Breaking up is hard to do

At the announcement Group CEO Alan Joyce said the change would enable a greater focus on the priorities of turning around the Qantas International business and enhancing the strong Qantas Domestic as part of the overall group strategy.

Given the toughest job – as highlighted by the airline’s recent profit downgrade, see elsewhere this issue – was Simon Hickey, who will be CEO Qantas International. Currently CEO of the very successful Qantas Frequent Flyer program, he is highly respected at Qantas.

Lyell Strambi, who had headed up Qantas airlines operations, was handed the CEO position at Qantas Domestic, which is performing well, although coming under greater pressure from Virgin Australia.

In the departure lounge are Jetstar CEO Bruce Buchanan and group executive commercial and freight of Qantas Rob Gurney. Mr Buchanan will remain a consultant to the group for 18 months but Mr Gurney decided it was not appropriate to stay on.

The role of Jetstar CEO goes to Jayne Hrdlicka, who had been group executive strategy and technology and that role now comes under chief financial officer Gareth Evans.

Lesley Grant who had been responsible for developing Qantas’s new international strategy, takes on the CEO Frequent Flyer position.

Mr Joyce said the restructure would strengthen the Qantas Group’s portfolio and help deliver its strategic goals: “Over the past 18 months we have established a clear path to building a better, more competitive Qantas.

“Our foundations are strong with the two most profitable airlines in the domestic market, one of the world’s best loyalty programs and Jetstar targeting the fast-growing Asian leisure travel market. We have begun the process of restoring Qantas International to a sustainable position.”

Part of the process was announced the day before with restructure and consolidation of the airline’s heavy maintenance operations in Australia to maximise the benefits of the next-generation fleet such as the 787 and A380.

Engineering consolidation

As expected, heavy maintenance on Boeing 737 aircraft will move from Tullamarine and be maintained in Brisbane along with 767 and Airbus A330s.
The Avalon base will continue to maintain Boeing 747s and will also do work on 737s and 767s, some aircraft reconfiguration and remain available for one-off maintenance tasks. Mr Joyce made the point during the announcement – and took a swipe at Virgin Australia – that Qantas would continue to be the only major airline to do heavy maintenance at its own facilities in Australia.

“Qantas has an outstanding track record in aircraft maintenance, and our commitment to setting a global standard for safety and quality in airline maintenance will never change,” he told the media.

“Like the manufacturing industry, aviation maintenance is a labour and capital intensive sector. Our cost base in heavy maintenance is 30 per cent per cent higher than that of our competitors. We must close this gap to secure Qantas’s future viability and success.”

The fact remains that with the advent of the 787 and A380, Qantas’s maintenance work will drop by 60 per cent over the next seven years.

Mr Joyce added that the airline has sought to minimise the impact on its people while delivering the best result: “Qantas undertook a two-month consultation with unions, employees and other stakeholders to discuss the challenges of having three sub-optimal heavy maintenance bases and options the company was considering.”

There will be a net reduction of 500 positions as a result of the restructure. Qantas will still employ over 30,000 people in Australia, about 5,000 in Qantas Engineering.

The details: there will be a reduction of 422 positions at Tullamarine. At Avalon, 113 positions will no longer be required due to the recent retirements of five 747s. There will be 30 new positions available in line maintenance in Melbourne and five jobs in Sydney.

All Qantas heavy maintenance apprentices will be given the opportunity to finish their apprenticeships with Qantas. There also will be new job opportunities in Brisbane as a result of 737 heavy maintenance being relocated.

Consolidating heavy maintenance and other engineering initiatives will have an annual benefit of $70-$100 million, according to the airline, and one-off costs associated with the heavy maintenance restructure, including redundancies, will be about $50 million.

Different situations

Mr Joyce highlighted that Qantas Domestic and Qantas International face very different situations, saying: “Qantas Domestic is strong and profitable and we are seeing the most sustained levels of high customer satisfaction on domestic services since 2004, and we are the airline of choice for corporate Australia.”

But he warned that the domestic operation cannot be complacent: “We must continue to offer customers the best network, frequency and flying experience in the domestic market, and find new ways to earn and reward their loyalty.”

Emphasising his personal commitment to turning around the loss making international division, he said: “Qantas International, a great airline with a rich history, is loss-making and does not deliver sustainable returns.

“However, we are committed to turning it around through the five-year strategy we announced last year, based on flying to global gateways, deeper alliances, smart investment in product and disciplined capital management.

“Formally separating the management of Qantas International and Qantas Domestic will ensure that we can independently run each business according to its specific priorities and market conditions. These measures give us the right structure to address the challenges and opportunities we face – and the right people.

“Simon Hickey has achieved record profits at Qantas Frequent Flyer, which now has 8.5 million members and is now a powerful brand in its own right.”

But Mr Hickey’s job is being made harder by the day with the Euro zone woes causing international and domestic traffic to slide.

Speculation

The splitting of Qantas immediately led to a wave of speculation that this was a precursor to a restructure of the shareholding of the airline, as done recently by Virgin Australia. A likely white knight looked remarkably like Emirates with some speculating that the middle-east giant would take a stake in Qantas.

That idea was rejected by CEO Alan Joyce: “I don’t know where these stories have come from,” Mr Joyce told the media. “What I am seeing in the press is completely wrong.”

But what is in the press comes largely from analysts and commentators, who see the logic of such a move.

Deutsche Bank analyst Cameron McDonald told Bloomberg that a direct investment in the lucrative domestic flights business could be on the cards, with a 30 per cent stake estimated to be worth $1.9 billion, saying: “For Emirates, an investment in Qantas Domestic would provide a direct interest in a profitable Australian feeder network with dominant corporate market share.”

And the respected CAPA Centre for Asia Pacific Aviation said: “Coming in the wake of local competitor Virgin Australia dividing its domestic and international businesses into what are effectively separate companies (something that Qantas is unable to do, thanks to political restrictions set in the Qantas Sale Act), this does also set Qantas up for something similar in the future.”

But in the interim, interest swung to a codeshare deal fuelled by Emirates’ president Tim Clark. Ten years ago, Emirates and Qantas were on the verge of a comprehensive codeshare deal scuttled by the then Qantas management.

Mr Clark told the Australian Financial Review that while he wouldn’t go as far as criticising former Qantas chief executive Geoff Dixon, the present management was a little bit more open: “The thinking is a bit different now. I look at the way Qantas is today and I think they would benefit from us as we would benefit from them.”

A codesharing agreement would help Qantas a great deal due to its network problems in Europe. With only London and Frankfurt as direct entry points it is being battered by Emirates, which has 31 entry points into Europe.

Adding to the imbalance, these two entry/exit points are subject to the highest passenger duty taxes, which largely disadvantage long-haul non-stop operations to Singapore as opposed to a shorter initial leg to Dubai.

However, Emirates downplayed any codeshare deal, a spokesperson telling Travel Daily that talks were mere speculation: “Qantas is a major interline partner and while we meet with such partners occasionally to explore commercial and customer opportunities, any specific options in this case are speculative.”

However, the magazine understands that changes already are afoot with agent GDS displays now indicating a Qantas preference for flights to Dubai via Asia with Emirates.

The publication said that until recently, GDSs would show first preference to DXB with QF’s oneworld alliance partner Cathay Pacific operating via Hong Kong, Bangkok and Singapore.

There is little doubt Emirates is a far better option into Europe than British Airways and the question for Qantas is: does it get in bed with Emirates now and share its passengers or wait for Emirates to take them away.

While oneworld serves Qantas very well into the US because of its strong links with American Airlines, its association with Cathay Pacific has always been cold, added to which London is not the centre of Europe and the UK government’s anti-aviation stance will further inhibit travel.

It’s time to think about what’s best for Qantas.

The detail

Mr Joyce went into considerable detail as to the thinking behind the spilt of Qantas at a press conference on May 22, saying the change process began about six months ago: “I felt it was very important looking at the successes of the Qantas Group that we learn from those successes and build on them.
“One of the things that is clear is that giving people accountability for individual businesses like Jetstar which I ran for five years and Frequent Flyer which Simon ran since set-up, generates all the shape and focus and drives in terms of making sure that those businesses deliver on performance, deliver on innovation and deliver on growth.”

He explained: “When we developed . . . our strategy we had three key priorities for the group. The first priority is to maintain our very strong domestic position in the premium and the low-cost end of the market, maintaining that key 65 per cent market share which optimises our profitability for the group.”

On the international division, he felt the best way to bring it into profit was to ensure there were people with clear accountability for those different areas: “As a consequence of that, the Qantas business in particular, I felt there was a need to set up two business segments — Qantas Domestic business and a Qantas International business.”

He said Mr Strambi was the obvious choice to run Qantas Domestic, which has the engineering, airports and catering divisions that have been undergoing substantial changes he has been leading for the last three years.

Mr Joyce highlighted that the goal with International was to break even within three years and to return the cost of capital within five: “As we went through the dialogue with the executives about those changes to the structure, it became clear who the right executives were on the right divisions.
“As part of that dialogue I was able to secure Bruce’s involvement with the Qantas Group for the next two years, with six months transition to the new chief executive and 18 months consultancy to help us work on a wide range of tasks.”

Mr Joyce added that the board decided to appoint Jayne Hrdlicka to head up Jetstar “who’s a very experienced executive who has had a long history in consultancy, but also very similar background to Bruce and being an entrepreneur and setting up her own business — obviously very well-known in the Australian environment and very capable.

“I’ve known Jayne now for the past 10 years. I think she’ll be a great asset to run the Jetstar business and a very capable person to deliver on the significant growth strategy that we have in Asia.”

For the herculean task of turning Qantas International around Mr Joyce said he felt there was no better person to run it than Simon Hickey, who had done “an amazing job” in setting up the Qantas Frequent Flyer business from scratch, developing it into an extremely profitable business and leveraging partnerships with Woolworths, Optus and all of the banks to achieve it.

He added: “With Simon’s knowledge of the commercial landscape in Australia as well as the knowledge of our Qantas customers and what their desires are for the Frequent Flyer loyalty program, I felt he was the obvious choice to take the international business down that path.”

Irony

And there is a significant touch of irony in that appointment, according to insiders. Mr Hickey was not a great fan of the A380 in its 450-seat configuration and in fact favoured the 777 in his fleet planning days. And while Qantas says the international division doesn’t pay, without it you would not have a viable frequent flyer program.

There is little doubt that Mr Hickey is the right man for the job and he will be counting down the seconds till he gets his hands on the first 787-9, which is the answer to the new International division’s woes.

On the Qantas International business, Mr Hickey said that it has some “fantastic strengths” the airline needs to leverage on: “It’s got a fabulous brand. It’s got great customer reach. It’s got the right revenue base and it’s started to form the right partnerships as we look around the world. It has a plan. The four-pillar strategy is a plan.”

However, he said the key message from passengers was ‘network’: “What we need to do and what our customers are telling us to do is that in delivering that service to them in 2012 and beyond we need to make sure that we’ve got the right network – which is a changing network for their needs – and that we deliver that in the most efficient possible means.”

In fact, Mr Hickey acknowledged that International is a very important business for the Qantas brand. “It’s a very important business for Qantas Domestic. It’s a very important business for Qantas Frequent Flyer.”

On the subject of alliances, he told the AFR at the launch press conference that while the airline was in good shape with its oneworld alliance “it doesn’t mean that we shouldn’t be open to always looking at what right partnership structures we should have going forward”.

However, he told the aviation editor of The Australian Steve Creedy that there was no silver bullet: “What I believe is that it’s going to take a multi-pronged approach, which we’ve articulated, and it’s going to take focus and dedication. That’s the team I’ll be pulling together that can pull that off and I don’t underestimate the task.”

Mr Joyce added: “This is important for the entire group. We have to fix International and we all know it. The way we work – the whole team works in a very collaborative nature – and the executive committee, which Simon’s been on for some time, have debated and discussed the entire strategy around International.

“It is the entire executive committee’s strategy and we’re fully behind it. We all believe it’s the way of turning around the business. Everybody is there supporting what Simon and the team are going to be doing.”

And rather than create extra administration positions Mr Joyce said that the split would be a catalyst for simplification: “We’ve had a project that’s been looking at taking out administration for some time.

“When I first came in we removed 500 administrative staff from the group and we think there’s more that can be taken out. We think we can do things a lot simpler and easier.

“Part of the task that Simon has in setting up Qantas International is to use this as a catalyst to reduce our costs further in the administrative overhead space.”

The Qantas chief said that at the moment, Qantas has three divisions – revenue, commercial and operations: “Then on top of that we have the finance and HR across them. We’re not going to create splits for the sake of splits, so for example with engineering, it remains intact under Qantas Domestic and charges Qantas International, which it does today for those services.

“But Simon, through that process, can challenge the cost, challenge the ability to get the cost down, and we believe there’s significant administrative overheads that we can take out of the group by streamlining processes.”

Mr Joyce admitted to AFR that Qantas International was burden down with lack of responsibility and accountability slowing decision making, saying: “We were in the position where I think I found that getting decisions done in Jetstar and Frequent Flyer were certainly a lot easier, because there was very clear accountability and responsibility.

“I think, you know, the Qantas business, we did it in stages. When I first came in, we killed some segments that didn’t really exist which were making decision-making even more difficult. They were the engineering in the airports and the catering segments and integrated them back into the operation. I think we were able to remove over 500 different administrative staff by doing that.”

He also believes that “creating these business segments will make us more efficient in decision-making and making things occur within both of those businesses, but more importantly, as part of that, gives people clear accountability and responsibility and allows us to take out a huge amount of cost that does exist because of that bureaucracy.”

Asked if the Asia premium adventure was over, he said: “We haven’t reached a limit on it because we’ve got partners knocking on the door to ask for new Jetstar franchises in a range of different countries.

“But certainly Jetstar Japan and Jetstar Hong Kong, growing Jetstar in Singapore and growing Jetstar in Australia and New Zealand, which are still having extensive growth, is going to take up a lot of bandwidth over the next two years, so we’ve paused.”

He explained that with Jetstar Japan starting up in July and getting 24 aircraft in the next two or three years and Jetstar Hong Kong, which will get to 18 aircraft over the next three years, it was time to pause deliver on both, get them up to speed, put the resources into getting them battened down and growing Jetstar Asia and Jetstar Australia.

“So we are still going aggressively after this, but we do need to deliver on those two franchises, and we’re not going to do another one until that may happen,” he said.

CAPA view

CAPA sees the Emirates link real and the oneworld alliance as shaky. In a special report on the restructure, it explained: “Qantas, as a relatively small international operator at the end of the line, is in a difficult position as the world changes around it.

“The oneworld alliance to which Qantas belongs has shaky linkages. Cathay Pacific has almost zero cooperation with Qantas and has made clear it does not support the view of Qantas, and others, that oneworld needs a Chinese mainland member while Cathay’s ties to Air China become stronger.
“New member Airberlin has aligned with Etihad, American Airlines is in Chapter 11 bankruptcy (which although provides a well-trodden path does leave an air of ambiguity) and Japan Airlines is reorganising its European relationships – it has strong ties with Air France – to account for better access to western Europe, where main partner British Airways (BA) is weaker.”

And CAPA points out that British Airways itself and the IAG Group are looking to go their own ways internationally, looking to acquire foreign airlines, possibly with even the prospect of a link-up with one of the Gulf carriers – something that could rock the boat for Qantas internationally.
“By creating an organisational arrangement that is more flexible, Qantas does set itself up to be more able to adapt to changing circumstances. For example, establishing a Qantas branded premium operation in Asia would sit easily within the Qantas International part of the Group,” it said.”

CAPA added that equally, with rumours flying about Emirates looking to establish a closer link with Qantas, to have a firmer foothold in the Australian domestic market the Qantas Domestic activity would be better positioned to make this a highly transparent process.

“That is one battle Qantas can never win. So perhaps the next move will be, if you can’t beat ‘em, join ’em’.”

And there would be, as the quid pro quo, greater opportunities for Emirates to codeshare transparently with the Qantas International arm.

Tellingly, CAPA highlighted that “recent figures from IATA for April 2012 showed passenger traffic in the Europe-Australia market plummeting over 30 per cent year-on-year, while Middle East-Australia grew by a similar amount – a very clear statement of how the old kangaroo route is being replaced by more effective connections to and from Europe over the Gulf states.

“That is one battle Qantas can never win. So perhaps the next move will be, if you can’t beat ‘em, joint ‘em, a prospect Air France-KLM is considering. At this stage of the game, that is probably a good idea. It could even lead to a reinvigoration of the Qantas international activity.”

CAPA also warned that Virgin Australia is well on course to becoming a much more virulent competitor to Qantas in its home market: “Having created a separation of its domestic and international businesses into two separate companies (not merely different business centres), Virgin is now in a position to sell down its domestic equity to a partner keen also to have a strong foothold in Australia’s rich domestic market.”

CAPA’s special report says it’s barely conceivable that the airline will end 2012 without a major new equity partner, and right on cue in early June Etihad announced it had acquired five per cent of the airline (joining Air New Zealand, which already holds nearly 20 per cent of the airline). “So time is of the essence for Qantas in both domestic and international spheres.

“The carrier is highly challenged at the moment in ways it has not previously experienced. The restructure will in turn drive a number of management and operational changes in middle management, for example, with two separate airline operations and separate chief pilots,” CAPA believes.
There can be little doubt that the splitting of the two airlines and the restructure is a good thing because it focuses attention on the loss making international division and brings to the fore the best management skills the airline has.

It is also time to embrace Emirates in a meaningful alliance before it is too late.

But a re-jigging of the Qantas Sale Act to enable a splitting of the airline’s shares and thus take on an equity partner in its domestic arm will be more difficult.