressed inventory at the last minute, has been a runaway success and to celebrate its fifth year the airline polled Grabaseat followers on where they would like to go if they could borrow a 747.

Over 70,000 voted and it was almost a unanimous big tick for Las Vegas.

The airline in fact put on two 747s with 700 passengers flying to Las Vegas with four nights at the Tropicana plus a pool party for NZ$2,299.

While most airlines bemoan the affect that low cost airlines are having on the market and their ability to compete Air New Zealand has shown that by engaging and motivating staff, innovating and then selling up an airline can not only survive but thrive.

Testimony to that is the fact that Air New Zealand’s 777-300ERs have more premium seats than any other aircraft in the world including the A380s!

It seems incredible that from a country that is one of the world’s smallest by population with a largely tourism and agricultural based economy with virtually no hub traffic Air New Zealand has fitted and is filling with record load factors 44 business premier, 50 premium economy and 60 Skycouch beds/seats in its 777-300ERs.