Time For Change?

Then a new breed of airlines with even lower costs such as AirAsiaX and China Southern entered the fray with rock-bottom prices and, in the case of the latter, an excellent product.

This trend combined with continued globalisation begs the question: Can Qantas survive in the international space without government support? The airline’s virtual monopoly on domestic business class recently came to a shuddering halt with the morphing of Virgin Blue into Virgin Australia with a premium product.

For Qantas it is a double nightmare. The Virgin A330 business class product is superior and the new upstart has reduced fares. The latest government index shows that the business class fare index that had remained stable for the past 10 years has dropped 40 per cent in the past two years.

Once Qantas boasted it was the first around the world with theSuper Connie and the first with the 707 outside the USA, and it was synonymous with the 747, while as Trans-Australia Airlines it was among the first airlines to order the 727 and DC-9.

Today it is not even a participant in the race to adopt cutting-edge technology such as the A350 and 777X and Qantas is cancelling orders because it cannot afford the 787. Not buying the 777 has robbed the airline of the most versatile, fuel-efficient and reliable aircraft ever built, while for all bar a handful of routes to major hubs the A380 is too big for the airline when travellers are demanding point-to-point services and high frequency.

Productivity

There are many who say that Qantas is not an airline but a committee. Harsh, possibly, but at so many touchpoints one can see many layers of management structure. This is of course inevitable when you have been in business for 93 years.

That inefficiency runs right through the airline in varying degrees, from the high-profile pilots to baggage handlers.

In the US, decades of inefficiency have been wiped out by airlines entering Chapter 11. Every major US carrier has sought to reorganise its workforce through invoking that blunt instrument. One result has been a 40 per cent decline in pay for pilots since 2001.

However, it is unfair to single out any one group for comparison or sacrifice – suffice it to say that the average wage cost at Qantas is $92,000 while at Emirates it is $47,000 and for Singapore Airlines $42,000. And one might assume that the productivity at those airlines is significantly higher.

While it is dangerous to compare short-haul airlines with long-haul carriers as the metrics are vastly different, the gap between averagesalaries is vast.

But the discussion about the efficiency of Qantas must also be a debate about all of Australia’s work practices and salary perks, such as weekend and penalty pay rates and such anachronistic institutions as long-service leave and leave loadings.

But changing work practices and increasing efficiency will only come if Qantas can change its culture, and that is a far bigger task. Charles Darwin wrote: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. ” This idea was alluded to by former British Airways and Ansett chief executive officer Rod Eddington when he warned in a 2004 interview with the author that achieving that responsiveness is extremely difficult.

“Changing airline culture is like trying to perform an engine change in flight,” Eddington said at the time. When Eddington arrived at British Airways in 2000, he found that staff did not perceive the need to change because the airline had a low-cost subsidiary called Go.

Changing airline culture is like trying to perform an engine change in flight.

He found that employees believed Go mitigated or even eliminated the need for further adjustments at mainline.

“My staff told me that Go was the solution,” he said. “I said I could possibly accept that if Go was making £300 million a year, which is what our European division was losing. ” He noted that it was difficult to change this mindset until Go was sold off to easyJet. “Once we sold Go, the staff at BA really focused on making the changes necessary to make BA itself competitive,” he said.

Similarly, with regard to Qantas, it could be argued that the success of Jetstar is having a negative impact on the need for change at the mainline operation.

Surveys have suggested that another reason for resistance to change is that although employees tend to agree that change is needed, they do not believe they themselves need to change. For example, at an American Airlines management conference in the late 1990s, participants were polled on a series of questions. More than 90 per cent responded positively to the proposition that management, colleagues and subordinates needed to change, but 90 per cent responded in the negative to the item “I need to change”.

Another perspective is that of Nawal Taneja, chairman of the Department of Aerospace Engineering and Aviation at Ohio State University, in his book Simpli-Flying.

“The problem for culture change is that you have to see death right between the eyes before the impetus to change becomes strong enough,” said Taneja. And while the notion that the government will help Qantas persists, change may be near impossible.

One of the major problems inherent in seeking to changestaff culture is how to strip out complexity, Taneja noted. He stated that airlines have added enormous complexity to their operations and processes over time, and these systems are deeply ingrained.

“Enormous fleet and network complexity and labour contracts have been built around these complex systems and processes,” he said. “Unfortunately for legacy airlines, many passengers now are not willing to pay for this complexity given the increasing availability of low-fare service by the LCCs. ” And Taneja warned that many of the structural changes we have seen are permanent and global. He added that there has been a massive transformation of the industry, with the change equivalent to what the former co-founder of Intel called “a strategic inflection point”, which is an event that changes the way we think and act. The change is also global, exemplified by the growth of LCCs in the Asia Pacific region,which would have been considered impossible only ten years ago.

Another perspective on the challenge of change is the emphasis on safety in airline culture built around strict management systems and attention to detail, which is the opposite of flexibility and flair. Airlines such as Qantas have built up a rigid model over decades for very sound reasons, but are they as relevant today? Qantas, like so many legacy carriers, has evolved out of a military base and much of the management style, marketplace orientation and paraphernalia of culture still reflect an authoritarian, hierarchical and command-and-control worldview.

Successive management teams have sidestepped taking on the more militant unions to address gross inefficiencies and ludicrous perks that dog the airline. Over the past 10 years, the launch of Jetstar and a monopoly in the domestic business class market courtesy of the demise of Ansett have masked the need for massive restructuring. But that has all changed.

There are no levers left to pull in the cockpit as passengers will no longer pay top fares. They now have alternatives in terms of price and product – better alternatives in many cases.

Marketshare

At the root of the fare war between Virgin Australia and Qantas is the capacity war instigated by the latter in defence of its refusal to move from a 65 per cent line-in-the-sand strategy for the domestic market.

It should be noted that Qantas only won that marketshare after Ansett collapsed. Prior to that, it had survived with excellent profits on a 50 per cent marketshare, which makes the whole strategy hollow at best.

The 65 per cent marketshare concept was born out of aviation’s S-curve theory, which argues that airlines that have a frequency-share

The entire Qantas business model is built on that domestic market dominance.

advantage garner a disproportionate market and revenue share. But that thought process had its roots in a 1972 study conducted at a time when low-cost carriers did not exist.

A recent McKinsey & Co study for IATA suggested that the relevance of the S-curve is waning. The report by Urs Binggeli and Lucio Pompeo found that the “S-curve principle must be applied in a more tailored and specific way than in the past, especially in markets where there is LCC competition. ” It noted that in the trade-off between efficiency (for example higher aircraft utilisation and larger aircraft) and schedule quality, the balance is moving towards greater efficiency as the S-curve premium will be further eroded through the continued growth of LCCs.

And in a warning that goes to the heart of the battle in Australia, the report added: “Frequency matching and escalation, which has often led to overcapacity and price wars, is becoming obsolete in many markets, potentially paving the way for a better balance of supply and demand. ” The report stated that the S-curve principle has been “hardwired” in the heads of many network planners for decades, “nevertheless, times are changing and airlines need to take stock of what does and does not work. ” However, the Business Spectator’s Stephen Bartholomeusz has made the point that while “at face value it would seem less painful to cede marketshare to Virgin. . . the risk in that option would be that it would transform the S-curve into an S-bend. ” Bartholomeusz argued: “Because [Qantas’s] cost base is significantly higher than Virgin’s, Qantas needs to capture a disproportionate share of higher-yielding fares. To do that – to dominate business travel – it has to have a frequency advantage, which means it has to more than match Virgin’s capacity increases. Its dominance of the high-yield end of the market feeds into its frequent flyer program in a self-reinforcing fashion, and that combination also provides volume and yield for its international business. ” And of course with lower costs, would Virgin’s CEO John Borghetti be happy to share 50 per cent of the market with Qantas – an airline that passed him over for the top job in 2008? Probably not! No matter what the government does with the Qantas Sale Act, or even if it steps in with a bank guarantee or a buy-in, Qantas is doomed if it does not aggressively address its cost base.

Bartholomeusz is spot on in his commentary when he says: “In other words, the entire Qantas business model is built on that domestic market dominance and that dominance has, until now, enabled its domestic business to remain consistently and highly profitable, despite its otherwise uncompetitive cost base. ” The final words are left to former Virgin Blue CEO Brett Godfrey, who said in 2004: “This year we will carry as many passengers as Ansett, with one third the staff. ” And that workforce was being paid approximately half the average of Ansett employees.

The clear and present danger for Qantas is avoiding becoming an Ansett Mk 2.