As expected, Qantas is flying in red ink. The Australian flag carrier posted a net loss of A$244 million (US$256 million) for the year ending 30th June, compared to a net profit of A$250 million last year. The result was weighed down heavily by the deepening loss of A$450 million incurred by its international operations arm. In contrast, Qantas domestic operations continued to be profitable, and in fact did better this year.
Both Jetstar and Qantas Frequent Flyer also turned in record results, the former posting an underlying earnings before interest and tax (EBIT) of A$203 million, up A$34 million or 20%, and the latter an underlying EBIT of A$231 million, up 14%. Ancillary revenues grew 27%. However, Qantas Freight’s underlying EBIT was A$45 million, down A$17 million.
Going forward, Qantas chief Alan Joyce said: “Our biggest challenge is Qantas International.”
The airline has since split its operations into two autonomous companies serving the domestic and international markets.
Image Courtesy of Phozographer
It is the familiar bugbear – rising fuel costs, that reached a high of A$4.3 billion during the year, an increase of A$645 million or 18%. Added to that, the woes of labour disputes that had cost the airline A$194 million when the staff went on strike and flights were disrupted, and the continuing economic woes of the European market. Not to be ignored is how the competition has eaten into the Qantas pie as it loses traffic to close rivals such as Middle East airlines such as Emirates Airline and Qatar Airways.
Joyce cannot help but be optimistic. Referring largely to the turnaround plan launched in August 2011, he asserted: “Qantas’ international turnaround plan is on track and set for improvement in 2012-13.”
One wonders, as the airline talks about the all too familiar measures of cancelling services on loss-making routes and, conversely, strengthening profitable routes. It reported increasing capacity to the Dallas/Fort Worth and Santiago hubs, rationalising maintenance operations that would reduce 2,800 jobs and save the airline A$300 million a year, and reducing capital expenditure to stay lean.
That last course of action – reducing capital expenditure – now includes the cancellation of orders for 35 Boeing 787-9 Dreamliner aircraft worth US$8.5 billion. Joyce explained that it was due to “lower growth requirements.” It should make sense in light of the current climate. Yet the action may signal a desperate short-term strategy to reduce debt and stabilize the airline’s financial position. It is reactionary, not quite an encouraging sign if it means resignation to the circumstances and an acceptance of its fate thereof.
The strategy may work against Qantas in the long term at a time when its rivals are waking up to the need of reinvigorating their brands to stay ahead of the competition. Consequently, the Qantas market may continue to shrink.
By comparison, Qantas exudes less the vigour that drives regional rivals such as Cathay Pacific Airways and Singapore Airlines (SIA). Cathay, announcing a first half loss of HK$935 million (US$121 million) in 2012, has been actively upgrading its cabin product, including the introduction of a premium economy class. Cathay is riding on its reputation as a premium carrier, voted the world’s best business class airline in the 2012 Skytrax survey (“Gleam of hope for Cathay Pacific in stormy skies“, 13th Aug, 12).
SIA too has awakened to the call to renew and refresh, announcing plans to revamp its cabin products that will see new seats, interiors and in-flight system. It is also giving its airport lounges a new look. All this, said SIA, aims at helping the airline “remain at the forefront of airline product innovation” (“Singapore Airlines needs fresh injection of excitement“, 22nd Aug, 12).
Image Courtesy of Seth Jaworski
To be fair, Qantas too has introduced measures to upgrade its cabin products. Joyce reported that the interiors of seven of a planned Boeing 747 aircraft refurbishment programme have been reconfigured with the Marc Newson interior. The flying kangaroo will also “refresh” 16 Boeing 767 aircraft with new interiors and individual in-flight entertainment through an iPad/Q Streaming initiative “as part of wider investment in the domestic customer experience”.
Qantas boasts its ranking as the most profitable domestic carrier in Australia and budget carrier in Asia. It has done much to improve the domestic product as well as push the low-cost Jetstar brand across Asia, setting up joint-venture bases in Singapore, Japan, Vietnam and Hong Kong of which Jetstar Hong Kong is planned for 2013, subject to regulatory approval. There is a natural tendency to favour and do more for the successful child, perhaps unwittingly, and the airline now faces a greater pressure to enhance its premium image.
However, Joyce presented a different perspective. He said: “While we are executing an aggressive strategy for Qantas International, we continue to invest in excellent product and service for our domestic and international businesses.”
The larger restructuring plan includes setting up an Asia-based premium airline to take advantage of the lucrative, growing Asian market, but for now that plan seems to have fallen through the cracks.
Recent rumour also has it that Qantas is considering an alliance with Emirates Airline, a move that would allow Qantas access to the wide African and Middle East networks of Emirates, and that Qantas could reduce operating costs by relying on Emirates as a transferee for its European traffic. Together with Emirates, it may be able to better meet the competition posed by other airlines such as SIA and Qatar Airways. But that too has remained as an uncertainty.
Moving forward, Qantas’ priority must be evolving a strategy to catch up with the competition and check the loss of customers to its rivals, if it wants to stay in the game. In a challenging and volatile environment, it has to be not only lean but also mean – even more aggressive than what Joyce already presented it to be.
August 28, 2012 - 10:48 pm
In 2005 Qantas signed orders/options for up to 115 Dreamliners for Qantas and Jetstar, providing the backbone of its new international strategy from 2008. Qantas launched the 787-9 (EIS 2009) , finally covering the 300 seat long haul gap left open by not ordering 777s, MD11 or A340s.
By now Qantas and Jetstar would have in service around 40 787-8s (EIS 2008) and 787-9 (EIS 2009), reducing fuel and maintenance costs, opening new destinations, fighting of competitors coming into secondairy airports with 777 and A340 and fighting Virgin Australia.
But everything went different. As Jon Ostrower of Wall Street journal reported:
Part of the problem is that delays in delivering the 787 are causing pain to airlines that is boomeranging back on Boeing.
The 787 is designed to be 20% more fuel efficient and have 30% lower maintenance costs than the Boeing 767, which Qantas had hoped to retire earlier. Airlines like Qantas haven’t been able to get their hands on the 787 to reduce their fuel bills.
When it first placed its order for up to 115 Dreamliners in 2005, Qantas hoped to have 28 in service by the end of 2011. To date, Boeing has only delivered a total of 17 Dreamliners to all airlines since September 2011.
“If it had been delivered on time it would have been great for Qantas,” said Mr. Harbison of CAPA Center for Aviation. “It would have fixed almost all the problems in their international business.”
Boeing will pay 440 miljon dollar as compensation and only 15 787s remain on firm order for Jetstar, but the damage to Qantas International because of having to continue flying on with fuel guzzling, wrong sized 747 and 767s is enormous and hard to repair short term.
QF is biting its tongue, looking forward and remains professional regarding this fleet drama, but I think the old relation between QF and Boeing is seriously damaged.
http://www.ausbt.com.au/qantas-ceo-very-p-ssed-off-with-boeing-over-787-dreamliner-delays
August 30, 2012 - 4:31 am
Wow, another anti-Boeing post by Keesje. Surprise!
The claim that Qantas’ troubles are caused by Boeing ignores so many factors in the landscape, not the least of which is the emergence of 5 star Middle Eastern carriers. Having the 787 certainly would have helped matters, but to sight it as causal puts the cart before the horse. Every other airline has dealt with 787 delays without these same problems. How? Well, having a sufficient fleet of A330s and 777s certainly did not hurt. Instead, Qantas went all in on the A380 – an expensive airplane with very little route flexibility and cargo revenue generation. Both the A380 and 787 represent new build aircraft with high risk of developmental delay. What did Qantas do to mitigate these risks? Almost nothing as near as I can tell. This mistake was compounded by high fuel prices and a volatile market for passenger travel to/from Europe.I feel bad for their employees, but their management seems to have followed the ignorant mistakes their American counterparts made in the 90s. AJ should be fired!
August 30, 2012 - 11:36 pm
Well said, Eric!
When the CEO of Qantas said he was very PO’d at Boeing I laughed because I thought the timing was very convenient. I understand he is fighting for his job and all, but making excuses for poor performance by pointing fingers at someone else does not solve problems. It just makes him look ridiculous. This is not professional behavior and if Qantas was really biting its tongue, as keesje is claiming, than the CEO would never have made the comment.
August 31, 2012 - 9:23 am
It is also interesting to see the ANZ second half result which runs in stark contrast to Qantas. They accomplished this on the backs of a big twin fleet (777 and 767). They are also awaiting their much delayed 787s, but somehow managed a profit operating in the same environment as Qantas. Certainly, the 747-400s do not help when fuel prices are high, but perhaps the A380 is the true Achilles heel at Qantas.
August 31, 2012 - 8:05 pm
Eric, Michael, but what if Boeing is to blame for a good part? Or is that not an option?
August 31, 2012 - 11:56 pm
Of course, having the 787 would have helped Qantas, but to what degree we will never know. My point is that no one else was getting their 787s either. Therefore, the playing was level, and we never heard any of them blaming Boeing for their results. The A380 was also delayed, and in reality is still well behind on their delivery schedule. Nobody is blaming Airbus for their results. Similarly, nobody will be crediting Boeing or Airbus when they post a good result on the backs of their aircraft designs. They’ll be taking the credit for themselves (management). It is somewhat like Obama still blaming GWB for the US economy in 2012 when you know he would taking all the credit were it better. You cannot have it both ways!
September 1, 2012 - 8:55 am
If we look at the competition they are using 777s and A340s. QF never ordered those, in 2004/2005 decided they skip them when they launched the slightly smaller, far more efficient 787-9, ordering dozens for entry into service from 2009, supplementing the 787-8s. Bypassing hubs flying directly into places like DFW. Replacing aging 747-400s, increasing frequencies, reducing costs.
http://blogs.crikey.com.au/planetalking/2012/09/01/qantas-emirates-route-hand-over-expected-within-days/
September 2, 2012 - 3:36 am
Keesje,
I hope you are not insinuating that A340s would have improved the Qantas result. Certainly not, for those are readily available at very cheap prices. The 777, on the other hand and especially the -300ER, would have been a much better choice as the 747-400 replacement than the A380. Qantas could have had more airplanes on the delivery schedule and at a better price. As an O&D market airline, they could be operating more routes with higher load factors and more cargo, all with less trip cost and greater route flexibility. These could have simultaneously replaced the 400s and bridged the gap until the 787/350 technologies open the much anticipated “long thin routes” profitably. This is the tactic that CX currently employs. For the reduction of risk, they continue to delay a decision on VLJs until the market has better transparency.
Cheers!
September 2, 2012 - 5:13 pm
Imaginairy 300-350 seat QF A340s could have lowered the cost base replacing long haul 747s, opening up new routes. Ask Virgin and many others operating them to Australia. Anyway all aircraft to the US are payload restricted, specially the big twins.
September 3, 2012 - 11:42 am
Well, I think it goes without saying that there were and are significantly better options in the 300-350 seat market than the A340. If this were not the case, EADS would still be producing them. As I said in an earlier post, A343/5/6s are all available at very low prices, much like the 744, because they burn too much fuel.
September 4, 2012 - 5:09 am
Yes, I’ve read many Boeing folks telling / repeating the ever better story of how the 777 beat the A340, some even wrote books about it. 4 engines for long haul, hahaha
Then the A340s little sister, A330, hears about it got angry and finished off both the 777200/ER and 767 and forced Boeing to do a plastic A330, the Dreamliner.
(The second part of the story isn’t part of the legend).
September 4, 2012 - 5:35 am
It’s sad that this rivalry is personal for you. You are right though, the A330 is a better medium haul airplane than the 772ER. Finishing off the 76 however, I think not. They are different sized airplanes and the 76 still appears to have legs, as does the 330. That said, Qantas International is a long haul airline and the 772LR and 773ER have no Airbus equal at the moment. I thought we were talking about long haul. When did that change?
September 10, 2012 - 6:58 pm
[...] International unit remains the key to improving the profitability of the Qantas Group (“Qantas backpedals on poor results“, 28th Jun, [...]