Qantas chief executive Alan Joyce is renewing his call for change as the airline posts a 52% drop in first half profits before tax (PBT) from A$417 million (US$448) to A$202 million. Earnings for the airline plunged from A$165 million to A$66 million, down 60%. This was attributed largely to the cost of industrial action amounting to A$194 million and increased fuel costs that jumped 26% or A$444 million to A$2.2 billion (“Qantas sets sights on Asian growth despite challenges“, 23rd Feb, 12).

Joyce said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” He reiterated an earlier warning that “doing nothing is not an option.”

It had not been a good 6-month for the Australian flag carrier up till December 2011. The big restructuring plan that Joyce unveiled last year to turn around the loss-making international arm of the airline and which includes setting up a regional premier airline in Asia has been set back by labour disputes that resulted in staff strikes and the much criticised action of the airline’s grounding its entire fleet for two days that elicited intervention by the authorities. Joyce defended the decision as one that “though difficult, was necessary.” He blamed the unions for damaging the Qantas brand and noted how “the business community was starting to leave Qantas.”

Much as Joyce might have asserted that Qantas emerged a stronger entity post-strike, it cannot be denied that the disruptions had dented its reputation, and the continuing technical problems it experiences with its A380 fleet has not helped in its recovery. The exciting Asia plan to set up a premium regional carrier based in that part of the world, which threatened the shift of some 1,000 jobs out of Australia, has lost some urgency and, according to Joyce, will now be a “capital-lite model”. The airline is said to be looking for a partner so as not to incur a significant amount of money on its own.

The delay may well be a blessing in disguise as it is with the delayed delivery of the Boeing 787-8 Dreamliner, the first three of 15 on order initially expected in 2010 then rescheduled to enter service in 2012 – which fits neatly with Qantas’ immediate priority to cut capital expenditure by A$700 million over the next two years. It has reduced projected capital expenditure for 2012 from A$2.5 billion to A$2.3 billion, to be maintained for 2013 which was originally projected to incur A$2.8 billion. The airline’s woes have been aggravated by not only the volatile fuel price but also the sluggish global economy, particularly worrying being the deepening European financial crisis. But that is not unique to Qantas alone, as rivals including Singapore Airlines (SIA) are also diffident about the future.

Image Courtesy of Phozographer

There is the added challenge in the competition posed by airlines such as Emirates and Qatar Airways that are growing their Middle East hubs in connecting Australia and Europe. Qantas is losing A$200 million annually, and its market share has fallen by 20% to just 18% of all international traffic to and from Australia. Joyce is mindful of the need to improve efficiency and competitiveness, noting how, for example, how Qantas Engineering services costs are at least 30% higher than those of its competitors.

The slew of measures in response to the challenges will include a review of engineering, catering and ground operations with a view to consolidating them. Some catering centres may be sold and the business will focus on four core facilities in Sydney, Melbourne, Brisbane and Perth. Heavy maintenance at three different bases in Melbourne, Brisbane and Avalon will be consolidated and supply chain operations as well as rostering and planning activities will be centralised in Sydney. Line maintenance will adopt a “maintenance on demand” approach to cut down on unnecessary checks – in a way supported by fleet renewal that has reduced the average age of the fleet although this may not be the best time to speak of reduced maintenance in light of the design and manufacturing flaws that plague its A380 superjumbo fleet.

The new change will result in some 500 positions being made redundant – largely the result of restructuring the maintenance and catering divisions – but as a sweetener, Joyce gave the assurance that no jobs would be shifted offshore. It is a less provocative, if not compromised, risk from a lesson learnt. It may not be a large number, considering that Qantas has an employee population of 32,500 of which 90% reside in Australia, but any job loss is an unhappy proposition. Qantas has said the number may go higher than 500, the final decision expected before end-April.

Yet there can be no better time to push ahead with unpopular decisions when the performance numbers that paint a bleak future are there for all to see – and what fortuitous timing it is for Qantas – in terms of both the urgency and market opportunities presented by the coincidental situation – as compatriot airline Air Australia went bust, leaving some 300 staff jobless. And so asserted Joyce: “We need to be ready to take tough decisions, and we must become more flexible and productive.”

There are also plans to cut some international routes. Qantas will cease flying to London via Bangkok and Hong Kong, from Singapore to Mumbai and from Auckland to Los Angeles. It has earlier indicated it would work closely with oneworld partner British Airways and not duplicate resources at some ports. This may not necessarily work to the advantage of Qantas, which risks losing brand visibility. In the short term, eliminating the costs of operating at these stations may improve the bottom line, but the problem is more than just a matter of cost. It reflects a marketing weakness in a highly competitive market. The cuts are clearly designed to protect profitability; the long term is not as critical an issue for now.

Joyce said: “We continue to work towards returning Qantas’ international performance to profitability in the short term. Our long-term goal is to ensure that the Qantas business, domestic and international combined, exceeds the cost of capital on a sustainable basis.”

But all is not gloom and doom. Qantas domestic market with a 65% market share remains its strong suit and its budget subsidiary Jetstar continues to expand at home and abroad. Jetstar achieved record earnings before interest and tax (EBIT) of A$147 million, up A$4 million. The airline has set up a joint-venture with Japan Airlines and Mitsubishi Corporation to tap into the Japanese domestic market – one of two initiatives announced by Joyce last year as the company looks to increase its presence in the lucrative Asian region, the other being the now-scaled down proposed Asian premium carrier RedQ. While Qantas flip-flops between basing the carrier in Singapore and Kuala Lumpur, it is clearly adopting a wait-and-see approach considering the present economic climate and the fierce competition to be expected from the more successful airlines such as SIA and Cathay Pacific.

Qantas Frequent Flyer also records an outstanding earnings before interest and tax (EBIT) of A$119 million, up from A$107 million. Qantas Freight on the other hand suffered a decline, down A$3 million to A$38 million, attributed to high fuel costs and weaker demand. However, according to Joyce, “a good performance in the domestic express freight market and increased contract revenue helped minimise the overall drop in earnings.”

While the outlook for the second half of FY2011/12 remains challenging and volatile, Qantas has reported that group forward bookings are indicating higher yields following fare increases and higher fuel surcharges although the first six months of the financial year is generally the stronger half. Ironically, the deepening woes of Qantas will make it easier for Joyce to take the hard decisions that he could not six months ago.

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