Can Asia heal Qantas?

Qantas is looking to Asia to avert what its chief executive Alan Joyce called an Australian “tragedy”. Mr Joyce said: “To do nothing, or tinker around the edges, would only guarantee the end of Qantas International in our home Australian market.”

The Australian flag carrier is expecting to post an A$200 million (US$214 million) loss for its international operations for the financial year ending Jun 2011, in contrast to the group’s forecast of an A$500 to A$550 million profit. That, said Mr Joyce, called for a “fundamental change” in its strategy.

The restructured Qantas will launch two new airlines in Asia: a budget joint venture with Japan Airlines (and Mitsubishi Corporation) to be based in Japan – not to be outdone by All Nippon Airways and AirAsia in a similar move announced earlier – and a new premium service to be headquartered in Asia where it believes the cost to be much lower.

It is not unexpected that Qantas should look to the growing Asian market for healing. According to International Air Transport Association, this is the only region where demand will outpace supply. In particular, the budget market is a goldmine when you consider the potential of China, India and Asean Open Skies to be implemented by 2015. It does not make sense that Qantas should be losing market share in a growing market. According to Mr Joyce, it has plummeted to a low 14 per cent.

But can Asia heal Qantas?

Asia promises plausible recovery in the foreseeable term, but it is not a quick fix. Qantas will continue to face challenges it already faces in the region and these are no different from what it already experiences in other parts of the world. The flying kangaroo’s problem is more worldwide than it seems and demands a total package solution. To begin with, it is plagued by an image problem. 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.” Obviously, Qantas is not Australians’ favourite airline, nor that of their visitors. This is not just a home problem.

No surprise how the competition always drives rival airlines to move in the same direction. The Asian budget pie is too tempting to resist. So too is it a matter of time before full-service airlines, reporting dismal results, begin to realize not only the erosion of their market by budget carriers encroaching on their turf but also new potential as the budget market expands. Qantas is not alone in feeling the pressure; Singapore Airlines (SIA), doyen of premium service, is feeling it too.

Hence, there is a plethora of budget carriers and joint ventures already dotting or set to fly the Asian skies. Qantas is merely following in the footstep of some of its Asian rivals including SIA, which has set up its wholly-owned budget subsidiary which will take to the sky in 2012. In many ways, Qantas and SIA are very much alike; Qantas already owns Jetstar Airways (Australia) and has a 49 per cent stake in sister company Jetstar Asia, and SIA owns 32.9 per cent 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. But Cathay has taken but an alternative approach to the same problem by considering instead the introduction of a premium economy class to retain and capture down-graders (and possibly attract new borderline up-graders as well). The Hong Kong-based carrier Cathay is also well complemented by wholly-owned subsidiary Dragonair which operates an extensive China network and to other destinations that are normally served by budget carriers.

Not differently, SIA also has in its stable wholly-owned SilkAir, which operates to several smaller destinations in the region, many of which are not served by the parent airline.

Numbers may be the name of the game as Qantas too decides to add yet another premium airline to its stable, this time to strategically situate it in Asia where the action is. Qantas has not confirmed where this new baby will be based, but it is said to be considering whether it should be one of three ports – Singapore (Changi), Hong Kong or Kuala Lumpur.

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 utilization and taking advantage of Changi Airport’s connectivity. If it opts for Singapore, it will be a natural extension or formalization 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 per cent year on year. It would boost traffic by full-service airlines which grew by only 6.6 per cent compared to 25.2 per cent by budget carriers. But what’s good for Changi may not necessarily be so for SIA. 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.
Hong Kong looks like an attractive alternative, considering its China gateway advantage which favours more the budget initiative. But Cathay Pacific Airways is no less a formidable competitor than SIA.

Kuala Lumpur may be less attractive in terms of facilities and connections, but it may offer a safe launching pad into the region if supported by lower costs. The Malaysian authorities will be keen to anchor Qantas to help grow the airport. In a share-swap, AirAsia and compatriot Malaysia Airlines (MAS) pledged to work together to reduce cost and take on the competition. Qantas is said to engaging AirAsia in a relationship of co-operation and has announced it would support Malaysia Airlines’ entry to the OneWorld Alliance. It cannot be ruled out that Qantas (together with Jetstar) may band with the Malaysian carriers to take on the regional competition while retaining its presence in Singapore.

If numbers is indeed the name of the game, then partnerships in any form can help increase an airline’s presence, especially in places where it would otherwise be unviable for it to operate on its own or where restrictions limit its reach. The dictum is, if you can’t do it alone, get a friend to help. Suffice it be said that Qantas viewed the recently inked co-operation agreement between SIA and compatriot Virgin Australia (formerly Virgin Blue) with some concern. The alliance offers SIA passengers seamless connections to a range of Australian destinations served by Virgin and reciprocal lounge access to eligible customers of both airlines. Some observers see this as a step nearer for SIA to achieving its dream of flying trans-Pacific from Australia to the United States.

In this business, AirAsia chief Tony Fernandes might tell you – judging by his success in forging budget ventures in various places including Thailand, Vietnam, Japan and the Philippines – having friends helps.

Mr Joyce had said: “We want to grow with Asia.” It makes a lot of sense geopolitically. Qantas’s increased presence will no doubt heighten the competition in the region. Fortunately for the Australian carrier, Asia adopts a more open skies policy than most, especially Singapore which was an early supporter and continues to be a champion of that policy – no less a reason why aviation in the region is growing. If Qantas fails to heal, it shall not be said it is because of the competition.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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