Game on

Qantas’s revenue increased six per cent to $15. 72 billion whereas Virgin’s jumped 9. 8 per cent to $3. 9 billion.

The results are even more dramatic given that Virgin Australia’s makeover has only just been completed and the full yield result will only be realised in the 2012-13 year.

Qantas Group CEO Alan Joyce was still upbeat on the result and said the Group had launched the biggest transformation program since privatisation in extremely challenging circumstances.

“Qantas has been through an exceptional period in its history over the past 12 months,” he said.

“Over the course of the year we made significant progress in advancing the Group’s strategy – building on our strong domestic business and frequent flyer

program and growing Jetstar across Asia.

Qantas’s international turnaround plan is on track and set for improvement in 2012/13.

“We are now coming off a period of high capital expenditure that has given us the youngest fleet since Qantas became a public company in 1995 – an average age of 8. 3 years for passenger aircraft. ” However, many of the group’s youngest aircraft are in service with low-cost subsidiary Jetstar.

The biggest factor behind the loss was Qantas International, which made an underlying EBIT (earnings before interest and tax) loss of approximately $450 million. By comparison, Qantas and Jetstar’s domestic networks together delivered underlying EBIT of approximately $600 million.

The numbers were met with a host of claims by unions and others that Qantas’s international operations were subsidising Jetstar’s cost base.

Those concerns were very well encapsulated in Greg Hoy’s excellent piece for ABC TV’s 7. 30 on August 23. CEO of the Australian Shareholders Association Vas Kolesnikoff told 7. 30 that “there are quite a few organisations and quite a few accountants going through the Qantas results and it does appear that the disclosure is very difficult to understand. ” Brad Hodson from the Australian and International Pilots Association claimed that “they’ll do pretty much whatever it is they have to can to keep Jetstar looking as profitable as it possibly can. ” Hodson added that “the law does require them to really be transparent and really I think we’d say at this particular point in time that’s not the case. ” Adding fuel to the fire was the TWU’s Tony Sheldon, who claimed that Qantas management had “put all these costs of their Jetstar expansion, operations that aren’t successful overseas, onto their international Qantas arm and they’re trying to say that it’s everybody’s fault other than the executives who have paid themselves an 82 per cent increase in executive pay in the last three years. ” Former chief economist of the Qantas Group Dr Tony Webber added some perspective and a touch of reality.

“What I do think has happened is that Jetstar enjoys a number of services that they don’t actually pay for, such as the legal department, corporate communications, investor relations – all of those overheads, back office overheads,” Dr Webber told 7. 30. However, he suggest that its “accounting convenience rather than deliberate deception. ” In fact there is absolutely no doubt that Jetstar benefits from its Qantas parent “being there”. To deny it would be absurd.

IN THE RED Qantas mainline recorded an underlying loss of $21 million, with Qantas saying international operations lost $450 million. (Rob Finlayson)

Jetstar would get a far better deal buying aircraft simply because it is part of a major group rather than a stand-alone startup.

And it’s also true that Qantas domestic operations and its frequent flyer program are far stronger and more profitable because the airline has an international arm.

However, there is also no doubt that Qantas International is not profitable, particularly when one compares the average labour cost at Qantas of $92,000 per employee with that of Emirates at $47,000.

Hodson also laid blame at what he termed “risky ventures into Asia” with “Red Q and Jetstar Pacific. ” “They’ve spent a lot of money, but there’s no return on capital there. ” Indeed he is right that the Red Q venture has faltered but Jetstar Pacific now has Vietnam Airlines as a partner and its future looks far more bullish.

Of course not everything in aviation succeeds and an airline must be prepared to take commercial risks if it is to prosper.

Sheldon added that a survey done by the TWU showed that “85 per cent of employees do not have confidence in the direction that Qantas is taking,” while only

“1. 5 per cent of employees at Virgin do not have confidence in their management. ” However, the most savage attack of Alan Joyce came from John Singleton, just after the Emirates deal was announced.

In an interview in Sky Business reported in The Australian Singleton claimed that there was a “crisis of management” at the national carrier.

Singleton said the low share price, poor marketing and international ratings, and combative industrial relations were evidence of management failings. He added that Joyce was the wrong man for the job.

“Qantas now is undergoing a crisis of management because a wrong decision was made about a CEO. There is nothing good about Qantas any more: the marketing is wrong, its advertising is wrong and the persona of the company is wrong. ” Singleton cited the collapse in the share price – down from $5. 44 in 2008 to $1. 20 at the time of the interview – and a slide in customer ratings as evidence of management failings at the airline. When asked if it was too simplistic to blame the chief executive, considering other cost and competitive pressures, Singleton pondered why John Borghetti [Virgin CEO] had been able to get it right under many of the same cost challenges.

“If Borghetti and Joyce swapped airlines, the Qantas share price would go up and Virgin’s would go down, no question,” he said.

However, Singleton failed to mention that Borghetti was working with an airline which has staff costs way below those at Qantas.

Singleton, who has been repeatedly associated with an equity buyout of Qantas, also claimed that there was a leadership black hole at the airline after the company enjoyed years of strong executive and board leadership from Gary Pemberton, James Strong, Margaret Jackson and Geoff Dixon.

“Nowadays there is an invisible chairman – does he make himself available for interviews? – and an invisible CEO in Alan Joyce, who is probably doing his best but every time he bobs up there’s more bad news,” he said. “He has no people skills and it’s all bad, bad, bad. ” Singleton told Sky Business that the leadership has to be held responsible for the plight the company is in.

“When they start announcing record losses instead of record profits and the solution is no new planes, you know they haven’t got a clue,” he said.

Singleton, however, showed that he wasn’t quite across the issues nor up with recent history. Errors made by Qantas management such as not buying the 777 (six times), delaying putting seatback videos into economy and coming a decade late to the premium economy party were all made on the watch of the previous management that Singleton lauds. Another alleged error was that of rejecting a deal with Emirates in the last decade.

And much of the adversarial union landscape was born out of the Dixon era at the airline, exacerbated by changes made in industrial law which Joyce inherited.

And Joyce can hardly be held to blame for record high fuel prices, unrealistic demands from some unions and significantly increased access to Australia by foreign airlines.

The fuel bill for 2011-12 was up $645 million to $4. 3 billion, while the industrial action culminating in the 2011 grounding of the Qantas fleet cost $194 million.

Joyce was right when he said that the airline has been through an exceptional period but he was upbeat on its position.

“Our domestic position is pre-eminent and our domestic earnings outperformed the previous year. We have the two most profitable airlines in Australia and we lead the market in both business and leisure with 65 per cent marketshare. We hold an estimated 84 per cent of Australia’s corporate customer base with double-digit corporate travel revenue growth on last year. ” Joyce said that “the Qantas Frequent Flyer program keeps delivering, with earnings up 14 per cent to a record normalised EBIT of

$231 million, membership up nine per cent and redemptions up 16 per cent. ” Jetstar – the airline Qantas staff love to hate – achieved record underlying EBIT of $203 million, up 20 per cent on the previous year. Jetstar is now the largest low-cost carrier in Asia Pacific measured by revenue.

Joyce was able to tell the market that Jetstar Japan was five months ahead of schedule, and had already flown 110,000 passengers with load factors at 86 per cent.

He also outlined significant progress made in Qantas’s international turnaround plan launched in August 2011. Qantas increased capacity to its Dallas/Fort Worth and Santiago hubs, reconfigured seven out of a planned nine 747-400s with A380 interiors and withdrew from major lossmaking routes.

Major business transformation initiatives, including heavy maintenance consolidation, were commenced during the year.

“The benefits from these initiatives have started to flow and will deliver annual savings of approximately $300 million when all measures announced to date have been implemented,” said Joyce.

In summary Joyce said that “in the past year we have made a series of right but tough decisions in order to secure a sustainable future for Australia’s Qantas and the Qantas Group. Over coming years we will reap the benefits of these decisions. We said we would return Qantas International to profit in three years and that over five years our Qantas flying businesses combined would exceed their cost of capital. We are on track, and we stand by our commitment. ” Of course those comments were made in the knowledge that the ground-breaking Emirates alliance was just two weeks away.

Several days later the rise and rise of Virgin Australia continued with a delighted Borghetti telling the market that the Virgin Australia group of airlines was reporting a 2011-12 statutory net profit after tax of $22. 8 million, an improvement of $90. 6 million on the previous year. The company reported an underlying profit before tax of $82. 5 million, which is an improvement of $149. 1 million on the prior year.

“The Group’s improved financial performance throughout the year demonstrates that the Game Change Program strategy is delivering positive results despite the challenging external environment and high fuel prices,” said Borghetti.

“This is reflected in our strong yield growth, with 12. 2 per cent across our domestic operations and 12. 0 per cent across the Group, notwithstanding strong price competition and total market capacity growth.

“Our progress in attracting higher yielding corporate and government customers has been a key driver of our improved profitability. This segment now makes up 20 per cent of our domestic revenue and, encouragingly, over the last three months we have averaged above this level.

“Importantly, reaching the 20 per cent target is a tipping point which we believe effectively creates a new competitive norm. ” There is no doubt that the Virgin Australia product is robust competition to Qantas, the full effects of which are yet to felt.

On the once lucrative transcontinental routes, Qantas was charging, before Virgin Australia introduced business class, around $1,800 for a one-way premium seat.

Now Qantas has been forced to drop its fare to around $1,300, so while it may retain the business it’s taking a haircut in yield and the full impact over a 12-month period is yet to show up in the bottom line.

Borghetti also said that the airline is benefiting from increased interline and codeshare revenue from its international alliances that was up 158 per cent on the prior period.

Another money spinner is the regional ATR 72 turboprop operations.

“As a result, we have now diversified our revenue sources and we are in a good position to respond to changes in market conditions and drive further growth,” he said.

Borghetti heaped praise on his staff: “Our performance this financial year is a credit to the tireless dedication of our people and the drive they have to make a real difference for our customers. It is also pleasing to see continued improvement in our already strong staff engagement scores this year. ” He continued: “Over a very short period we have repositioned Virgin Australia as a genuine competitor on all key customer measures, including product, network and loyalty programs, while maintaining

our service and cost advantages. This has enabled us to turn around the financial performance of the airline in a difficult and highly competitive environment.

“Today’s results confirm we have changed the competitive landscape in Australian aviation and we are now ready for the next phase of our development,” Borghetti said.

Clearly the key to that are the new business products. “The Group has seen yield growth of 12 per cent, significantly outperforming the market. This has largely been driven by strong take-up of our new business class and flexi fares, which has seen high-yield fare revenue increase by 113 per cent,” Borghetti said.

“Following the implementation of business class across our trans-continental services on September 28 2011 and across [the rest of ] our domestic network on January 18 2012, we carried double the number of business class customers compared to premium economy customers in the prior corresponding period. ” Borghetti said that during the 2012 financial year the airline had “made significant progress in our goal to create a seamless, first-rate experience for customers, both in the air and on the ground.

“A key part of this has been updating the look and feel of our product in line with the new Virgin Australia identity and introducing a range of new service initiatives designed to enhance the end-to-end customer experience. ” By any measure the progress has been outstanding.

Virgin has taken delivery of new Airbus A330-200 and ATR 72 turboprop aircraft.

Dedicated business class will be installed in the Embraer 190 fleet by early 2013 OCTOBER 2012 AUSTRALIAN AVIATION completing the domestic fleet reconfiguration while the refurbishment of the fleet of five Boeing 777-300ER aircraft will be complete by the end of the year.

Borghetti also noted that a host of other infrastructure upgrades were nearing completion.

“Given we have grown both our alliance and domestic business ahead of expectations, we are accelerating the pace of infrastructure upgrades. This includes enhancements at Sydney Airport’s domestic terminal (T2) which will see us extend our dedicated pier from nine to 14 gates (including four widebody aircraft gates), enabling us to make further improvements to our on-time performance in Sydney.

“Later this calendar year we will commence implementation of a leading Wi-Fi system developed by Lufthansa Systems, which will enable customers to stream video and audio directly to their own personal electronic devices”, Borghetti said.

And coming in early 2013 is a new Sabre reservations system. “It will also enable us to improve interaction within our internal systems and with those of our alliance partners, therefore enhancing our ability to provide seamless domestic and international travel experiences for our customers. ” In a blunt warning to Qantas Borghetti said: “At the beginning of financial year 2011 we announced a three-year strategy, the Game Change Program, to reposition the business for a more stable financial future.

“We are now almost a year ahead of schedule on the strategy, having achieved the majority of our goals. Today’s result gives us the confidence to reach for the next phase of the Game Change Program – it is now ‘Game On’.