In Command

Joyce recalls a chat with one long-time Qantas employee – and worried father of three young children – on a flight to South Africa who asked him: “Are you going to be able to turn it around?”.

“That to me was a bit of a shock at the time because I obviously had faith in the management team, I obviously had faith that strategy was the right strategy and it would pay dividends,” Joyce tells Australian Aviation in an interview four days after announcing the airline had returned to profitability in 2014/15.

The conversation, and no doubt others like it, reinforced in Joyce’s mind the need to redouble the company’s efforts to ensure there was open communication and trust between the management team and staff.

While there will always be tensions between the company and the unions representing engineers, ground staff, pilots and cabin crew, among others, the fact many have agreed to 18-month pay freezes as part of new enterprise deals perhaps reflects an understanding about Qantas needing to change.

Obviously part of that change involves the loss of 5,000 jobs, butthe applause and cheers among those gathered at the Qantas’s Mascot HQ when the 2014/15 full year net profit of $557 million was announced on August 19 also suggests the workforce again feels upbeat about the future after some tough times.

“There are times in our history when we didn’t get the communications right and we didn’t get the trust right,” Joyce explains.

“It was very important that people didn’t believe you were crying wolf. I think one of the things [with] previous management. . . was probably. . . that they cried wolf too often.

“We, for a number of years were saying this is going to be a problem if we don’t change. I suppose the proof was in the pudding with last year’s results because nobody could say that management was crying wolf at that stage.

“It was real, it was stark but at the same time then you have to give confidence that the plan is the right plan to turn it around and here is what we are going to do to achieve it. ” Figures from Qantas show staff engagement at the company sitting at 75 per cent, based on a 2015 Towers Watson survey, which

It is because of the transformation program that has got us to that competitive position.

the airline describes as a “strong outcome” amid the acclerated business transformation of the past two years. Staff were also “proud to be associated with Qantas/Jetstar” and believed in the goals of the company.

More than fuel, more than carbon tax

Qantas’s turnaround from an eye-watering $2. 853 billion loss to a $557 million statutory net profit in 2014/15 represents one of the largest rebounds in Australian corporate history.

The resurgence was achieved with three per cent growth in revenue, highlighting the impact of the cost-cutting initiatives underway.

Qantas says the transformation plan delivered $576 million of benefits in 2014/15, which was achieved through job losses, 18-month wage freezes under new collective bargaining agreements with staff and heavy maintenance changes.

In a further bonus, the company’s 2014/15 fuel bill was about $600 million lower in 2014/15 compared with the prior year. The end of the carbon tax also yielded a $116 million boost, as did improved market conditions and slower international and domestic capacity growth.

Not all carriers have been able to take as big an advantage as Qantas from global oil prices falling from more than US$100 per barrel just over a year ago to about US$40, with the likes of Singapore Airlines and Cathay Pacific recently reporting losses from their fuel hedging program.

Joyce points out, with some pride, that in 2014/15 Qantas for the first time in its history made more money than Etihad, Singapore Airlines, Virgin Australia and Air New Zealand put together.

“That means there is more than fuel in this, there is more than carbon tax in this, it is because ofthe transformation program that has got us to that competitive position,” Joyce says.

“Completing that will leave us in a very strong position to cope with whatever competitive dynamic and whatever environment we are faced with in the future. That is why we are so focused on it and so determined to get that through. ” The total fuel bill for 2015/16 was expected to be no higher than the $3. 90 billion in 2014/15, and could potentially be up to $300 million lower depending on how the price of fuel moves in the year ahead.

The overall results were broadly inline with market expectations, with analysts welcoming the company’s proposed $505 million capital return to shareholders and describing the $975 million underlying profit before tax as solid.

Qantas chief financial officer Tino La Spina, presenting his first full year results since taking over from Gareth Evans earlier in 2015, said the capital return was the most efficient way of returning surplus capital to shareholders.

The company said the airline’s financial metrics were now “within an investment grade range”, having paid off $1. 1 billion in debt since 2012/13.

And looking further ahead, Macquarie Securities analysts Sam Dobson and Avinash Srinivasan said the modest flat to one per cent increase in domestic capacity Qantas has forecast for the first half of 2015/16 would support further growth in profitability.

“Whilst the underlying capacity environment is unlikely to see a return to 9. 1 per cent growth we saw in FY13, the outlook for capacity growth remains supportive of further profitability as we expect a continuation of the domestic yield growth delivered in FY15,” the pair said in a research note dated August 25.

“We continue to expect QAN and VAH’s domestic capacity growth to be modest in FY16.

“Based on the latest available scheduling data we estimate both VAH and QAN have negative growth across vast portions of the domestic network, with Jetstar and Tiger still showing some growth, albeit quite modest. “We expect continued yield growth domestically reflecting the benign capacity growth environment. ” Deutsche Bank research analyst Cameron McDonald forecast Qantas’s underlying profit before tax to reach $1. 474 billion for the current financial year, a near $500 million improvement from 2014/15, with the earnings uplift “largely internal or locked in”.

“Our current forecasts do not rely on a material improvement in operational conditions,” McDonald said in a research note dated August 20.

“We believe the earnings momentum and cash generation will continue to improve into FY16. ”

Going for growth

It will be boosting sales in the years ahead that will be important as the benefits of the three-year, $2 billion cost-cutting initiative that played such a big role in getting the airline group back to profitability comes to an end.

While Joyce acknowledges the transformation plan is about cutting costs, which is an ongoing focus for any company, he says some of the 250 or so initiatives identified as the airline seeks to get itself set up for a sustainable future also involve growing revenue.

These include implementation of the new PROS revenue management system, which will help Qantas better manage its seat availability and pricing on more than 50,000 origin and destination city-pairs.

Joyce cites the example of a passenger planning to fly from Wagga Wagga to London on Qantas but, finding he cannot secure any seats on the Wagga Wagga-Sydney sector, ends up flying Rex and self-connecting to potentially another carrier such as Singapore Airlines or Cathay Pacific.

This results in a missedopportunity and missed revenue, something the PROS system is designed to avoid by protecting seats on, in the Wagga example, the short regional flight so that the passenger can book the long-haul service to Europe or the Americas.

“We may get a little bit less revenue on Wagga-Sydney but the group is a lot better off,” Joyce says.

“We think there is going to be huge upside on that, to the tune of tens of millions of dollars, that’s going to start kicking in next year.

“A lot of the revenue is empty seats. ” Qantas is also using new technology to help its operations centre deal with flight disruptions, which can come up with not just the best solution to any potential drama, such as fog in Canberra, in minutes, but also tailor that solution to minimise inconvenience to a select group of passengers such as top tier frequent flyers or so-called high-value customers.

Beyond the transformation, Joyce points to three areas where he believes there are opportunities to grow in the period ahead.

The first is in Australia’s domestic market.

In May, the company completed a review of about 120 domestic routes that focused on the optimum way to deploy the full-service carrier, Qantas, and low-cost unit Jetstar as part of a dual-brand offering in the local market.

As a result, the schedules of both Qantas and Jetstar on about 25 routes were tweaked to better reflect the demands of their target customer segments. This has included Qantas adding Melbourne-Gold Coast services, which is already a Jetstar route, as well as returning to Maroochydore.

Joyce says there are plenty more opportunities out there such as those, particularly given Virgin’s move to compete with Qantas at the full-service end of the market.

“Jetstar has been ‘given’ all these price-sensitive customers that Virgin is moving away from so if you get your segmentation right in how you are applying the two brands there is huge upside in getting more revenue,” Joyce says.

While Qantas’s rival must must be hoping the bulk of those price-sensitive customers for whom Virgin is no longer an option will shift their flying to its wholly-owned low-cost unit Tigerair Australia, Joyce is not so sure.

“I don’t think they ever will, but that’s my view,” Joyce says.

The second growth opportunity is in Asia for both Qantas and Jetstar.

Qantas reported its Singapore-based Jetstar Asia franchise returned to profitability in 2014/15, while Jetstar Pacific in Vietnam was in the black in the second half of the previous financial year.

Although Jetstar Japan was still losing money, Joyce says the airline’s performance is “dramatically improving” as it expands its international operations.

Overall, underlying EBIT for the Jetstar group of airlines came in at $230 million, a turnaround from a loss of $116 million in the prior corresponding period.

Qantas International posted underlying EBIT of $267 million, a turnaround from an underlying EBIT loss of $497 million in 2013/14.

A lot of the revenue is empty seats.

The Flying Kangaroo’s overseas flying has been reshaped around a strong position in the Americas, where it has partnerships with American Airlines and LAN Chile, and an alliance with Emirates that solves the tricky and previously financially crippling issue of flying to Europe from the other end of the world.

That leaves Asia, and Qantas has said previously the financial performance of its Asian network has improved enormously after it was “de-linked” from the airline’s European operations following the tie-up with Emirates.

Flight schedules to Asia – Qantas operates to Bangkok, Hong Kong, Manila, Jakarta, Singapore, Tokyo and Shanghai with its own aircraft – were changed to allow more same-day connections, while there were also capacity adjustments through the use of smaller Airbus A330s on some routes.

Joyce is bullish about the prospects of both Jetstar’s offshore franchises, as well as Qantas’s place in the fast-growing Asian region.

In particular, the focus will be on China in the period ahead, after the Australian Competition and Consumer Commission reversed its initial objections and approved Qantas’s tie-up with China Eastern.

The partnership between the two carriers on Australia-China routes is expected to result in new services and is one of several alliances Qantas has with other airlines in the region.

“We have got good partnerships with a lot of airlines in the Asian market and we think there is huge upside for us to grow in Asia both with Jetstar and with Qantas and with Qantas freight,” Joyce says.

“We are looking at expansion opportunities there. ” Joyce says Qantas had about five per cent of the China-North America freight market. Qantas Freight reported $114 million inunderlying EBIT, a strong increase from $24 million in 2013/14.

The third area of growth that has the Qantas chief executive excited are the opportunities around a slew of recently launched loyalty-based initiatives such as Qantas Cash, Qantas Golf, Red Planet, epiQure and Aquire, which were “all making money”.

Joyce says there are more new initiatives in the pipeline due to be launched in the months and years ahead and notes one-third of Qantas Loyalty’s growth in underlying EBIT in 2014/15 came from these adjacent businesses.

Qantas Loyalty grew underlying EBIT 10 per cent to $315 million in 2014/15, from $286 million a year earlier. It was the second largest contributor to earnings behind Qantas Domestic ($480 million).

The return to profitability is also the culmination of several

incremental changes

that have occurred during Joyce’s almost seven years as chief executive.

Some, such as the overhaul of Qantas’s Airbus A380 maintenance plan to make it more efficient that involved the complete rewriting of the maintenance planning documents, began years ago and has only recently been completed and signed off by all the relevant authorities.

Similarly, the Emirates deal, although completed relatively quickly, came only after a series of false starts following unsuccessful talks with the likes of Singapore Airlines, Cathay Pacific and Malaysia Airlines.

And efforts to increase fleet utilisation and free up aircraft to open up new routes or launch seasonal services are starting to pay off – nonstop Brisbane-Tokyo Narita services launched in August, Sydney-San Francisco returns to the Qantas network in December and there areextra flights planned to Asia during the upcoming summer holidays.

There have also been more gradual changes implemented that came together over the course of 2014/15, such as the simplification of the Qantas domestic fleet to two types – the 737 and A330 – following the retirement of the 767.

There are also ongoing projects to improve both the customer experience and the airline’s economics, with Qantas installing new business class on board its A330 fleet, adding an extra six seats on its Australian-based 737s and upgrading airport facilities (refurbished lounges in Perth, Singapore, Hong Kong and Los Angeles have opened in the past few years).

And the arrival of the Boeing 787-9 in Qantas colours from the 2017/18 financial year (see separate story) will also herald another step-change in the Australian carrier’s development.

“They are all steady, they all feel like they are incremental, but when they all come together you can have a massive turnaround because you have done them patiently,” Joyce says.

Joyce says he always had board and shareholder support to make the necessary changes to turn the company around.

“They could see all of these strategies coming together over time and eventually they were going to get us there. ” Joyce says it has been a massive team effort right across the company’s workforce, which numbered 28,622 at June 30, to get to this position.

“My role is just coordinating and appointing the right people to do their jobs with the right levels of expertise, give them guidance and direction,” Joyce says.

“There is a huge amount of people who will take credit, and rightly, for this. All of our people, at every level. ”

When they all come together you can have a massive turnaround

.ork makes him an invaluable asset to any project.