Qantas finds its route to profitability

Courtesy Getty Images

Courtesy Getty Images

The market is tough, admitted Qantas chief executive Alan Joyce when he announced the airline’s FY13 performance. Against that background, even as uncertainty lies ahead for the industry – with the looming fear of a Middle-East crisis as the political turmoil in Syria comes to a head, threatening yet another round of spiralling fuel prices – the Australian carrier deserved a well-earned moment to celebrate its steady recovery in international operations whose losses have shrunk by half to A$246 million (US$221 million).

Mr Joyce attributed the positive swing to Qantas’ alliance with Emirates although the full impact of that partnership would only be felt in 2015, by which time he expected the international arm would be back in the black.

He said: “The Qantas Emirates partnership gives the group a strengthened position on routes to Europe, the Middle East and North Africa, via the global hub of Dubai.” According to him, “Bookings have been very positive, running at about twice the level of Qantas’ previous code-share arrangements for flights to Europe.”

So it has emerged that Qantas has made the right decision – to ditch British Airways for Emirates and re-route the flights through Dubai instead of Singapore. That was a move that could be said to have changed the rules of the game, much to the credit of Mr Joyce. In his words, “It gives us a clear network advantage over our competitors to London and Europe.” That demonstrates how geography can shift with improved technology, enhanced by strategic alliances and positioning. However, Mr Joyce said “there is still a lot of work to do bedding down the partnership in FY14”, unwittingly suggesting that even that could change if taken for granted.

At the same time, Mr Joyce reiterated the importance of Asia in Qantas’ international operations as laid out in its 5-year restructuring plan now in its second year. The approach is one of providing “the best possible product and service on routes to major Asian hubs – and to extend our network through the right partners.” Using Singapore as a major Asian hub is not an entirely new strategy; Qantas has long been taking advantage of Singapore’s liberal aviation policies to connect passengers within Asia.

Besides Dubai and Singapore as part of restructuring the international network “around a series of global gateways”, there is no clear indication of what other hubs Qantas is considering at this moment or in the immediate future. Unless there are more strategically placed and at the same time more cost-effective alternatives, it is unlikely that Dubai and Singapore will lose their importance in this respect. Nor is there any pressing need for Qantas to dot more hubs across Asia, excepting perhaps a most likely third hub to be Hong Kong or an airport in mainland China to capture the Chinese market. Qantas will most likely look to working closely with partners such as China Eastern Airlines to extend its reach across the region.

Softened by the reduced losses of international operations, the Qantas group made a net profit of A$6 million, reversing last year’s loss of A$244 million. The earnings were also boosted by a settlement of A$125 million it received from Boeing following B787 order cancellations. Qantas Domestic, Jetstar and Qantas Loyalty continued to be profitable; however, earnings for both domestic operations and the budget carrier declined.

Increased competition was cited as a reason for the 21-per-cent dip in profitability of domestic operations to A$365 million. However, Virgin Australia, which has acquired a 60-per-cent stake in Tigerair Australia, is expected to report a full year loss of up to A$110 million, pointing also to a general slowdown in demand across the country. Mr Joyce remained optimistic about Qantas’ prospects vis-à-vis the competition, reporting a trend of corporate customers switching back to the airline, apparently “after trying the alternative”. Qantas’s share of the corporate travel market in Australia is 84 per cent.

Jetstar’s profits suffered a steeper drop of 32 per cent to A$138 million. However, the budget carrier remains a strong contender in the low-cost market in the region and a complementary arm of the parent airline if not a key extension of the Qantas network. Jetstar Japan, launched in July 2101 in partnership with Japan Airlines, has emerged as the leading budget carrier in Japan, outshining rival AirAsia Japan which has since been fully acquired by All Nippon Airways and renamed Vanilla Air.

Qantas will prove wrong critics who doubted the viability of a budget carrier in Hong Kong as approval for Jetstar Hong Kong – a partnership with China Eastern Airlines and Shun Tak Holdings – by the authorities looks set to be formalized. With the huge potential of the China market, there is little reason to doubt that the carrier will make some impact on a market dominated by Cathay Pacific and Dragonair.

Going forward, Mr Joyce said “the global outlook is mixed” with signs of recovery in America and Europe but the uncertainty of its sustainability. It being a volatile market, his commitment to focus on “the elements we can control” may be about the best that any airline can do under the circumstances, but within the framework of a disciplined programme such as one known as Qantas Transformation.

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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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