Qantas in the fight of its life
It’s been a tough month for Qantas, arguably the toughest in the flag carrier’s history. Late February saw the confirmation of sweeping changes within the airline that many had predicted for some time. And the numbers were dire in every sense.
By 2017 the airline will shed 5000 staff, and those who remain face the galling prospect of wage freezes for the foreseeable future. Alan Joyce, the embattled chief executive, will have his wage cut by 36% this year in a bid to share the pain. In terms of inventory, 50 aircraft are to be sold or have their delivery postponed, with six 747s phased out in the next two years. Brisbane’s airport terminal lease will also be sold as part of a series of measures to reduce costs by $2 billion.
Lancing 15% of a 33,000 strong workforce in one stroke is indeed a bold measure and the fallout via impending union action will be the next hurdle for Qantas to overcome. That said, when a sombre Joyce remarked that Qantas would not be joining the list of Australian businesses that had failed because they were not prepared to make tough decisions, it was hard not to be taken in by the weight of his words. Decisions of this nature are not made lightly.
Somewhat perversely, it has taken another airline’s travails to remove the increasingly glum visage of Joyce from the front pages of the national newspapers. But while the fate of Malaysian Airlines flight 370 – which vanished into the night on March 8 – will, it is fervently hoped, be revealed in the weeks ahead, Qantas faces an even more uncertain future.
The flying kangaroo’s plight can be looked at through a number of prisms. Firstly there’s the legacy problem it faces which manifests itself mainly through the airline’s structure. The carrier grew into a large and prosperous entity through the boom decades of the 1980s and 1990s, when it had the Australian corporate and leisure markets cornered. The domestic market consisted of smaller players such as Ansett Australia, which drowned in debt in 2001, while Australian Airlines was swallowed in a Qantas buyout back in 1992.
Operating as a virtual monopoly during those heady years, the company’s ranks swelled and salaries grew commensurate with the airline’s standing as top dog in the Australian aviation domain. Then the early years of the millennium saw a paradigm shift. Virgin Blue, as it was then, entered the fray in 2000 and quickly expanded, with its low cost strategy stealing a portion of Qantas’ clientele.
In response to this new competitive threat, Qantas, in 2003, created Jetstar to operate in the low cost arena. Since then Tiger Airways (now majority owned by Virgin Australia) has sprung up and it too vies for a chunk of the increasingly crowded domestic space.
Qantas’ woes have been further compounded by the gaggle of foreign airlines increasing their capacity to Australia and in the process making inroads into the national carrier’s once untouchable position. A raft of Asian airlines, from China in particular, as well as the Gulf carriers have rained on Qantas’ parade.
Peter Harbison, executive chairman of CAPA – Centre for Aviation, the country’s leader in airline market intelligence and analysis, agrees.
“Qantas as a legacy carrier is a victim of its history. It has a long-standing route network that really isn’t appropriate in today’s world,” he said.
Consequently Qantas has the dual dilemma of a bloated workforce and the reality of diminishing returns from many of its once profitable international routes. In this context the dramatic slashing of jobs and the inevitable route cuts that will follow in the coming years seem warranted, and perhaps even overdue.
Harbison doesn’t mince words when it comes to what Qantas needs to do. “The faster the airline scales back its international business the better. The route cuts really have to be bigger than what we’ve seen so far.”
International routes aside, Harbison is more forgiving than the average travel pundit when it comes to Qantas’ broader tactics and Alan Joyce’s tenure. “In fairness, the real issues affecting Qantas are not internal, they are in the world around them. The threat comes from the impact of low cost carriers at home and long haul low cost carriers flying into Australia.”
Leniency is also warranted, Harbison says, regarding Qantas’ oft criticised tactic of escalating a domestic capacity war, particularly Joyce’s slavish adherence to maintaining a 65% market share. “Most businesses that have a monopoly or are an incumbent don’t readily give away market share to a new entrant. Market share is important in differentiating you and generating high yields,” Harbison said.
Qantas, meanwhile, has made no secret of what it believes is the key stumbling block to its progress. The 22 year-old Qantas Sale Act, which prevents any more than 49% of the airline being owned by foreign interests, and any more than 25% being owned by a single foreign airline, is a manacle which Joyce would dearly love to see unshackled. In desperation, debt relief via the federal government was flagged in late February as a life saving measure. However, after some fiery rhetoric from Virgin’s bosses Richard Branson and John Borghetti, the Abbott government prudently decided that it could not offer a guarantee to one company and reasonably expect to stonewall another.
Harbison is equally trenchant in his belief that scrapping the Qantas Sale Act is essential if the carrier is to escape the mire. “Qantas should have the same ability to structure its airline as the competition does. The restrictive Sale Act itself is a relic. It wasn’t even instituted for Qantas in the first place; it was there to enable the passage of privatisation for Telecom, which the unions stipulated as a requirement.”
But a fight looms in federal parliament before the Sale Act is repealed or indeed even amended. The Labor party is staunchly in favour of its retention on the basis that Australian jobs will likely go offshore should foreign ownership levels increase. Clive Palmer is another in the senate who has made it clear his party will not support changes to the ownership rules.
But Harbison believes nationalistic or sentimental notions regarding Qantas are outdated or disingenuous. “The arguments for the status quo are spurious at best. I’ve not yet heard anyone say which particular jobs would go offshore or how many would be lost. I recently heard the figure of 10,000 bandied about, but I can’t think of more than a few dozen.”
Harbison points to another of CAPA’s analysis papers, released in late February, titled Is loving Qantas to death in Australia’s national interest? A statistic in the report that flies in the face of the Sale Act preservationists states “Virgin Australia, propped up by foreign governments (so it is argued), has actually expanded its Australian workforce by over 30% between 2010 and 2013.”
As time goes by it only seems more likely that the argument for releasing Qantas from its restrictive ownership bonds will gain momentum. Ongoing hurdles to a return to profitability will be seized on by the airline and government reluctance to provide a debt parachute are likely to see the Sale Act come under far greater scrutiny in the next year. Those wedded to old fashioned notions of Qantas as purely Australian will similarly need to reassess them.
“Protecting the status quo endangers the future. If we love Qantas to death, it will die, simple as that,” Harbison said.
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