Qantas at the crossroads
Alan Joyce’s plans to restructure Qantas have been described as everything from a bold move to a sham, writes Emma Kelly.
For some, 16 August 2011 marked the point at which Qantas’ fortunes changed for the better, while others warn it heralds the end of the Australian carrier as we know it.
On that day, Qantas Chief Executive Officer Alan Joyce announced a raft of changes to the carrier, including 1,000 redundancies, a 110-aircraft order, strengthened alliances, a new Asia-based premium carrier, a new low-cost carrier in Japan, the deferral of Airbus A380 orders and the retirement of Boeing 747s. Much of Joyce’s strategy is focused on Asia, in an effort to benefit from the enormous, still-untapped potential of the region.
Outlining his plans, Joyce made clear that Qantas had little choice but to undergo a major transformation. The airline’s dual-brand domestic product – comprising Qantas and Jetstar – is performing well, with 65 percent market share. The problem, according to Joyce, lies with Qantas International, which is “a steadily fading business, suffering big financial losses and a substantial decline in market share”.
“Qantas International faces serious structural challenges, to do with the progressive deregulation of our market at home, the influx of competition here and abroad and our high cost base [20 percent higher than many rivals’],” Joyce said.
Collapsing market share
About 82 out of every 100 people flying out of Australia fly with an airline other than Qantas, resulting in the airline’s share of the Asian international market collapsing to 14 percent.
“Competitors are piling in, many with substantial foreign government backing, meaning we have some of the fastest capacity growth of any market in the world,” said Joyce, pointing to Asian and Middle Eastern carriers in particular. Many of the airline’s Asian and European routes are unprofitable, while those that are profitable cannot make up the shortfall, he says.
“We don’t have the option of pretending that things will change if we stay the same. They won’t. To do nothing, or tinker around the edges would only guarantee the end of Qantas International in our home Australian market. That would be a tragedy,” said Joyce.
His plan is a five-year one, designed to return Qantas International to profitability in the short-term. Asia – “the most important region in the world for Australia and for Qantas” – is the key to Joyce’s strategy. Qantas is seeking to access the “massive untapped potential” and “many millions of premium travellers in-waiting” through the creation of a new Asia-based premium airline.
The carrier will not operate under the Qantas name, but will leverage Qantas know-how, and will operate under a new name, with a new brand and new aircraft – initially 11 single-aisle Airbus A320s.
Joyce said the airline has narrowed down the choice of possible locations, with Singapore and Kuala Lumpur believed to be the frontrunners. Singapore is considered the favourite by many analysts, with such a move set to further intensify competition with Singapore Airlines (SIA).
“For the first time in our history, Qantas intends to fully participate in the benefits of an Asian aviation hub,” said Joyce, adding that the new airline will operate same-day services to and within Asia, while connections between Asia and Australia will grow.
“Until now Qantas has been a ‘home and away’ business,” the airline chief said. “Now we are making the transition to a regional and global business.”
Before deciding to launch a premium Asian carrier, Qantas commissioned the Lowy Institute to look at the future of the Asian market. Researchers forecast that, within 20 years, 16 percent of the world’s middle class will be in East Asia. By then, China may already have the world’s fourth-largest population of millionaires and India the twelfth.
Asian plans also include establishing a new low-cost carrier in Japan, in partnership with Japan Airlines (JAL) and Mitsubishi, with each partner holding a third of the voting rights in the company. To be called Jetstar Japan, the new unit will launch domestic Japanese services by the end of next year from Tokyo’s Narita airport and Osaka Kansai International, with an initial fleet of three new 180-seat A320s, growing to 24 aircraft in its first few years of operations.
Destinations under consideration include Sapporo, Fukuoka and Okinawa. The carrier will also introduce short-haul international services to key Asian cities in China and South-East Asia in the first year of operations.
The new unit’s workforce will initially be 150, rising to 800 within a few years. Total capitalisation committed to the new airline is 12 billion yen (US$156 million). The partners plan to apply for an operators’ certificate in September.
Jetstar itself has been serving Japan since March 2007, operating widebody A330s in a two-class configuration, linking Tokyo and Osaka with Cairns and the Gold Coast. The company also flies from Singapore via Taipei to Osaka with Jetstar Asia’s A320s. Jetstar is the largest carrier operating services between Australia and Japan, carrying some 2 million passengers a year.
In Asia, Qantas is also looking at opportunities to work with Malaysia Airlines (MAS), which is set to join the Oneworld alliance, particularly on services to Europe.
Elsewhere, a “gateways to the world” strategy based on an expanded network of alliance relationships is an important part of the transformation. In North America, for example, Qantas is working on joint commercial planning, sales and marketing with partner American Airlines.
In South America, Qantas will replace Buenos Aires with Chilean capital Santiago on its network, working with Oneworld partner LAN to provide connections throughout the region.
Qantas will launch thrice-weekly flights between Sydney and Santiago from early 2012, using a Boeing 747 reconfigured with the same cabin product the carrier offers on its Airbus A380 fleet, with plans to increase this to a daily frequency. Santiago will provide more connections across the continent than the carrier’s existing services to Buenos Aires.
Next April, Qantas will also expand its long-running partnership with British Airways (BA), under the airlines’ Joint Services Agreement (JSA). Singapore will be consolidated as the primary JSA hub, with Qantas’s London flights from Melbourne and Sydney to be consolidated through Singapore using A380s, while BA will upgrade its London-Singapore-Sydney services from a 777 to a 747 jetliner. Qantas will also construct a new premium lounge at Changi International Airport.
From early 2012, Qantas will serve Bangkok and Hong Kong from Australia, while BA will operate Bangkok-London and Hong Kong-London. Qantas will no longer offer onward flights to London from those Asian destinations, while BA will no longer continue to Sydney on these sectors.
The move will reduce loss-making, asset-intensive flying, at the same time as maintaining connections and frequent-flyer benefits for travellers to the UK and other destinations. It will also allow Qantas to retire four 747s. Valuable Heathrow slots will be preserved for future requirements, Joyce said.
Meanwhile, the airline’s partnership with South African Airways on services to Johannesburg will continue.
“We are negotiating further opportunities to advance our ‘gateway’ strategy,” said Joyce.
Fleet changes are also afoot, with Joyce acknowledging that “the right fleet plan is fundamental.”
The airline has ordered up to 110 new A320-family aircraft, plus 194 purchase rights and options. Of these new aircraft, between 28 and 32 will be current-generation A320s and 78 will be re-engined A320neos. The A320neo offers an 8 percent cost advantage over current models of the aircraft, with up to 15 percent lower fuel burn, up to 20 percent lower engine-maintenance costs and improved payload-range capability.
Some 24 of the new A320s will go to Jetstar Japan, with half of the A320neos replacing leased aircraft, while the other half will support base growth in the existing Jetstar business. Eight of the new aircraft will go to Qantas’s new premium carrier.
The airline has negotiated with Airbus to defer delivery of six of its 20 A380s by five to six years. These aircraft will now be delivered between 2018 and 2021, corresponding with the retirement of the last 747-400ERs. Such a move significantly reduces capital invested in the International business – by about A$2.3 billion (US$2.5 billion) based on current list prices for the aircraft.
Four out of 26 747-400 jetliners will be retired this financial year, while some 12 A380s will be in service by the end of this calendar year. Meanwhile, the airline is refitting nine of its 747s with the A380 interior, including the same seats and new Panasonic in-flight entertainment systems, with the first aircraft to be ready within three months.
“Over the coming decade, our fleet strategy will deliver a simplified, highly flexible fleet of next-generation aircraft capable of meeting our needs while driving down operating costs,” Joyce said.
Alongside these changes come inevitable redundancies – this time totalling 1,000 job cuts. These will include management positions, pilots, cabin crew and engineers, with Joyce expecting the majority of the redundancies to be voluntary.
The airline will also attempt to preserve links with some skilled personnel, Joyce said. For example, some pilots may be offered unpaid leave to take up opportunities elsewhere in the group. Expansion in Asia will also offer opportunities, the CEO said.
“This is the way of the future for smart Australian companies. Like our leading mining, finance and IT companies, as an Australian company we can take our unique skills and knowledge to the world and see the benefits flow back to us,” said Joyce.
He also stresses that despite the moves to Asia, Qantas will continue to be “an Australian company, owned by Australians, with the vast majority of our operations based in Australia”.
The news has not gone down well with unions, which were already at loggerheads with management over new deals and conditions, with catering employees, engineers, ground staff and pilots already considering or conducting industrial action.
The Australian and International Pilots Association (AIPA), which represents Qantas pilots, is already seeking a Qantas flight/Qantas pilot clause in their ongoing negotiations, under which all Qantas flights must be operated by Qantas pilots. The pilots fear that the airline’s management plans to outsource flight duties by basing operations in Asia. Qantas pilots have been taking action since July, starting by making public announcements on their flights in an effort to increase public awareness of the issue.
In late August, the Australian Licensed Aircraft Engineers Association became the latest union to take action, including work stoppages and overtime restrictions, following the collapse of talks regarding a new enterprise agreement.
Unions and MPs met in Canberra following Joyce’s announcement to protest against the restructuring plan. Unions have questioned Qantas claims that its international division is losing A$200 million a year and warn that the 1,000 job losses could turn into 6,000 jobs directly and indirectly in the industry.
The unions also fear that the new premium airline in Asia will be the start of a drive to send jobs overseas, questioning whether Qantas can still call itself an Australian carrier. Unions have called on the government to investigate whether the plan would put Qantas in breach of the Qantas Sales Act.
“The federal government needs to look very carefully at the implications of Alan Joyce’s announcement for the Australian public,” said AIPA president Captain Barry Jackson.
“Strip away the spin and eye-watering amount spent on advertising this morning,” he said, referring to the reported A$2 million the airline spent on full-page advertisements in all major Australian newspapers on the day of the announcement, “and what’s left is exactly what Qantas pilots have been warning of for months – a shift of Australian Qantas operations into Asia to start employing people working to Asian conditions and standards.”
The financial market has been largely positive in its response to Joyce’s plans, acknowledging that something had to be done. The restructuring plan will allow the airline to capture Asian growth and position itself to compete effectively in the future, analysts believe, although the market is waiting with interest for details of the new Asian premium airline.
As the Sydney-based consultancy Centre for Asia Pacific Aviation (CAPA) pointed out: “There are still some major areas of detail to work through, but the foundations have been set for a new, more focused international business to emerge.”
“Qantas’s share price has fallen almost 40 percent over the past 12 months, putting it last in a peer assessment with Singapore Airlines (down 30 percent), Cathay Pacific and Virgin Australia (each down 15 percent). Qantas’ shares have risen as much as 4.2 percent in early trade on 16 August after the announcement – an early endorsement from the market at least that the airline can get back on track under Joyce’s plan,” CAPA said.