Black Ink And Blue Skies

And it is ironic that one of the worst ever defeats the Wallabies have suffered at the hands of the All Blacks just happened to be a matter of days before Air New Zealand kicked Qantas clean out of the park! And this is no flash in the pan – it’s been coming for years.

Forget the massive writedown of the Qantas fleet. It’s the $646 million operating loss that contrasts Air New Zealand’s NZ$332 million profit.

Roughly, a billion dollar difference.

This magazine has been warning about the divide between the two airlines for years and highlighting the differences in strategies.

Air New Zealand’s result is all the more extraordinary given that New Zealand truly is at the end of the world with no hub connectivity and the economy is based on agriculture and tourism.

It doesn’t have Australia’s more central location, bigger population or resource wealth but it has had its moment of facing death with the collapse of Ansett in 2001.

As has been highlighted before in this journal, experts agree that unless staff and management face death they will not change their culture. After the collapse of Ansett a new management team and board at Air New Zealand made sweeping changes.

One of the most important was to equip staff with the right tools and inspire and encourage them to greater heights.

The right tools were the 777 and 787, and premium economy.

Not satisfied with the initial off-theshelf offerings the management then challenged staff to reinvent travel.

The award-winning Skycouch and Spaceseat resulted. But more than that, the staff felt that they were on a winning team – and because they did, they were.

Air New Zealand continues to win accolade after accolade from across the globe, many from the most prestigious industry bodies and journals.

To say they are punching above their weight would be an understatement.

Put simply, Air New Zealand is textbook case of what an airline should be in today’s intensely competitive and more liberalised market.

And the results are there in bold black – a normalised earnings before taxation profit of NZ$332 million.

And to add salt into the wound that figure was 30 per cent up on the prior year.

Air New Zealand chairman Tony Carter summed the result up perfectly when he said that the result – the third consecutive year of strong earnings growth for the airline – is one Air New Zealand can be proud of.

“Our employees, our customers and our shareholders can be confident that Air New Zealand continues to be a world leading airline both in terms of customer experience and financial performance,” Carter said.

“We have made significant progress on our key strategic initiatives. With new aircraft offering better operating economics, an optimised network with the right alliance partners, disciplined cost management and a daily focus on improving the customer experience, we are very well positioned to continue growing. ” And this result is before any impact of the new fleet of Boeing 787s which are magnificently fitted out.

Air New Zealand chief executive officer Christopher Luxon rightly said that the result was testament to the efforts of Air New Zealanders at all levels of the organisation.

“Our team is demonstrating their passion and commitment to ensuring that Air New Zealand is performing better than ever before. A successfulAir New Zealand is good for everyone – it is a virtuous circle. As we grow our revenue and control costs, we generate strong financial results which lead to sustainable returns to shareholders and investment back in the business,” Luxon said.

If Air New Zealand is in a virtuous circle some would argue that unless Qantas has an epiphany then it is in a downward spiral.

While Qantas CEO Alan Joyce says the airline has come through the worst, in fact the worst is yet to come, if some unions and both sides of politics do not see the reality of the marketplace. Joyce is saddled with numerous mistakes by former boards and management on aircraft selection and timely product innovation which have been well documented in this journal over the years.

Those challenges cannot be fixed overnight – and some not at all.

And Joyce is also weighed down by the Qantas Sale Act provisions relating to offshore work which means the airline simply cannot compete in a liberalised market that is aviation today – courtesy of the government.

While the Abbott government wants to free Qantas up, Labor, the Greens and cross bench senators are stoic in their resistance.

On one hand the government stands by and sees all car manufacturing go offshore but on the other will not let Qantas move more of its maintenance to the most economical locations.

However the government and Labor reached a compromise in late July to pass laws to allow a single foreign investor or foreign airline to hold up to a 49 per cent stake in Qantas.

Certainly Joyce must get the numbers right first, start making profits and paying dividends or the investment required to really turn the airline around cannot be made.

According to Joyce, “both Qantas Domestic and Jetstar Domesticwere profitable over the year – in all likelihood, the only profitable airlines in the domestic market – in a year of unprecedented competitive pressure. ” Certainly a positive sign and both airlines also “delivered unit cost improvements, offsetting some of the revenue decline and higher fuel costs. ” As expected the shining light and the glue that holds Qantas together, the frequent flyer program, recorded its fifth straight year of double-digit earnings growth – another record result.

Joyce highlighted that the Qantas Transformation Program is the biggest and fastest transition since the privatisation of Qantas in 1995.

“Our transformation is about working our assets harder, making our business smarter, giving even more to our customers and reshaping our operations for long-term sustainable success,” said Joyce.

The numbers sound good and are good but will they be enough? Joyce claims that at the end of the two-year program the airline will have “dramatically reduced our cost-base disadvantages in QantasRESULTSDomestic, compared with our competitor, to under five per cent, and significantly reduced the Qantas International cost base. ” But the very next day Virgin’s captain John Borghetti announced that his airline was also focused on a $1 billion boost saving program that would probably maintain the cost advantage it enjoys over Qantas.

But staff morale is rock bottom.

Joyce conceded that morale was low but added that [staff] engagement was extremely high.

Qantas “lost engagement with its staff” in the unsuccessful and chaotic $11. 1 billion Airline Partners Australia bid for the airline.

The $100 million success fee was a devastating blow to staff management relations which were already rocky.

It is easy to understand the lack of trust by staff and unions.

Add to that the rhetoric from Transport Workers Union National Secretary Tony Sheldon, Federal Secretary of the ALAEA Steve Purvinas and Senator Nick Xenophon, and the mix is toxic.

And the rhetoric will soon arc up as key unions face off withmanagement over new EBAs.

While some say that many do not take the comments from Joyce’s three greatest detractors seriously their collective criticism is sticking and only a stunning full-year profit will reverse the damage.

Qantas management need to address small – yet major – issues such as staff travel where more senior employees’ priority can override longer-term but lower-ranked staff.

Over at Air New Zealand, former CEO Rob Fyfe said that he wanted his staff to read the manual then throw it away and be themselves. “I don’t care if they don’t present a bottle of wine with the label around the right way. . . I want them to smile,” he told Australian Aviation in 2011. At Qantas the contrary is the case with staff buried in red tape and procedures that appear to be stifling initiative.

By The Numbers
Air New Zealand

That possibly wasn’t a problem when Qantas had a monopoly on premium domestic travel, but with Virgin Australia now serving French champagne to a growing number of business travellers it becomes a major drama. Air New Zealand posted a strong rise in fullyear net profit and expects to grow capacity and profits in 2014/15, reporting net profit after tax of NZ$262 million (A$235 million) for the 12 months to June 30 2014, up 45 per cent from NZ$181 million in the prior corresponding period. Revenue rose one per cent to NZ$4. 7 billion (A$4. 2 billion).

It was Air NZ’s third straight year of profit growth.

Air NZ chairman Tony Carter said the airline expected to significantly grow capacity in 2014/15, as new aircraft entered the fleet.

“With new aircraft offering better operating economics, an optimised network with the right alliance partners, disciplined cost management and a daily focus on improving the customer experience, we are very well positioned to continue growing,” Carter said in a statement.

“Based on our current expectations of market demand and fuel prices, we expect to improve on the 2014 result in the coming year.

Normalised earnings before tax rose 30 per cent to NZ$332m (A$298m), Air NZ said.

“Operating revenue, capacity and yields grew across the network, while unit costs remained stable,” the airline said.

Air NZ said it expected to grow capacity, as measured by available seat kilometres, by six per cent in 2014/15.

The increased growth would come from extra seats in the domestic market as Airbus A320 aircraft replaced older Boeing 737s flying around New Zealand, as well as the use of more Boeing 777-300ERs to North America and the replacement of 767s with 787-9s to Asia.

The last Boeing 747-400 in Air NZ’s fleet was due to be retired in September, while the last of the 737s was expected to leave the fleet by September 2015.

The NZ flag carrier was also starting services to Singapore with Boeing 777-200ER aircraft on January 6 2015, returning to the Auckland-Singapore route for the first time since 2006.

Resumption of flights to Singapore was part of the recently approved alliance with Singapore Airlines, which will deploy Airbus A380s to Auckland over thepeak summer period.

“I can look across the whole of our network and see some really strong performances everywhere,” Luxon told reporters during the company’s results presentation.

“When we look at the Pacific Rim region – around Asia, the Americas, Australasia – it is just a huge opportunity. ” On the trans-Tasman Luxon says the Kiwi carrier is planning for further growth even as a stronger Kiwi currency affects the market.

“We are certainly holding our own and being very competitive on the Tasman,” Luxon said.

“In the coming year we would expect in the range of two to three per cent growth, about three per cent growth in capacity share.

“Australia remains a huge opportunity for us. It might be growing a slightly bit slower than other parts of Asia but it is still incredibly important. ” Luxon said the New Zealand dollar’s strength – the Kiwi reached a high of about 88 US cents in early July, compared with 77 cents a year ago – had “impacted a little bit on the Tasman”. However, he said it had been quite manageable.

The Air NZ-Virgin Australia alliance on trans- Tasman routes had about 52 per cent marketshare and was in good shape, he said.

“Despite competitive activity we’ve been able to more than hold our ground in the last year and a half and we just are continually looking for opportunities to actually grow between the two countries,” he said.

“We feel quite positive about the Tasman and how our business is developing there. ” Air NZ said it would treat its 25. 99 per cent shareholding in Virgin Australia as an equity investment in its accounts in 2014/15, after Luxon joined the Australian airline’s board.

Two days before Virgin Australia announced its $355 million loss, Luxon said the strategic rationale for buying into Australia’s second-largest carrier “still makes sense”.