Succession Plans

By last year, as Qantas sank to its lowest ebb with a stunning $2. 8 billion loss and the headlines were suggesting it wasn’t a matter of “if” he would go but “when”, most observers seemed convinced his forecast of longevity at the helm was a mere pipedream. Today, in the wake of Qantas’s recent remarkable turnaround to an after-tax $557 million profit in its latest financial year, the squawking from the vultures seeking his departure has become decidedly muffled.

And Joyce hasn’t changed his tune. “No, I’m not going anywhere,” he declared after the latest result. “I’ve had the support of the shareholders and board, and as long as that continues, and as long as I’m enjoying the job – which I am – and these are good times for Qantas: we’re making good changes, good returns for our shareholders, great improvement for our customers and really good opportunities for employees. So I’m going to be here for some time. ”Across at rival Virgin Australia, chief executive John Borghetti has never come under the same sort of fire over his future as Joyce has, despite the ongoing losses the carrier has suffered over recent years, some $98 million in 2013, $356 million in 2014 and another $93. 8 million in its latest year. While the last result remains in the red, it also represents a significant turnaround and a boost to shareholder confidence the carrier is on the right track. Borghetti says Virgin will return to profit in the current financial year for the first time in four years. Like Joyce, he isn’t planning to hand over the reins any time soon. For both men, there is one single factor that should be understood: whatever the ups and downs of recent years they have consistently been given the full support of their boards. Directors and major shareholders in both camps have been unwavering in their backing for their respective business plans.

“The thing about Alan,” said one current Qantas executive who did not want to be identified, “is his determination to stick to the plan whatever problems are placed in his path. Throughout the past few years, through thick and thin, he has been absolutely persistent and methodical in explaining to his board not only what is happening but why it is happening and what the results will be. He projects total confidence in his strategy and that has resulted in the board having total confidence in his ability to achieve his goals. ” For Borghetti, the story is virtually the same. All who know and work with him say he has a steely determination to succeed and the ability to inspire confidence in the future.

As Qantas leaps back into sustainable profitability and Virgin Indeed many analysts miss the point when looking at the Qantas v Virgin saga. appears to be heading there, much discussion in recent times has centred round who is winning the battle between the two. Both were losers during a ferocious domestic capacity war which battered their yields and income and which reached a truce only last year.

Former Cathay Pacific and British Airways chief executive Sir Rod Eddington, talking to The Sydney Morning Herald after the latest financial announcements, got it right. It’s not a simple matter of either man winning or losing, he pointed out. “For a long time they both lost. Qantas’s numbers were awful for a while and Virgin’s numbers were awful. It wasn’t as if one won and one lost. If anyone ‘won’, in inverted commas, it was a Pyrrhic victory. ”

Indeed many analysts miss the point when looking at the Qantas v Virgin saga.

Sure, they are pitched in open battle in the marketplace. They compete furiously for customers at home and abroad, asdo all serious airlines. They want to make money and they thrive on competition, which often leads to poor results on the bottom line, particularly during periods of over-capacity or economic downturn. Qantas’s continuing tussle with its only serious local contender is a natural, though often heated, state of affairs.

But their respective positions must also be seen in isolation. Their strategies are not a mirror of each other. They are significantly different. Qantas is a legacy carrier with a lot of weight that was suffering from its past. Joyce put in a three-year restructure plan that included a lot of necessary pain. Job losses were massive. Alterations to the heavily loss-making international arm had to be put in place, including network and fleet change. Cutting $2 billion from costs wasn’t easy in a world where running an airline is the most volatile of businesses and worse when fuel prices were going through the roof. Neitherwas taking the decision to move hubs from Singapore to Dubai and team up with Emirates Airline. Or grounding the fleet when unions threatened to “slow bake” Qantas with the potential of worsening already bad results.

When the carrier announced its dismal $2. 8 billion deficit last year many failed to look beyond the headline grabbing basics. In reality, the 2013-14 year was a watershed. A huge chunk of the big loss was down to depreciation of the value of aircraft. It was a matter of “let’s dump all the bad news at once, get it out of the way and get back to business”.

Which is exactly what Joyce has done, underpinning the faith of his shareholders and, it seems likely, finally closing in on setting Qantas up for the future. It has now firmed up an order for eight Boeing 787-9 Dreamliners with the first four arriving in the 2017-2018 financial year and the rest coming in 2018 and 2019. That will bring significant cuts in operating costsand open the door to an array of new network opportunities.

A day after its latest results there was even more good news, with the Australian Competition and Consumer Commission (ACCC) giving the green light to a five-year partnership deal between Qantas and China Eastern Airlines. Given the enormous growth of air traffic in China and the opportunity to build another major offshore hub in Shanghai, that could ultimately be as big a deal as the Qantas-Emirates marriage.

Borghetti had a different plan and different aims. He had a very young no-frills airline with little real history which he had to turn into a quality, full-service network carrier, something that had never been done before anywhere in the world. In the process he had to make it competitive vis-a-vis Qantas, not only in domestic skies but internationally. He couldn’t match the size and network reach of his big rival by rapidly expandinghis fleet and network so he had to find another way of doing it. That resulted in the arrival of big international airline investors and the ability to tap into their networks across the globe – Singapore Airlines, Etihad and Air New Zealand, plus an alliance with Delta in the US. He had to put up an alternative to Jetstar at the lower end of the market, achieved through the purchase of Tigerair, now seemingly heading towards profitability by next year. He had to get into the regional domestic market, done through buying Skywest and giving birth to Virgin Regional.

All that has been achieved but in many ways it is and will remain a one-sided battle. Virgin will never have as much heavy metal in the sky as Qantas. It is highly unlikely to ever have a 50 per cent share of the domestic market.

But that’s not the point. The point, as Borghetti says, is that whatever your marketshare, the important factor is that it is profitable. The point now is also that each, in their own way, are winners. Virgin, it appears, is certainly heading in the direction of black ink for the first time in several years. Borghetti’s restructure plan, now more than halfway through, is on track and sailing well.

While all the signs now point to a period of further chief executive stability for Qantas and Virgin, like any good company they both maintain a serious watch on the issue of succession. Laying the groundwork for a smooth handover of executive power is one of the primary keys to ongoing stability and success.

In Qantas’s case, if those management changes made three years ago were indeed an opportunity to probe the abilities of Hickey, Strambi and Hrdlicka to eventually take on the top job, that plan has gone astray. Hickey and Strambi departed late last year for pastures new.

What is notable in Qantas’s history is that its chief executiveshave always come from within the company. Although he had worked with the former government-owned domestic Australian Airlines and with Ansett, Joyce’s predecessor Geoff Dixon had been deputy CEO for three years before taking charge in 2001. Joyce, who left Aer Lingus in 1996 to join Ansett, came aboard Qantas in 2000 as head of network planning, schedules planning and network strategy functions, became CEO of the new budget subsidiary Jetstar in October 2003, then moved to the helm of Qantas in November 2008.

If history is anything to go by that would make Hrdlicka, who has more than impressed with her handling of the various trials and tribulations of the Jetstar group in recent years, a prime candidate to become Qantas’s first female CEO at some stage.

She will, however, hardly be the only candidate. Also high on the list is Gareth Evans, now head of international and freight operations, who was hired by the airline in 1999. He had been chief financial officer of the group since 2010. Evans has been responsible for the financial operations of the airline, commercial and business analysis and the implementation of major business change initiatives and played a key role in the current, seemingly successful, ongoing restructure plan. While others may be players, including former chief operating officer and now head of domestic, Andrew David, insiders suggest Evans and Hrdlicka are at the head of the pack. In the event, if all remain in place, it will likely become a triangular contest as it was last time round between Joyce, Borghetti and Peter Gregg, the then CFO who left Qantas just weeks after losing out on the top spot to Joyce.

At Virgin, it is a completelydifferent story. Unlike Qantas, it has no long history of chief executive succession. Indeed it has only had two CEOs, Brett Godfrey during its original life as no-frills Virgin Blue and Borghetti, who came to the carrier after a 36-year history with Qantas and who, since his arrival five years ago, has transformed it into the full-service domestic and international operator it is today.

Virgin executives say privately that there is no sense within the airline’s management that the thought of leaving has even entered Borghetti’s mind at this stage. They also suggest that there has been virtually no discussion about who might possibly replace him.

Within the carrier, the potential candidates have thinned, with the departure of chief financial officer Sankar Narayan in November last year after four years in the role. The lead contender within the group is probably Rob Sharp, who took over as chief executive of budget subsidiary Tigerair Australia in April 2013.

Sharp has had a long career in aviation, having previously spent 15 years with Qantas where his positions included general manager of strategy and business innovation, stints heading the airline’s project and vendor management section as well as business improvement and internal audit functions. His last job at Qantas was as head of global airport infrastructure and services. Under his leadership troubled Tigerair finally appears to be turning the corner and heading towards making money and he could replicate Joyce’s jump from budget chief to full-service supremo.

Other executives who might be considered for the top job at Virgin are chief operating officer Gary Hammes, currently responsible for the day-to-day operational running of Virgin Australia, including engineering, ground, flight and network operations, group flight standards, operations planning, technical, safety systems, international operations and catering as well as being responsible for corporate facilities, property and Virgin Australia (New Zealand). That’s the sort of wide-ranging job that makes chief executives. There is also chief commercial officer Judith Crompton who is responsible for alliances, network, revenue management and sales, covering Virgin’s domestic and international network.

But when looking at Virgin’s potential succession strategy there is one important factor to be taken into account: the unique nature of the business as an Australian airline that is majority owned by foreign carriers Singapore Airlines, Etihad Airways and Air New Zealand. When the board gets round to considering candidates their representatives, SIA’s CEO Goh Choon Phong, Air New Zealand CEO Christopher Luxon and Etihad chief operating officer Bruno Matheu (he joined the board in February this year to replace Etihad CEO James Hogan), will have enormous input. It makes it almost certain that the search for a Borghetti replacement will be extremely widespread and will include candidates from the three shareholding international carriers.

In the meantime, Joyce and Borghetti will soldier on. Both have had a lot of bottom line assistance with the dramatic plunge in fuel costs, but there are sure to be other potential pitfalls emerging over the coming months and years. But they have demonstrated one thing during their tenures: both are also highly capable of managing whatever crisis comes along.