Wounded Roo

With some politicians and unions baying for his blood and union officials hinting at strike action over the job losses, negotiations with angry workers’ representatives were never going to be easy.

It didn’t take long for the fur to begin flying as the Qantas chief met union leaders the day after his latest bout of grim news, with ACTU secretary Dave Oliver angrily declaring Joyce had come to the table with no real detail of how 15 per cent of the workforce would be axed. “The company was not able to justify how they came up with the 5,000 job number,” he said. National secretary of the Transport Workers Union Tony Sheldon was equally furious, saying he believed Joyce had no strategy and simply “plucked a jobs total out of the air”.

Ultimately, the unions will be unable to stop Joyce getting rid of as many employees as he has decided, either through retrenchment or other means such as voluntary retirement. Where they can throw a major fly into the cost-cutting ointment, however, is in his declaration of a wage freeze, intended to stay in place until the carrier is back in profit. Convincing some of the unions which have enterprise bargaining agreements (EBAs) locked in place, including provisions for annual pay rises, to accept changes to their conditions may be akin to pulling the pin from a hand grenade and waiting for it to explode.

Joyce’s problem is that while some EBAs are currently open for renegotiation, others are not. “You’re absolutely right,” he concedes. “There are different complexities in EBAs that are open and EBAs that aren’t open. Qantas has 54 different EBAs across 14 different union groups, some of which are open today, which our pay policy going forward will be: ‘No pay increases until the company makes money’. With the EBAs that are closed we will be talking to those unions directly and in some cases waiting til the EBA opens and then applying it. We’ll make sure that at the end of the process we have addressed all the areas and have equality across all parts of the group so this applies to all parts of the group. ” It is difficult to understand his confidence. Over the years Qantas has been no stranger to industrial disputation and the potential for an eruption of union warfare over the coming months, at a time the airline is fighting for survival in deteriorating market conditions, represents a genuine threat to the biggest recovery program the Flying Kangaroo has ever faced. Joyce has already shown he is prepared to go to extremes, having grounded the entire airline worldwide in October 2011 to stall union action. But such confrontation is the last thing he needs while the balance sheet continues to spew out red ink.

Union issues aside, there is no doubt Qantas desperately requires major surgery. Its latest half year result – and the first six months are normally the most profitable for Australian carriers – made dismal reading. Domestic operations were profitable to the tune of $50. 9 million but that was down from $194 million in the same period the previous year. Qantas International lost $234 million, nearly triple last year’s $81. 3 loss. The Jetstar group lost $14. 3 million, down from a profit of $114. 4 million. The only bright note was a record profit of $130. 4 million for the Qantas Frequent Flyer program.

There could be worse to come. Analysts suggest it may be heading for a full-year loss of more than $800 million.

In an attempt to fend of total disaster Joyce’s action not only includes job cuts. Some 50 aircraft will be sold or have their delivery deferred, network changes will eliminate loss-making routes and planned growth in the development of Jetstar Asia in Singapore, a key plank in the carrier’s Asian strategy, will be suspended. The plan includes deferring delivery of eight Airbus A380s and three Boeing 787s.

There is no doubt Qantas desperately requires major surgery.

Other moves include a restructure of line maintenance operations and catering facilities, including the (previously-announced) closure of Adelaide catering. As also previously announced, the Avalon maintenance base is also being closed. Agreement has also been reached on the disposal of its Brisbane terminal lease to Brisbane Airport Corporation, with a cash value of $112 million to be recognised in the second half of this financial year. Other assets are likely to be put on the chopping block over coming months. Whether that includes the highly successful Frequent Flyer program remains to be seen.

Joyce, who admits the airline’s performance is “unacceptable” and the situation “unsustainable”, points out that over the past five years Qantas has reduced unit costs by 19 per cent, renewed its fleet with 130 aircraft – giving an average fleet age of just 7. 6 years, consolidated its engineering bases from three to one, modernised numerous maintenance practices and sold non-core assets. But it still hasn’t been enough.

Particularly troubling is the ongoing decline in the performance of the international operation. Back in 2003 Qantas held a 32. 7 per cent share of international passengers flying to and from Australia. That is now down to 25. 3 per cent (including Jetstar’s share of 8. 1 per cent). The major problem there, according to the Qantas chief, is an “uneven playing field” that helps his rivals and hinders Qantas. His evidence? Over the past five years Australia has been hit by a “giant wave” of new airline seat capacity from foreign carriers.

“Qantas International capacity has grown by 2. 9 per cent since 2009 but competitor capacity into Australia has grown by 46 per cent over the same period, in contrast to global growth of less than half that rate. In this full financial year alone, international market capacity growth in Australia will be nine per cent. Domestic capacity has also surged, with capacity growth of 18 per cent by the Virgin Group since July 2011, compared to eight per cent by the Qantas Group… the capacity growth in both our international and domestic markets is led by state-owned airlines. ” Some of their costs are “often spurred by national economic development goals rather than profit targets and they have the backing of their governments to raise capital,” he said.

In the months leading up to Joyce’s announcement most of the headlines focused on his ongoing lobbying with the federal government on the Qantas Sales Act front and the possibility of Canberra supplying some

The Emirates deal was “killing Qantas and everyone knows it”.

sort of financial assistance or debt guarantee to the airline. The Act certainly shackles Qantas’s ability to operate freely in global financial markets because it limits investment by a single foreign airline to 25 per cent, by a group of airlines to 35 per cent and overall offshore investment to 49 per cent.

Joyce argues that since being privatised Qantas has operated without the benefits many of its competitors get from their governments. “No preferred access to airports, no tax breaks, no free infrastructure, no public subsidy. We have never asked for a handout and we are not asking for one now,” he said. “Over the past five years, we have done everything in our control to reform Qantas for the changing global economy. But when one set of rules applies to Qantas, and another to our competitors, then a clear distortion exists. The Qantas Sale Act limits our financial options, it adds cost to our business, and it influences our actions as a publicly listed company. Over the long term, repealing it is essential to remove the distortions in our aviation system. ” Clearly, the fact its major local rival, Virgin Australia, is majority foreign-owned – Air New Zealand, Abu Dhabi-based Etihad Airways and Singapore Airlines hold a combined 67 per cent of Virgin, with Virgin Atlantic’s Sir Richard Branson holding a further 10 per cent – is a thorn in Joyce’s side.

Interestingly, Virgin Australia chief executive John Borghetti has no objections to the scrapping of the Qantas legislation or allowing higher foreign ownership levels. “The Qantas Sale Act is outdated and it should be removed and there is no doubt about that. ” However he added that “two wrongs don’t make a right… just because the Qantas Sale Act is wrong, making another wrong by providing a debt guarantee does not make the situation right. ” But realising there has been divided political and community appetite for changing the Act in the short term Qantas had been talking to government to look for “appropriate solutions to address the uneven playing field as it stands right now”.

But it quickly became crystal clear that Tony Abbot’s Coalition was unwilling to supply even a guarantee on its debt, a move which would substantially help by lowering the carrier’s cost of borrowing. Essentially, if Canberra provided a debt guarantee to Qantas it would have to give similar backing to all local airlines, including Virgin.

Instead, the government’s response to Qantas’s cry for help was to try to legislate to change the Sale Act to allow a higher ownership level by foreign airlines and to remove requirements that the airline be headquartered and have its main operations, maintenance and administration in Australia, raising the prospect of some of those functions being moved offshore. “I have enormous faith in the ability of Qantas to compete and to flourish, but I think it is best placed to compete and to flourish if it is unshackled and un-propped up by government, I hasten to add,” said Prime Minister Tony Abbott.

But that legistlation can’t get through through both houses of Parliament because of the combined opposition of Labor and the Greens. Neither will the government put cash into Qantas. Instead of receiving government help, Qantas has quickly become a political football, an unwilling recruit in the government’s broader battles against trade unionism and corporate welfare.

At any rate, analysts and industry insiders believe the focus on what Canberra can do to help has been overblown. Qantas is a privately-owned company and its problems are a business issue, not a political one, they say. Among criticisms are Joyce’s obstinate 65 per cent line in the sand domestic market stance, which has clearly led to a damaging capacity war with Virgin, which is itself not without blame in exacerbating the situation. It has cost both carriers money. The domestic profit pool was over $700 million in 2012 but in the first half of this year it was less than $100 million.

The damage beyond Qantas became clear when Virgin announced it had lost $84 million in its first six months, plunging from a $23 million profit a year earlier. Ironically, across the Tasman Virgin’s largest shareholder with 24. 5 per cent, Air New Zealand, was showing everyone up by reporting a record six month pre-tax profit of A$167. 7 million.

Qantas’s alliance with Emirates Airline is also being questioned by many. One former senior Qantas executive said the deal was “killing Qantas and everyone knows it”. All it had done, he said, was to “open the door” to Australia’s markets to a big Gulf carrier. It had worsened the situation because other major Qantas competitors such as Singapore Airlines, Cathay Pacific and China Southern Airlines have reacted by throwing more of their capacity into the market. The executive put forward the view that there was “a little bit of cry wolf” about Qantas’s situation, pointing out it still has $3. 5 billion in the bank and was hardly on the point of bankruptcy.

Another ex-Qantas manager said Qantas is losing out on what were profitable routes, such as Melbourne to London through Singapore, where it filled services to Europe not only with Melbourne traffic but connecting passengers from Brisbane and Perth as well as Singaporeans themselves. “Now, it goes to Dubai and there are no (Qantas) flights from Perth and Brisbane. It goes to Dubai and there’s very little pick-up from Dubai. If you really want to go on to Europe or anywhere else in the UK except for London, you may as well go with Emirates. ” On his part, Joyce says the innovative partnership with Emirates allows it to give customers wide global access, while restraining costs. “Our tie-up with Emirates has had an overwhelming positive customer response, and the Sydney and Melbourne to Dubai routes have the highest satisfaction levels of our international network. ” Analysts also believe some of the fleet decisions the airline is now making should have been made long ago. After undertaking a detailed review of networks and schedules, Qantas will exit under-performing routes (though no real detail has been given on this beyond quiting Perth-Singapore) and re-assign aircraft to better match demand, sell aircraft and defer deliveries, and increase utilisation through improved turnaround times.

The airline’s remaining domestic 737-400s were retired in early March. Its remaining 15 767s will be retired by early next year and six older 747s will be out of the fleet by early 2016. Rather than spending money refurbishing some of these aircraft Qantas should have retired them earlier and replaced them with newer, fuel-efficient planes, say analysts. Qantas is also deferring delivery of eight A380s and three of the remaining 11 787-8s it has on order. From 11 aircraft types, the fleet will be down to just seven by the end of June 2016.

Also under fire are operations in Asia by budget offshoot Jetstar. Growth has been suspended in Singapore, in itself a risky move because competitors

At the end of its current ordeal the national flag carrier will be a very different beast.

such as Malaysia’s AirAsia, Indonesia’s Lion Air, Singapore’s Tigerair and the Philippines Cebu Pacific are forging ahead with massive fleet expansion plan. As a result Jetstar, frozen in time, could ultimately find itself lagging far behind its rivals in the marketplace. There has also been no mention of the disastrous Jetstar Hong Kong project, still awaiting regulatory clearance to fly. In the meantime several Jetstar A320s are lying idle in Toulouse and Jetstar Hong Kong staff are mostly sitting twiddling their thumbs with little to do, all costing Qantas millions of dollars.

Nevertheless, Joyce says Jetstar has achieved unprecedented acceptance in the Asian marketplace, which is the fastest growing aviation market in the world, with a huge and growing middle class that loves to travel. “The prospects for Jetstar in Asia are a major opportunity that we continue to believe in. But we need to take the right decisions in accord with current market circumstances and our balance sheet… the over-arching focus in Asia continues to be profitably bedding down existing businesses and partnerships. ” Overall, Qantas also faces the same challenges as everyone else flying metal across the skies.

High fuel prices and foreign currency movements have exacerbated the problem, costing the Qantas Group more than $500 million dollars more in 2013 than in 2009. The fuel bill for 2014 is expected to be a record $4. 6 billion.

Joyce says Qantas will “cut where we can, in order to invest where we must… we will be a far leaner Qantas Group. ” It should be understood the airline is taking these actions “irrespective of any decision which the government may or may not take in relation to levelling the playing field,” he added. And he pointed out there are many examples of Australian companies that have failed because they have not been prepared to make the hard decisions. “But Qantas isn’t one of them. Over our 93-year history Qantas has a record of resilience and adaptation. We’ve survived through war and crisis, boom and bust. ” Few can envisage Qantas disappearing altogether, but what is certain is that at the end of its current ordeal the national flag carrier will be a very different, and probably far smaller, beast, possibly with an even smaller marketshare.