Analysis – For Qantas Int’l, the future is looking smaller all the time

written by australianaviation.com.au | August 23, 2012
Qantas' current international fleet includes 12 Airbus A380s and nine Boeing 747-400s. (Rob Finlayson)

The most extreme interpretation of Qantas’s decision to cancel 35 firm orders for Boeing 787 Dreamliners is that the move represents a step toward the inevitable end of the Flying Kangaroo’s iconic overseas services.

Saddled with a high legacy cost base and obvious geographic disadvantages – the thinking here goes – Qantas simply cannot compete with Middle Eastern and Asian airlines, and is choosing to wind up its haemorrhaging international operations while there’s still time to save its profitable domestic business. International flights would be turned over to the much cheaper-to-operate Jetstar and, perhaps, a revived version of the Asia-based premium carrier Qantas has sought to get off the ground in recent years.

Needless to say, this rather dire picture is not the one Qantas CEO Alan Joyce sought to paint today as he unveiled the carrier’s $244 million loss for the last financial year. Rather, Mr Joyce was quick to point out that Qantas retains options to purchase 50 of the carbon composite 787-9s – meaning in theory that the Dreamliner could join Qantas’s fleet by 2016, only two years later than the first of the 35 firm orders was scheduled to arrive. Qantas will also go ahead with 15 firm orders for 787-8s scheduled for delivery starting next year, though the fact that these will join the Jetstar fleet tends to highlight the less rosy prognostications for Qantas International’s future.

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To be sure, Qantas’s original order for 65 787s, placed way back in the halcyon days of 2005, seems wildly optimistic today. As its $244 million loss last financial year makes clear, Qantas International has problems that can’t be solved simply with more fuel efficient planes. But as the Flying Kangaroo’s moves today also make clear, the airline did well to retain significant flexibility in that deal. Even with the cancellations, in the medium term Qantas remains in line to receive as many of the fuel-saving 787s as it is likely to want. The real question is not only how many of the aircraft Qantas will want, but whether those aircraft will be headed to a revived Qantas International or to Jetstar, Qantas Domestic or somewhere else.

That’s anyone’s guess, and with Qantas’s apparently-serious talks with Emirates over a codesharing alliance still hanging in the balance, there’s another shoe yet to drop. If Qantas’s decision today is a clear indication of anything, however, it’s that the airline no longer views more efficient aircraft as a viable short-term fix for an international operation that needs to be fixed pretty quickly. And that points to the likelihood that – even if Qantas International survives – it’s likely to keep on shrinking.

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35 Comments

  • ilikegoodpeople

    says:

    So when are you intending to wind up Qantas operations, Alan?

    Qantas is into a downward spiral.. who will get it out?

  • Jayden

    says:

    The resolution is simple.
    Replace management, CEO ALAN JOYCE and get a new board!!!!
    Can’t they see its a management problem!!!
    Surrender yourselves and leave!!!

  • Observer

    says:

    Are we going to see silver and orange A380’s fly around soon?

  • John Harrison

    says:

    A sad sight the way Mr Joyce and Co are slowly ruining Qantas, I still say if a Football team does bad, the first to go is the manager. Why is Mr Joyce still with us. I fully understand its a very tough world out there in airline land and not many airlines have black line profits. We can only hope they is a silver lining, but as alot of people think it will be orange lined !!

  • Justin

    says:

    Jetstar has been very successful. So I’m not quite sure why everyone has some sort of smart arsed comment. The fact is the people of Qantas have been overpaid for too long. Look at the legacy airlines of the USA. All filed for bankruptcy. It doesn’t help that their service is terrible. However is saying that some very bad business decisions have been made. Especially not ordering the 777. John Borghetti and his staff are looking pretty good right now.

  • Hutch

    says:

    My thoughts:

    1. QF needs the corporate market
    2. The corporate market enjoys amongst other things: frequency, frequent flyer benefits and network.
    3. If QF removes it’s international network it will seriously impact its ability to maintain some corporate accounts.
    4. Not having an international network will impact on domestic feed.
    5. QF cannot remove it’s international network without seriously impacting the appeal of its frequent flyer program.
    6. The suggestion/hint that QF can drop its international network to focus on its Domestic business is rather odd in my mind (similar to previous AA comments that AmericanAirlines may launch Australian flights :-p ). The domestic network and frequent flyer business is highly profitable, however a large percentage of that profitability is reliant on QF having an international business. No international network will hamper two cornerstones of your business.
    6. I concur that the International network will shrink, but hasn’t that been made clear by QF management previously. I’d suggest (like many others) that its likely that Frankfurt is a goner on QF metal and I’d suggest Honolulu isn’t sustainable with a B767 product (787 or A330 anyone?). South Africa could also be shaky in the medium term.
    7. I understand that mainland North America is profitable and is relatively safe from the impact of cheap Asian and Gulf airlines
    8. It looks like the move to SCL from EZE has proven to be a good one.
    9. Restructuring requires capital and other expenditure.
    10. The decision to cancel/delay 787 orders is short-sighted (similar to not buying 777). However I heard that QF will receive compensation from Boeing for doing so. So financially taking a 2 year delay for $400million compo may have been enticing for QF. Personally I think the 787-9 is a plane QF international needs and is a plane customers will pay a slight premium to fly.
    11. The argument that QF now has the youngest fleet age since privatization is a mute argument Mr Joyce. You do not (or at least you shouldn’t) compete against yourself. Fleet age against SQ, CX, EK, EY, VA is what matters. If you can’t come out of restructure in 3 years and say our fleet is newer than the competition then you have failed.
    12. QF needs to give up its 65% market share target. As JB said ‘you can’t bank market share’. This was supported by Tony Webster (ex QF in the SMH today)
    13. Up until today, in my opinion AJ has been doing an okay job (judging a CEO during troubled times is hard), but today was very uninspiring. Losing money once (considering you grounded the fleet it was always going to happen) shouldn’t be a massive deal. The market will wear it if they think you have a plan to fix (at least) most of the structural issues and return to some growth in the medium term. Delaying the 787 is about fixing costs now as opposed to the best long term interests of QF.
    14. I’m getting over the spotlight on QF, perhaps AJ should go (only cause his background brings out the worst in Australians and if a born Australian was there, then the QF wouldn’t be as easy a target for the media). But I’d also love to see the Sheldon’s of the world walk too. Fresh eyes on both sides of the fence.

  • NJP

    says:

    I’d be interested to know the cost saving of renovating the 767 fleet v leasing replacement A330’s or taking the B787’s as planned? I still won’t fly on ancient B767’s no matter how good the new leather seats & iPads are – I wonder how many other business PAX will do the same?

  • Justin

    says:

    Hutch. That is spot on.

  • random

    says:

    The Qantas conundrum….. can’t perform effectively as an ultra-premium airline, too expensive as a low cost carrier, and burnt its spiritual advantage of unimpeachable maintenance standards trying to survive.

    Unfortunately what this is really saying is that there are very few if any routes that Qantas International can effectively compete on – which is a big statement to make – It’s a sad day when that’s the conclusion. It seems however a little bit unclear what role Qantas management has had to play in this over the past decade (including Joyce). One would have to suggest that over the past 10 years they have bungled aircraft selection (general concensus says they should have 777s), and have bungled route selection (it’s hard to believe that the only routes that really suit Qantas International are London, LA, Dallas, Jo’Burg, Singapore, and Buenos, give or take a couple). Surely there are other city pairs that could turn a profit?

    Admittedly Australia is being “punished” for being a geographical extremity (ie the end point of very long routes from any direction), which makes it nigh on impossible to generate through traffic – which seems to be one notable reason why Asia and The Middle East are now growing so rapidly. It doesn’t really matter where the traffic originates and where it’s going, providing it can be routed via their home base, and being geographically in the middle gives them a cruel advantage. This does beg the question, how different might Qantas’ plight be if and when technology and manufacturers support an economic aircraft range of 18,000km direct, thus removing the requirement to one-stop the longest legs. Places like Bahrain suffered immeasurably from the first range extension of aircraft like the 747 – might the same occur again if the longest legs could become no stop.

    To return to a previous point, it’s hard to believe that no-one inside Qantas can dream up new routes that might make Qantas Intl a profitable concern – its a sad indictment on management when that’s the case. Add to that the cancellation of 787 orders which might just have given Qantas Intl the capacity to profitably consider new city pairs, and it’s a very uncertain path that lies ahead.

  • James from Sydney

    says:

    Let’s move on….

    The sooner QF give up International the better. We decided many years ago to open the skies and QF cannot compete. No Australian airline can. Let’s move on and QF domestic can codeshare with other airlines for international travel.

  • Shane

    says:

    Qantas intl flights to go to Jstar ? I like to and do enjoy flying qantas. i barely tolerate Jstar on domestic routes and only fly them as a last resort. I absolutely wont be flying j star intl as an option to qantas. At that point if it happens i will go with a foreign carrier !

  • Phill

    says:

    QF Intl should be selective in it routes eg LAX SCL SIN HKG. drop all the others or gift them to JQ , but do the ones they keep very well with hight service and frequency – just a start but at least it’s not an end

  • Alex from SYD

    says:

    I think the frequent suggestions that QF can not run a profitable international network due to the geographic disadvantages is an over simplification, and frankly very easy to disprove. Of course Asian and Middle Eastern airlines have a strong advantage that some (certainly not most) are able to capitalise on, but one doesn’t have to look far to see that airlines can be profitable in similar and even worse geographic circumstances.

    Casing point is Air NZ, who are managing to turn things around on their international business and continue to be profitable on the whole, despite being arguably in a worse geographical position and a much smaller and somewhat less affluent home market.

    I think QF management should take a good look at Air NZ’s fleet management and overall product and they might find some inspiration of how to get out of this mess. Cancelling the 787 and keeping the 747’s and 767’s might have been crucial mistake. Even if QF can use it’s remaining 787 options two years after the original entry to service they might join the back of the queue at Boeing, once the global economy surfaces from the doom and gloom days.

  • Hutch

    says:

    Alex – I don’t think Air New Zealand is a good example to support your case. The last I read (2011), Air NZ long-haul international flights were losing $1million a week (with a much smaller network than QF).

    Phil – I think you are correct. I wouldn’t trim as much as you, but if QF is flying on a route it isn’t making money on (and has no chance of making money on within 5 years) and it holds no strategic value, then those routes need to be reconsidered in the short-term.

    One thing is (amongst the doom and gloom) if the EK deal (or my preferred QR deal) happens, things will look very different for the Roo. It’s European problems will reduce- the days of flying to every port with your own metal are well & truly gone. It’s just a shame QF won’t have 787’s to improve Asian network, fleet & frequency (well timed double daily flights to HKG for example with world-class product – current A330’s are not good enough).

    To finish on a positive… I’ve read (and experienced) that QF cabin crew service has improved. I’ll be on QF1 in two weeks so hope it proves true.

  • Alex from SYD

    says:

    Hutch: They were indeed losing about 1M a week, but overall the company was profitable. My point is that Air NZ have managed to turn much of their international losses around more recently (and at a time when most airlines report falling profits and frequently losses):

    http://www.stuff.co.nz/business/industries/7080724/Air-NZ-soars-towards-target

    Their fleet management seems to have a lot to do with that, along with a number of inovations such as the new 777 cabin Y and premium Y product (which also saw them take ATW’s Airline of the Year award last year. When was the last time QF’s product stood out in a crowd?).

    The other interesting thing about Air NZ, along with a number of QF biggest competitors (Singapore, Emirates and plenty others) is that they are at least in part state-owned. I think loosing QF international would be a very bad thing for the Australian aviation sector and Australian tourism as a whole. Maybe Tony Webber was right when he wrote his opinion piece in the Herald last year:

    Nationalise Qantas International (http://www.smh.com.au/business/nationalise-qantas-international-20111014-1lo1o.html).

  • Hutch

    says:

    Alex: Thanks, good to hear Air NZ’s restructuring is progressing well.Don’t get me wrong, I think Air NZ is a good airline and QF can learn some things from them, but I don’t hold them to be a model airline. The fact that they were losing money suggests they had similar problems to QF but moved quicker than QF to address them. But also I think NZ (in my opinion) is a less complicated market – it is essentially a market focused on one core city, is less attractive to competition than Australia and has a complete monopoly on North American routes (and of course has some Government backing).

    I also think its important to acknowledge that overall QF is a profitable enterprise. It wasn’t long ago that they were posting billion dollar profits and barring some one-off costs last financial year, (my understanding) QF wouldn’t have produced a statutory loss. I’d be surprised if QF didn’t return to some small profit this financial year – 3 out of its 4 main business are profitable.

    I have to agree that I don’t like QF’s fleet management. 1 week ago I would have suggested that QF shouldn’t have bothered with the 777 as they would soon by flying 787. Since that has fallen over, I don’t have that defence anymore. It seems odd you wouldn’t get the 787’s ASAP to position yourself for the Asian boom of air travel. My only concern is that I don’t think that the 777 are suitable for Syd>Jnb and Syd>Scl which would mean you would keep a number of 747’s for those routes.

    The last time QF’s product stood out would be this year http://www.worldairlineawards.com/Awards_2012/wclass.htm I’ve flown this once (complimentary upgrade) and think it was great – but generally poorly priced.

    I agree losing QF International wouldn’t be a good thing. I don’t believe it will happen. But I wouldn’t be against the Government owning a portion of the Roo. But I would suggest the first thing the Government should do is try and stop airlines from dumping capacity on Australia.

  • James

    says:

    Qantas is the name of the company and the full service brand.but Jetstar Asia,& related JS brands are a great growth story so far represent a lower cost and a strong brand going into the Asian century.This is the area where AJ has good experience

  • RH Hastings

    says:

    Qantas might as well transfer their A380 fleet… to Emirates or Singapore.

  • Michael Anderson

    says:

    Qantas has to get its wages bill down. It has far too many overpaid staff.

    No one is worth 1/2 million dollars a year, no one.

    Plus, does QF really need things like 2 x SYD/LAX daily, 3 hours apart.

    From what I can tell, for much of the year, this could easily be cut to 1/day or 10/week, with either a 744 or an A380 operating the service.

    Qantas can no longer afford to dump seats to fill aircraft, so it should just cancel flights. If someone is booked on one of the SYD/LAX & they are switched to other, it’s not a huge disruption, but is a massive saving in costs.

  • The Truth

    says:

    So, where was Alan Joyce before Qantas and Jetstar? Ansett. And look what a fine mess he left that airline.

  • Andrew

    says:

    Ever since Joyce became CEO it has been his unstated intention to change Qantas into the Jetstar model and it does not trouble him if he has to trash the history and status of Qantas. Just the way he thinks

  • Patrick Kilby

    says:

    This seems eminently sensible, QF ends up with 30 A330s which have the same economics as the 787; end up with a squillion is compensation and then can still buy the 787 at the same time it would have been available anyway. Even in the best scenario the 787-9 could not have been delivered before 2015 (one year later at best). I cannot understand the big deal over a sensible management decision which in effect changes nothing but gives QF more flexibility (A330s or A350s if there are more 787 delays) and more money

  • Hutch

    says:

    Michael – whilst I am not completely against your comment, getting staff wages down is a lot easier said than done. The easier option would be to keep increases down and look at efficiencies (jobs previously done by 3 people, done by 2 now etc). Additionally QF could look at outsourcing more non-core functions. But yes, from my research QF staff (pilots at least anyway) are well paid.

    I don’t agree with your second comment. North America is profitable for the Roo. I don’t see why they would need to cut anything out from this route. The Australian airlines (QF/VA) by all reports, are currently vastly superior in service to their American counterparts (UA/DL) on this route. Perhaps they can look at timing of the second flight (QF11), but if it departed much later it rules out any east coast connections (which may not be that important with DFW flight). I also suggest there’s a fair amount of cargo on the LAX-SYD route. If you wish to see poor QF departure timings Syd-Hkg is much worse and hard to understand.

  • James from Sydney

    says:

    QANTAS – UNIONS – ANSETT

  • rod

    says:

    Where is the 77W / 77L in a QFI plan ?
    Ditch the too large 380 & go for a more appropriate aircraft – international pax want frequency.
    Just look North to SIN / HKG / NRT – 380 is only good on a few routes – multi flights a day are far more desireable

  • Tony

    says:

    Qanstar – has a nice ring for a future marketing campaign – the only livery change would be in the name – but then I suppose a silver kangaroo would look nice inside the orange star. The truth is, regardless of who is running the show – most of the corporate contacts I know have either already let Qantas Club memberships expire and gone over to Virgin or about to do so. Most people I know have Velocity Gold or Platinum already and are more than happy to choose SQ or Etihad for Internationals. Perth domestic from Melbourne and Sydney on Virgin is going to be all A330. On Qantas, you could end up on a 20 year old 767 or a 737 – if you are lucky there are A330’s in assorted domestic or international layouts with a 747 once daily between SYD – PTH.

    The 787 cancellation issue is merely another example of poor fleet desicions – as said already in the prior comments – no 777’s ?? The Boeing compensation benifits will be needed for Joyce to try and tidy up the fallout from the poor Consumer sentiment and Marketing mess that already exists.

  • Pacer

    says:

    Michael Anderson says:

    August 27, 2012 at 1:57 pm

    Michael, just to put your comments into perspective. Who are the overpaid staff that get $500,000? Is a CEO that has been in the driver seat of QANTAS for the last four years, seen the share price down to less than half, not paid a dividend since 2008/09, shut an airline down for 48 hours stranding 100,000 passengers worldwide, worth the $5million he got last year? I think not. NO CEO is worth that much. None of them.

    People want frequency. QANTAS supplies this and has a considerable share of this market, and people fly them. Some say there aren’t enough flights.

    QANTAS isn’t “dumping seats”. I’m sure you’d like to be switched from the last flight of the day to the first of the next day. That is a huge disruption.

    QANTAS seems to the media and public punching bag at the moment. There is a constant internal battle between staff and management. No it’s not industrial relations, but the speed of changes and trying to do more with less. This is especially hard when much of the infrastructure and spares (tooling, computer systems, spare parts, etc) within the company is very outdated or not in the port needed, but interstate) and constantly being tinkered with to make it work. Why? because management won’t spend the money to improve the infrastructure that is needed to make things work more efficicnetly.

    It’s nice to have a great lounge at the airport and Frequent Flyer Program, but the lounge won’t get you to your destination and will you use your QANTAS points on Jetstar?

  • sanchez

    says:

    Justin: go take your liberal idealoligy and stick it where the sun dont shine.. I bet you dont even know anyone working for qantas! Believe you me, we are not over paid but majority are extremley hard working and earn less than your average garbage collector! And all why we stand by and watch our fellow employees made redundant and we are then expected to pick up there work as well as our own

  • Pacer

    says:

    Hutch says:

    August 24, 2012 at 12:01 am

    My thoughts:

    13. Up until today, in my opinion AJ has been doing an okay job (judging a CEO during troubled times is hard), but today was very uninspiring. Losing money once (considering you grounded the fleet it was always going to happen) shouldn’t be a massive deal. The market will wear it if they think you have a plan to fix (at least) most of the structural issues and return to some growth in the medium term. Delaying the 787 is about fixing costs now as opposed to the best long term interests of QF.

    14. I’m getting over the spotlight on QF, perhaps AJ should go (only cause his background brings out the worst in Australians and if a born Australian was there, then the QF wouldn’t be as easy a target for the media). But I’d also love to see the Sheldon’s of the world walk too. Fresh eyes on both sides of the fence.

    Hutch,

    13. I don’t see how AJ has been doing an OK job. Since his tenure as CEO of QANTAS started, the share price has dropped, dividends have stopped, QANTAS International has shrunk, and this is no mistake. It is a continuation of the Dixon era, which is why AJ was selected over John Borghetti. Another fatal mistake by QANTAS upper management.

    14. AJ’s background has nothing to do with it. Geoff Dixon is an Aussie, and was just as despised by the QANTAS workforce and some of the general public. It’s just that AJ is a more stupid person than Dixon, and not as savvy as him. That is why Leigh Clifford, the chairman, took control of the AGM last year, as AJ didn’t have the goods to answer non-scripted questions from the general public.

    AJ’s racial background has nothing to do with being disliked, because if that was the case, a majority of the QANTAS workforce would be hated.

  • Hutch

    says:

    Pacer

    13. We will have differing opinions on this subject. I don’t disagree with anything you said, but as you said, ‘this is not a mistake’. The CEO’s job to implement a strategy with the approval of the board. Reality is, it is my opinion (and others) that QF International needs to shrink – the days of flying everywhere with your own metal are gone (granted many people disagree with this). Borghetti understands this as he has implemented his ‘partner strategy’, which is working well. There have been significant changes in QANTAS over the last few years and change generally is not popular. This will impact on the business – profits, share prices and dividends (not to mention a major global financial crisis)(I hold QF shares in my super). The theory being short term pain (now) will lead to long term gain (3 years +). My point being AJ’s performance can only really be measured once the QF ‘turn-around’ strategy is completed – if it ever is. However I wouldn’t be paying him anywhere near his current salary – my opinion is the CEO’s salary should be set at the highest employees (A380 pilot) with performance payments above this linked to profitability, share price and dividends (though that won’t happen).

    14. Whilst I concur that AJ is not liked by a fair share of the public, I disagree that a portion of this does not include racial element. Whenever there is QF article with public comments on any news website, you don’t need to look too far to see several comments talking about sending the Irishman home – something which should be frowned upon.

  • Adrian Paddingtom

    says:

    2 A380 s sat on the ground at Heathrow for between 15 and 17 hours everyday not earning. No wonder QANTAS lose money!. Wet lease to British Airways and fly them to New York and back in that time or utilise the Polish community links and fly Warsaw Poland eastern europe. Then do the trip back home from Heathrow as normal.

  • Freight Jockey

    says:

    Turn it into a cargo airline: no trolley dolly, Terminal or exaggerated marketing costs. No missing slot times waiting for ignoramus pax staggering from the bar, mesmerised by the Duty Free Store or too stupid to listen to boarding calls or read the destination boards. AND it could pay its pilots HALF of what the Skygods get!

  • Haroun

    says:

    In the first place, why did Qantas ever take the bald step of acquiring the twelve A380’s currently in it’s fleet, fore-seeing the downward spiral of the airline industry. Surely this would have added to it’s capital losses with huge balance of payments. I believe that there is another six on order still awaiting delivery. Is there any room for them in the present Qantas fleet or are they just going to gather dust at Syd Int Airport. In current circumstances, it would be wise for QF to cut back on wide bodied aircraft that’s used on unprofitable intl routes and concentrate on smaller, cheaper one’s for their more lucrative domestic routes. Lesser big jets to be used on lucrative intl routes only. This will reduce maintenance costs as well as unnecessary fuel expenditure. It’s time to think wisely and diligently.

  • Romy Maranesi

    says:

    Overview:
    1. why people with one of the most expensive currencies (this means, overseas tourism becomes cheaper) is flying other airlines, plus it is an airline who became worldwide “safety-famous” thanks to Tom Cruise and Dustin Hoffman (nobody can pay such an ad!)?
    2. What are the ratios (headcount) for flying people, maintenance, and administrative people? How does it compare to other airlines? Can you separate between national and international?
    3. What is the wages gap between Qantas and an average Asian airline? National and international pay basically the same?
    4. Why it went from making money to losing? Where is the difference? Depreciation of “new-buys” very rarely is the issue; re-structuring expenses maybe
    5. In this industry, decisions rarely have immediate results. F. ex., EZE change was not a good idea, because the trip became so long (auckland-santiago, almost doubled the total time), while more expensive than Aer Arg, that eventuallly people will switch; contrary sense, some decisions may prove right later
    6. Qantas is losing money when everybody else is making it? I.e., after taking out the “re-structuring” expenses. I am pretty sure is not the case for Aer Arg
    7. Similar question for average occupancy, is it worse for Qantas than for the rest?
    8. People is willing and ready to pay a little bit more (let’s say, around 15%) for a better service (on and off plane); is Qantas service really better?
    9. Personally, and don’t take this wrong, I don’t understand why such a focus on the fleet, if we don’t get these answers first
    10. Tony says that a lot of people is leaving Qantas, particularly at the corporate level. How can we check if this info is right?
    11. The discussion has other levels, more important than this one: how much private and how much public is Qantas? I.e., how important it is from a national perspective, how symbolic it is for all of us?
    12. Finally, I am the financial controller of a hotel in Canberra; before coming here I lived, worked and studied in every continent except Africa. Coming to Australia was the best decision I ever made (after getting married, of course dear). The main question is: if Australia cannot compete in services, what is our future?

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