Qantas backpedals on poor results

Photo courtesy of Qantas

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 Jun 30 – 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 EBIT of A$203 million, up A$34 million or 20 per cent, and the latter an Underlying EBIT of A$231 million, up 14 per cent. Ancillary revenues grew 27 per cent. 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.

It’s 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 per cent. 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 Airlines and Qatar Airways.

Mr 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, rationalizing 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 B787-9 Dreamliner aircraft worth A$8.2 billion. Mr 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.

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.”

To be fair, Qantas too has introduced measures to upgrade its cabin products. Mr Joyce reported that the interiors of seven of a planned Boeing 747 aircraft programme have been reconfigured. 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 (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, Mr 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 Airlines, 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 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 Mr Joyce already presented it to be.

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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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