Qantas’ dismal performance: The singer or the song?

Courtesy Getty Images

Courtesy Getty Images


QANTAS reported a loss of A$252 million (US$225) for the half year (July-December 2013) which was worse than the loss of A$91 million last year. At the same time the Australian flag carrier announced it would cut 5,000 jobs as part of a three-year plan to reduce costs by A$2 billion. Other measures include deferring delivery of eight Airbus A380 for the parent airline and three Boeing B787 Dreamliner aircraft for budget subsidiary Jetstar as well as relinquishing some of the routes.

Qantas CEO Alan Joyce said: “We must take actions that are unprecedented in scope and depth to strengthen the core of the Qantas Group business.” He added: “We have already made tough decisions and nobody should doubt that there are more ahead.” So what’s new? One may then wonder if the dismal performance of Qantas is more about the singer than the song.

Mr Joyce attributed the poorer results to competition, high fuel prices and unfavourable foreign exchange rates – all the stock answers you can expect from any airline in a similar situation, not that they were in any way invalid but that they were definitely not the unusual suspects. The unions, naturally disenchanted by the announced staff cuts, had suggested that this might have been in part due to creative accounting in recent years.

It does not bode well for Qantas when the global economy is on the road to recovery with some major airlines already reporting profitable performances in sync with the optimistic outlook forecast by the International Air Transport Association. The flying kangaroo has been struggling to regain profitability on the back of a major restructuring initiative filled with such promise that would have observers believe in its certain recovery although not everyone was convinced. Something seemed to have gone amiss along the way.

A major thrust of Mr Joyce’s “transformation” strategy was to capitalize on the growth in Asia, which saw Qantas mounting more direct services in the region. But the flying kangaroo suffered from an image problem that even Australians preferred to book with competitor airlines such as Singapore Airlines (SIA) and Cathay. 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.” That might still hold true considering the airline’s latest results. The Asia plan to avert what Mr Joyce then referred to as an Australian “tragedy” was to launch a premier regional carrier based in Asia code-named RedQ, which never took off, and to promote Jetstar aggressively across the region. Jetstar Japan was launched in 2012 jointly with Japan Airlines, and Jetstar Hong Kong was established with China Eastern Airlines much to the displeasure of Cathay. But even Jetstar, once the star performer, was reporting a loss. Did Mr Joyce misread Asia and underestimate the competition? Was there a mismatch between his enthusiasm and the reality? Or did the fault lie in the execution?

Today Mr Joyce is reiterating the call for renewal he made two years ago when, announcing a 52% dip in first half profits, he said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” At that time, 500 jobs were axed consequently. Then Cathay also reported a plunge of more than 60% in full-year profits (2011) and the results for SIA were just as lacklustre. The airline industry was suffering. To avert further losses largely incurred by its international arm, Qantas split its international and domestic operations into separate autonomous units in May 2012. Mr Joyce could be right that international and domestic operations faced different demands and challenges, and an independent Qantas International would have a freer hand in pursuing the Asia dream and other channels of growth. He said then, “We have begun the process of restoring Qantas International to a sustainable position.” Then as higher losses were expected for the full year came the glimmer of hope when the mega alliance with Emirates Airlines was announced, an initiative that looked likely to hurt rival SIA with the shift of Qantas’ hub for the kangaroo route from Singapore to Dubai that expands its accessibility to Europe, the Middle-East and Africa through Emirates. While Mr Joyce admitted that the alliance had cushioned the losses, the impact was far below expectations.

Only last year did Qantas send out signals that it was back on course, reporting a reduced loss for the first half. Mr Joyce, pleased with the turnaround, said: “We are now beginning to realise the benefits of the tough decisions that we have made over the past 18 months.” The improved performance of international operations was encouraging. It turned out to be a lull before the perfect storm. To be fair to Mr Joyce, one has to take a long term view of the strategy and recognize that external and unexpected events can affect the initial plans adversely and avert the desired results, and that under the circumstances a change of course would be expected of any dynamic organization. So one should cut Mr Joyce some slack lest one becomes too hasty in one’s judgement of the supposed “Qantas transformation program” which he would now accelerate to achieve a cost reduction of A$2 billion by 2016-17.

But the future looms large with uncertainty. It is not quite clear how Qantas would move ahead as the added measures appear to be short term and expedient, which may decelerate the growth of the airline and open up more room for the competition. A press release issued by the pilots’ association stated: “Qantas management has today outlined a demolition of jobs, but failed to follow through with a strategy for how it will grow the business and serve the national interest.” As if in preparation to ameliorate the negative impact of the devastating results, Mr Joyce has been harping on the Australian government’s unfair treatment of Qantas compared to Virgin Australia. The rules limiting foreign ownership have apparently put it at a disadvantage; rival Virgin on the other hand enjoys the investment that comes from partial ownership by Air New Zealand, Etihad Airways and SIA. Mr Joyce asserted: “The Australian domestic market has been distorted by current aviation policy.”

That restriction might be a hurdle to Qantas’ expansion, but it did not explain satisfactorily the failure of the airline to perform in progression with Mr Joyce’s grand restructuring plan. Above the sound and fury, as Australian Prime Minister Tony Abbott had commented, Qantas would have to first put its house in order.

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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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