For all that gloom painted leading to the announcement of the result, Qantas chief executive Alan Joyce should be – as he visibly was – pleased with the Australian flag carrier’s full year performance ending June 30 even though its international operations incurred a loss of A$200 (US$215) million, which was compensated by a strong domestic market.
Mr Joyce said: “Qantas remains the most profitable domestic airline, offsetting the losses in the international business.” The airline reported earnings before interest and tax (EBIT) of A$228 (US$241) million compared with A$67 (US$71) million in financial year 2010.
The Qantas Group’s profit increased 46% to A$552 (US$584) million, boosted by an A$95 (US$100) million settlement with Rolls-Royce for disruptions to its A380 fleet operations as a result of engine failure. Budget subsidiary Jetstar turned in record EBIT of $169 (US$179) million, up 29% from the previous year. Mr Joyce said: “This result reflects the strength of the Qantas Group’s portfolio and is our best performance since the global financial crisis.”
Image Courtesy of eosdude
Qantas’ announcement came soon after rival Singapore Airlines (SIA) reported a dismal first quarter performance for financial year 2011/12. One of the world’s most successful airlines, the Southeast-Asian carrier saw group profits tumble 82 per cent year-on-year from S$253 (US$210) million to S$45 (US$37) million while SIA the airline incurred an operating loss of S$36 (US$30) million in contrast to a profit of S$136 (US$113) million in the previous year (“What could be ailing Singapore Airlines?” 9th Aug, 11).
Although the first quarter is generally the weakest for SIA, this past quarter by all indications was a universally cruel one of soaring fuel prices, continuing unrest in the Middle-East and the nuclear fallout in Japan. Fortunately for Qantas, it came at the end of a reporting year that for more than the first half saw the industry recovering while for SIA, the result was more alarming because it started a new financial year on not quite an auspicious note.
What is clear is that the year ahead is not going to be easy for most airlines as the global economy continues to flounder in economic uncertainty. Against this backdrop, the competition for air travel is shifting from full-service to budget, blurring the line between them, and full-service airlines are losing the edge of differentiation. Geographically, attention is shifting from the rest of the world to Asia where China and India offer large untapped potential and where the Asean Open Skies policy to be fully implemented by 2015 promises the opening of new markets. Particularly for Qantas, based in a far corner of the world, it may be an issue of identity as it seeks to realign itself with Asia or risks being shut out of a lucrative market.
Thus Qantas is looking to Asia to avert what Mr Joyce had called an Australian “tragedy”. In a new five-tear plan, he said Qantas would “increase our focus on the world’s fastest growing aviation region: Asia.” Indeed, it does not make sense that Qantas should in a growing market be losing market share, which, according to Mr Joyce, has plummeted to a low 14%. The plans include launching two new airlines in Asia: a budget joint venture with Japan Airlines (JAL) and Mitsubishi Corporation to be based in Japan and a new premium service to be headquartered in Asia where it believes the cost to be much lower.
But can Asia heal Qantas (“Moving Qantas International’s base to Asia not a panacea”, 17th Aug, 11)?
The Asian budget pie is simply too tempting to resist (“Scramble for the budget pie”, 22th Aug, 11). Although the stated intention of Qantas’ new joint venture budget carrier – Jetstar Japan – is to focus on the Japanese market, in a move not to be outdone by All Nippon Airways (ANA) and AirAsia which had earlier announced the setting up of AirAsia Japan (“Japanese low-cost travel sets to take flight“, 5th Aug, 11), it must be eyeing connections beyond the domestic market. Particularly so when the number of budget carriers in Japan is set to grow to take advantage of increased slots at larger airports; besides, Japan is already served by a network of competent high-speed trains.
Qantas is merely following in the footstep of Asian rivals including SIA, which has set up its wholly-owned budget subsidiary which will take to the skies in 2012. In many ways, Qantas and SIA are very much alike; Qantas already owns Jetstar Airways (Australia) and has a 49% stake in sister company Jetstar Asia, and SIA owns 32.9% of Tiger Airways. Both airlines see the budget extension as a way to protect their turf, expand their business and perhaps by their combined strength hope to eliminate the competition.
One may note the exception of Asia’s leading airline Cathay Pacific Airways which has said it would not enter the budget arena. Cathay has taken but an alternative approach to the same problem by introducing a premium economy class to retain and capture down-graders and possibly attract new borderline up-graders as well (“Cathay Pacific’s premium economy to improve profitability“, 24th Aug, 11). The Hong Kong-based carrier is also well complemented by wholly-owned subsidiary Dragonair which operates an extensive China network and routes to other destinations that are normally served by budget carriers.
Qantas’ bigger interest is its intended investment in an Asia-wide premium service to be based in Asia, possibly Singapore according to sources although Kuala Lumpur has been cited as a contender. In fact, Qantas has for a long time been engaging in hub-operations out of Singapore, where it feeds passengers from both ends of the Kangaroo route to onward ports, enjoying the benefits of better fleet utilisation and taking advantage of Changi Airport’s connectivity. If it opts for Singapore, it will be a natural extension or formalisation of an existing strategy. It seems to make sense for Qantas to complement the strong presence of Jetstar at Changi in a move that could bring about better economy of scale and network meshing. Qantas can also benefit from Changi’s growth and Singapore’s geography to fan out into the region – China and Japan to the northeast, India to the west, and Asean all around.
Ever keen to grow its traffic and be the region’s major hub, it will be good news for Changi, which handled 22.4 million passengers in the first six months of the year, an increase of 10.7% year-on-year. It would boost traffic by full-service airlines which grew by only 6.6% compared to 25.2% by budget carriers. But what’s good for Changi may not necessarily be so for SIA. On the other hand, Qantas may think twice about direct competition with SIA on its home ground, considering the latter’s strength in the premium market not just in Singapore but also across its network.
However, Mr Joyce is optimistic. He said the new airline will have more luxurious cabins than those already in operation, and that it “will be a top premium product” with a “private-jet feel”. Now that is throwing a big challenge at SIA, doyen of luxury air travel. From Singapore, Qantas looks to tapping the growing affluence of the China market which is said to becoming increasingly brand and class conscious. But do not expect SIA, if threatened by the competition, to stand idly by.
Since, according to Mr Joyce, “82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas, not including Jetstar,” Qantas obviously suffers from an image problem for its international operations. It would be naive to think this is just a home problem and not baggage that it will carry abroad. Perhaps conscious of this, Mr Joyce said the restructured Qantas “will continue to focus on improving the customer experience” as it increases its presence in Asia.
Mr Joyce is full of conviction about growing with Asia. Setting up base in the region helps to be near where the action is. The real challenge is getting accepted, and that comes with how successfully Qantas is able to translate Mr Joyce’s conviction into an understanding of the Asian market beyond just identifying its potential.