Irreversible change

And for the fly-in/fly-out mum flying home from Karratha to her family through vicious summer thunderstorms, the Boeing 737 captain’s salary of an average $255,000 is absolutely justified.

But sadly those passengers are the exceptions, not the rule.

The safety dynamic

For according to the leading global survey SITA, the overwhelming majority of passengers – 73 per cent – safety is not their first consideration – price is.

And whereas once Qantas could trade on and command a price premium for its unblemished jet safety record, that advantage has all but disappeared with new technology cockpits that have greatly reduced pilot error – the major cause of accidents – and allowed most airlines to boast similar records over the past 15 years.

In the movie Rain Man, Dustin Hoffman, playing Raymond Babbitt, uttered the now famous words that “Qantas never crashed”. The movie came out in 1988, at a time when Qantas was at the top of its game with well over 40 per cent of the traffic in and out of Australia.

Government policy was to protect from foreign competition its 100 per cent owned national carrier, which was selling tickets at a premium to adoring travellers because so many well known airlines such as Pan Am, Alitalia, UTA French Airlines, Korean Air, Continental Airlines and American Airlines were having tragic accidents.

In 1989 there were 231 accidents and incidents, which made Qantas’ unblemished jet plane record shine.

Fast forward to this year and the landscape is so very different.

Qantas is privatised and exposed to the reality of an unforgiving sharemarket, the government has opened up Australia’s skies to fierce competition from better equipped lower cost airlines, and the flying kangaroo can no longer charge a premium for its safety record because most airlines now boast perfect records over the past 10 years.

In fact, last year there were 131 incidents and accidents – while traffic since 1988 has tripled.

Liberalisation

Compounding that problem over the past 23 years, Australia’s governments have not only deregulated – opened up to all players – the domestic airline system, but also allowed 100 per cent foreign owned airlines – such as Tiger Airways – to set up domestic airline operations.

Initially Virgin Australia was also 100 per cent foreign owned.

At the same time, successive governments on both sides of politics have followed the global trend and freed up access to Australian cities to international airlines such as Emirates, Singapore Airlines and Cathay Pacific as they chase a bigger share of the world’s fastest growing industry – tourism.

For some smaller Australian cities it is open skies.

Last year, Qantas’ slice of international traffic to and from Australia sank to just 18 per cent, with its low cost subsidiary Jetstar holding 8 per cent. Its share to and from Asia, the world’s fastest growing market, was just 14 per cent.

In 1995, in a more restricted (and much smaller) market, Qantas still commanded over 40 per cent of international traffic.

On international services Qantas is losing market share, down from 35 per cent in 2003 to 17.7 per cent in August, although some of that loss was because of unprofitable routes being transferred to its low cost subsidiary Jetstar.

Low cost airlines now carry more international passengers into and out of Australia than Qantas. The problem for Qantas is that virtually all those international airlines – low cost or legacy – for a variety of reasons have lower costs.

Direct comparisons are difficult and sometimes quite misleading, but while Qantas’ staff are 25 per cent of its cost base, Cathay’s are 16 per cent, Singapore’s 16.7 and Emirates’ are 15 per cent.

Only last month (November), one of the lower cost operations, China Southern, touched down in Perth, promising to more than triple flights between China and Australia by 2015. China Southern president Si Xianmin was very happy to support Joyce’s warnings, announcing his airline planned to increase weekly flights to Australia from the present 32 to more than 110 during the next four years.

Passenger innovation

Passengers will, however, pay higher fares to support improved levels of service.

The development of high yield business and premium economy class are testament to that.

The problem for Qantas is that while it invented business class in 1979 it has been a laggard in every other cabin innovation since.

Singapore Airlines and Emirates installed seatback videos in economy in the early 1990s, but Qantas did not fit the majority of its long haul fleet until well into the last decade.

And the airline rejected repeated proposals for premium economy from this author in 1997, despite the fact that Australians are the world’s second tallest passengers and fly the longest air routes. Qantas finally moved on premium economy in 2008, and former CEO Geoff Dixon admitted that not putting the product in earlier had been a big mistake.

Recent claims that the A380 is a passenger innovation have a hollow ring. Certainly, having the interior designed by Marc Newson is nice, but hardly a leap forward.

The value of being first to market with new products in incalculable.

Many passengers still remember that Singapore Airlines led the way by snubbing its nose at IATA and offering free drinks and plastic headsets.

Sadly, the mis-steps don’t end with seatback videos and premium economy.

Another was the Boeing 777 in 1996 – and six times since.

The 300 to 365-seater is the world’s most versatile and economical twin engine longhaul aircraft and is the cornerstone of the industry’s most successful and profitable airlines – Emirates, Singapore Airlines and Cathay Pacific. The 777-200ER would have enabled Qantas to maintain its presence in many European markets while making destinations such as San Francisco viable.

Joyce argued at October’s heated AGM that the 777 is the wrong aircraft for Qantas, but that is hard to fathom when it is the cornerstone of so many airlines around the globe.

And a new larger, longer range and more capable model is just around the corner.

Having missed the 777, Qantas opted for the revolutionary 250-340 seat Boeing 787, but that plane is now effectively four years late, which has thrown the airline’s fleet planning and product innovation into a tailspin. The Qantas Group should have had 40 787s in service by now, but its first will not touch down til late next year.

There is no doubt that once in the hands of Qantas the 787 will be the enabler of new routes as well as cutting the airline’s fuel bill, while the cabin innovation will give the airline a point of difference.

Dixon said in 2008 that “nothing can really compensate” for the delays in the 787. “Our business would be totally different if they had been on time,” he said.

Asian strategy

Unions are focused on what they see as the destruction of the flying kangaroo in favour of the bare bones Jetstar with its lower wages to match its lower fares and the new premium Asia-based operation.

Qantas launched Jetstar in 2004 to meet the competition of lower cost Virgin Blue and Kuala Lumpur-based AirAsia, which were savaging its traffic base.

At the time, Dixon rightly said that it is better to cannibalise one’s own traffic that have someone else do it.

Jetstar, both here in Australia and in Singapore, has been very successful in enabling Qantas to both retain market share and return to tourist destinations that were simply not viable under the Qantas cost structure.

Tapping into Asia, the largest and fastest growing aviation market, is smart business and is to be applauded, just as we laud Australian businesses such as BHP and the banks investing overseas.

The venture into Japan is simply taking the Jetstar model and investing with JAL and Mitsubishi. By all accounts it will be an excellent investment.

The RedQ premium brand is the focus of the unions as they see that being able to sustain the higher wages.

Again, Qantas is an investor – a minority player – and the major investors in what is a start-up and unproven business model in the region would be looking for the lowest costs possible and ones that are not above local pay rates.

It is, however, questionable if RedQ will get airborne, with reports that Singapore Airlines is lobbying hard to kill off any base at Changi.

At the same time, AirAsia CEO Tony Fernandes has flagged that he will be setting up a new premium regional airline that will compete head-on with RedQ. According to Malaysia’s Sun newspaper, the airline will be likely be called Caterham Jet and fly Bombardier CRJs. It will operate from KL’s downtown Subang Airport and will launch in May 2012 and fly to Bangkok, Jakarta and Singapore. The name comes from the recent purchase by Fernandes of British sports car manufacturer Caterham Cars.

Mistrust and brand

At the same time, Qantas management must understand the profound mistrust of staff about its intentions after the US-driven Airline Partners Australia buyout fiasco on 2007, which would have seen the airline crash into bankruptcy in the GFC in early 2009.

That traumatic bid was only one of many blips on the staff management radar. The 2008 battle with the engineers was another which had a far greater impact on the airline’s operations than the current one.

In so many areas the staff/management relationship is adversarial, which surfaces too many times at the staff/passenger interface.

Despite that, the Qantas brand is strong and has survived the A380 accident last year and the engineers dispute in 2008. Qantas also expects to fully rebound from the recent grounding.

“I think the brand will recover this time a lot better than it did in 2008 because we didn’t allow the strike to go on and we didn’t allow hundreds of thousands of passengers to be disrupted by the strike,” Joyce said.

“I have every confidence that we will recover back to a 65 per cent market share domestically. We will recover back to our international market share and importantly we’ll recover our share of the corporate market and get it back to where it needs to be for Qantas to continue to make profits on the domestic market.”

The Business Spectator website noted that, according to brand valuation specialists Brand Finance, the Qantas brand was worth $1.1 billion in January but the grounding had dropped that value by just $100 million.

Brand Finance managing director Tim Heberden told Business Spectator that the grounding “could result in direct loss of revenue due to cancelled flights, increased costs in the recovery phase through advertising and discounts, increased capital costs if ratings agencies lose confidence and time to recover lost market share”.

It cited many examples, such as Toyota, where the brand bounced back after very negative exposure.

Virgin exposure

CAPA – Centre for Aviation noted that the grounding thwarted too much exposure by disaffected Qantas passengers to the Virgin Australia product.

“Qantas can be expected to keep most of its high value customers despite the two-day grounding, which largely impacted business travellers only on the last day, a Monday. The grounding and resulting termination of industrial action ensures, as Mr Joyce made clear at the end of the grounding, customers can book Qantas tickets ‘with confidence’ as there will be no industrial action related delays or cancellations in the short and medium term,” CAPA said.

Joyce also took the opportunity to remind unions of the changing market dynamics in the corporate sector, with Virgin Australia repositioning itself and encroaching on Qantas’ near monopoly of the corporate sector.

“We ended this and did not let it go on for another year. If this was like 2008 with the engineering dispute, which lasted for three or four months, we wouldn’t have gotten those customers back. This dispute is now over. We can now recover those customers and get them back flying on Qantas,” Joyce said.

For the first time since Ansett’s collapse there is a full-service competitor to Qantas – a competitor that disrupted passengers could change allegiance to.

And of concern to Qantas, the full impact of the Virgin Australia rebrand is yet to be felt.

In the weeks leading up to the grounding, CAPA said that Virgin’s passenger numbers increased by 5 per cent.

During the dispute, Virgin Australia went into overdrive to accommodate disrupted passengers, even liaising with its international strategic partners to add capacity, either to supplement Virgin services or take over select Virgin routes, allowing Virgin to redeploy its capacity.

Fair work

While trying to soothe an irritated public and enraged politicians, Qantas must also conclude discussions with the unions, who by 21 November must report agreements or mutual progress with a request for a 21-day extension to finalise an agreement. If no agreement is reached, Fair Work Australia (FWA) will consider the case and make a binding resolution.

However, according to CAPA, FWA has already shown a disposition to Qantas, although the carrier’s claim was bolstered with support from multiple government officials who wanted the matter resolved and not dragged on.

FWA has already ruled in favour of Qantas on the Jetconnect pilots.

CAPA notes that “FWA, even though nine of its 11 commissioners are former union officials or advocates, would be hardpressed to identify a sector that offers job security and then decree Qantas must offer job security”.

FWA may well of course balance any such outcome by supporting the union’s claim of a higher pay rise than what Qantas is willing to offer.

But CAPA notes that it would be hard for FWA to agree a higher deal than was struck by the union with Virgin Australia.

Joyce claimed that even with the pay increase Virgin Australia’s long haul pilots will be paid half that of Qantas pilots.

A current Virgin 777 captain is paid $244,500 for 1,000 block hours with no penalty payments. Direct comparisons are difficult, but according to one senior Jetstar pilot a “Qantas A330 captain is paid 40 per cent more income for working 26 per cent fewer hours”.

The average salary for a Qantas A330 captain including superannuation is $341,717.

The future?

Success in the airline industry is built largely on one thing – customer service.

For Joyce, the harsh reality is that the so-called victory of having industrial action terminated by FWA may be a hollow one if he cannot unite the workforce and get them onside.

It matters little to passengers about the technical merits of what plane they fly on, but it does matter if the crew are surly.

And while check-in staff and flight attendants were not involved in this latest stoush, they have concerns about the future direction of the airline.

Qantas is clearly blessed with some of the best professionals in the business, but years of sometimes perplexing decisions by the airline, such as those listed above, has left staff making excuses to travellers.

While the outcome of the FWA process – which was under legal challenge as Australian Aviation went to press – is expected to fall broadly in line with what other Qantas staff has accepted, unless Joyce can heal the deep wounds Australians can expect a repeat of the industrial warfare in three years.

It matters little if you win a battle but lose the war.

One of the best ways to inspire the staff is to get on the front foot with product innovation.

Whereas 20 years ago the airline could trade on its safety reputation, those days are largely gone.

Passengers today are far more interested in how many movies they can choose.

Joyce needs to launch a comprehensive company-wide program to reinvent every aspect of travel, just as Air New Zealand has done, not just tinker around the edges with new cutlery.

The New Zealand airline, through inspirational leadership, has become the most admired company in the country – and the most popular employer.

Joyce and his management team appear to have won a titanic battle on the industrial front, but they must win the hearts and minds of their workforce if they are to win the trust and support of the flying public.

The public has choices – a fact that should also not be lost on the airline’s unions, for the government is committed to further liberalisation of Australia’s air services.

Qantas’ future is simply not guaranteed and it may not reach its 100th year in 2020.

Brought to you by the Australian Aviation Dec 2011 Archives