The Long Haul

The Asian expansion plans, whether it be the original ‘RedQ’ concept for premium class A320s based in Singapore or the more recent ‘capital-lite’ partnership plan with Malaysia Airlines, always was going to be exceedingly difficult to execute. But does that mean Qantas shouldn’t have tried in the first place, given the potential returns? Still, the venture’s evident collapse leaves open the question: What is Plan B for the airline’s international arm? And to what extent did the Asian venture detract Qantas management’s attention from other issues on its substantial ‘to do’ list? In the absence of an Asian growth vehicle, Qantas’s only other stated plan for its international operations is the ‘Gateway’ plan of consolidating long-haul operations to key international hub cities.

In the past six months Qantas has announced just one new destination, Santiago, but has or is cutting a fistful of other destinations and routes: Buenos Aires, Mumbai, Auckland-Los Angeles, Bangkok-London and Hong Kong-London.

In effect, Qantas International is focused on a few key hubs – Singapore, London, Los Angeles, Dallas and Santiago – where it can link with partner airlines, and on direct services to a handful of other key cities – New York, Tokyo, Shanghai, Johannesburg, Frankfurt and Auckland.

There are some glaring omissions.

Incredibly, Qantas doesn’t fly in its own right to Beijing and soon, India, not to mention Seoul, Taipei and Kuala Lumpur. It flies nowhere in the Middle East, has tried and failed to make Paris and San Franscisco work and for most points on continental Europe its passengers have to hub through London Heathrow and fly backwards to their destination on British Airways.

The Qantas International network is patchier still when you consider its Sydney-centric focus. For example, it offers only two direct international services from Perth to Singapore and Hong Kong.

In light of this, it is easy to see why the major Asian and Middle Eastern airlines offer such a compelling alternative to Qantas, with their ability to take passengers from every major Australian capital to almost any point on the globe via one stop through an invariably efficient, modern hub, on modern aircraft with world-class inflight product and service.

That service and product offering, on top of the benefits of government ownership or support, the natural advantages of their hubs and their lower labour costs and lower tax regimes put carriers like Emirates and Singapore Airlines at a huge competitive advantage to Qantas.

Compare that to Qantas’s increasingly limited network and, A380s and A330s aside, ageing international fleet.

Increasingly, the question arises: “In a deregulated environment, can Australian-based international airlines compete?” Clearly, Air Australia couldn’t.

And Virgin Australia is electing not to, at least for now, instead building its own ‘capital-lite’ international network through alliances with Etihad, Singapore, Delta and Air New Zealand.

Unquestionably, Qantas has under-invested in its international fleet and product – not helped by the 787 delays – which has given passengers even more reasons to fly elsewhere.

Meanwhile, Air New Zealand has shown what can be achieved by product innovation and investment. But even then that is no guarantor of success – witness Air New Zealand’s recent announcement of 441 job cuts and its own profit slump.

And new investment in Qantas International doesn’t look like materialising any time soon, with Mr Joyce warning Qantas International “will exceed the cost of capital on a sustainable basis”.

Even if the international division was covering its cost of capital, Qantas’s ability to raise that capital is becoming harder with its recent downgrading by Moody’s, thanks in part to the airline’s modest profitability of late and its challenging outlook. If the airline isn’t generating cash – and borrowing it is more expensive – much-needed investment in fleet and product becomes that much harder, even when a business case can be made for it.

No wonder Qantas favoured the capital-lite approach for its Asian enterprise. But even if it had gone ahead, RedQ would have been years away from generating strong profits and traffic feed into the broader Qantas network, and so was no panacea to the structural challenges facing Qantas International.

So what’s Plan B?