Success signs

“The level of activity and achievement has been immense. If you take just the month of April we’ve launched our first new uniform in over a decade, opened a state-of-the-art lounge in Singapore, taken delivery of Jetstar’s 100th aircraft, hit a milestone of five million Jetstar customers in New Zealand, opened a hangar in Brisbane to service our regional aircraft and launched a whole new world of travel with our partnership with Emirates,” Joyce noted.

While acknowledging the advances under the intensive transformation process, Joyce was candid about costs associated with the change program in what could be seen as positioning statements for the airline’s full-year results.

“We’ve always made it clear that long-term gain can’t be achieved without the short term cost of transition. We are certainly seeing the benefits begin to flow from initiatives already undertaken. But there will be cost impacts within the second half of FY13, which is typically the weaker half in each year, as we implement our strategy,” he explained.

International turnaround

The most significant of achievements in the year to date has been the alliance with Emirates. Joyce sees this as having a profound positive influence on Qantas International’s sustainability, but in addition to rolling out the highly-publicised comments about the benefits of the partnership to passengers, Joyce was candid about the practicalities of establishing the alliance.

”Right now we are still managing through the transition phase, including the $50 million impact of transferring our hub from Singapore to Dubai. As we predicted, we are also seeing aggressive short-term responses from our competitors,” Joyce said.

These responses come as Virgin Australia surges forward with its plans to consolidate its relationships with investors Etihad and Singapore Airlines, with codeshare agreements having been expanded with the Abu Dhabi-based carrier and a further investment by the Singapore carrier, bringing its total share of Virgin Australia up to nearly 20 per cent, all but equaling that of Air New Zealand.

Virgin Australia, of course, has for some time benefited from codeshare arrangements with both airlines on its growing domestic network.
Indeed, the domestic networks for Qantas and Virgin are vitally important to the commercial success of their international businesses, with feed between the networks contributing significant revenues through the marketing of joint services in which the respective airlines buy seats on the others’ flights.

“Right now we are still managing through the transition phase, including the $50 million impact of transferring our hub from Singapore to Dubai.”

It is known that Emirates, for example, sees Qantas’s domestic operation as the primary achievement in its new alliance. Emirates is currently selling services to 32 Australian destinations, offering an international reach for the domestic market that was unparalleled under the British Airways joint services agreement that preceded the Emirates alliance.

“The number of Emirates customers booked to travel on Qantas domestically is also well ahead of our previous partnership with British Airways” Joyce said in his speech.

Emirates’ interest in Australia is seconded only by access to the Qantas Frequent Flyer program that gives Emirates access to more than eight million frequent travellers on domestic and international services. And for Dubai, that seems to be paying off.

“Since the launch of the partnership, the number of points redeemed on partner airlines has more than doubled compared to the same period last year,” Joyce explained. “This is largely driven by Emirates. Higher redemptions indicate a higher level of member engagement, which is the lifeblood of any successful loyalty program.”

Similar benefits arise in airfreight, where Emirates sees domestic and Pacific Rim access as vitally important to its successful global expansion. However, with the recent announcement of Etihad’s introduction of pure freight services to Sydney from June, the shadowing by the two Middle East airlines of one another’s Australia-Pacific strategies demonstrates the competitive tension between them, but so too the critical role Qantas and Virgin play in their respective ambitions.

For Joyce, though, he early signs of success he sees in the opening months of the alliance provide comfort that Qantas International may yet be rescued from the path of demise it was certainly headed for before Emirates’ Tim Clark proposed the partnership.

“Clearly it is central to our turnaround plan for Qantas International. We saw a significant increase in bookings to Europe on the joint network in the first nine weeks of sales, compared to the same period last year, which we knew reflected some pent-up demand. Sales continue to perform very strongly,” Joyce extolled.

As vital as the Emirates alliance is to Qantas, however, the Australia carrier continues to exercise other aspects of its international network important to its strategic future.

Joyce noted the strong partnership with American Airlines, flying daily into its hub of Dallas/Fort Worth, a strengthened relationship with South African Airways to open up southern Africa via Johannesburg and the re-timed services to Asia, which Qantas sees as a major beneficial outcome of the Emirates alliance.

Interestingly, Joyce also foreshadowed during his speech the possibility of more services into Latin America, saying: “We have had preliminary discussions with LATAM to strengthen Santiago as the gateway to South America.”

This relationship will be boosted mid-next year when LATAM – the merger of Chile’s and Brazil’s national airlines – joins the oneworld alliance, which is still seen by Qantas as a valuable source of international feed despite the power of Emirates, whose CEO still sees no benefit in joining.

Domestic nexus

“We’ve got the full package of assets – the scale, network, frequency and distribution, all backed up by our loyalty program which is now better than ever.”

There was no hint of defence in Joyce’s comments – they were absolute in their defiance of rising competition in the domestic market. And this defiance will be vital if Qantas is to fend off the increasing depth of Virgin Australia’s coverage of the domestic and regional markets.

“We are resolute in maintaining our …65 per cent market share, while noting with due caution: “We still face a tough environment with a high degree of capacity growth in the market, pushing down yields and profitability. While we do not expect any improvement this half, capacity growth is alleviating, which will lead to a healthier domestic capacity position in FY14.”

While Qantas’s cash position remains relatively strong, it will need to avoid sustained blood-letting on the domestic network, whether through the cost of maintaining marketshare-protecting capacity or a reduction in yield from fare discounting.

Maintaining a healthy domestic business is also why Qantas is intent on reducing the age of its domestic fleet and improving route economics. Joyce said the retirement of 767s by the end of the middle of 2015 would “significantly reduce our domestic cost base” and that the withdrawal of older 737-400s would be complete by the end of 2013.

Operations at home have been critical to buoying the Group’s financial position and if that is eroded too significantly, any benefit generated by the Emirates relationship stands to be negated.

This is just one of a number of reasons why Joyce was unable to give profit guidance for the full financial year.

“We are a $16 billion revenue business with exposure to numerous external and global forces, where a small shift can create a significant movement in our earnings.

“Given this high degree of volatility and uncertainty, the Group continues to be unable to provide profit guidance at this time.

“Our plans are in place, and progressing.
We remain extremely confident about the Group’s strategy, and our future,” Joyce concluded.