Qantas’ stellar turnaround: To whom is the credit due?

qantas- courtesy qantasQantas reported a stellar half-year performance (June to December 2014) which may have surprised some observers. To whom is the credit due? Or, is this willy-nilly a matter of rolling back on a favourable global economic tide?

The Australian carrier made an underlying profit of A$367 million (US$289 million), its best in four years. This was all the more impressive following on a record annual loss of A$2.48 billion ending in June last year. Plus, the international arm made a profit of A$50 million for the first time ever since the global financial crisis, during which long period it was bleeding the airline at the expense of domestic earnings and which led Qantas to decide on splitting its operations into separate autonomous divisions. The domestic market continues to be profitable, with Qantas and low-cost subsidiary Jetstar reporting earnings close to A$300 million.

Courtesy Qantas

Courtesy Qantas

Once again, Qantas’ success reads like an Alan Joyce story. Chief executive Joyce faced pressure to resign following the “shocking” dismal result last year, but was now able to say, “We will be a company able to withstand tough times, capitalise on the good times, and deliver sustainable and attractive long term returns to our shareholders… And today we can see a bright future for this great Australian company.” (Qantas’ performance: Is it about the singer or the song? 15 Sep 2014)

Mr Joyce attributed Qantas’ turnaround to “the impact of transformation”, without which he said the airline would not be profitable. The restructuring started in 2011 when Mr Joyce took action to avert what he called an Australian “tragedy”; among the proposals was an expanded thrust into Asia that would include setting up a premium airline in the region and plans to lift its international operations out of the red. It has been a long and rough road riddled with industrial disputes and staff strikes, Mr Joyce in 2012 blaming the unions for damaging the Qantas brand and driving away customers. He said then: “We continue to work towards returning Qantas’ performance to profitability in the short term.” The Asia-based premium carrier never took off, but international operations are finally making a profit in 2015. Has it taken too long? It depends on how you define the short term. In fact, Mr Joyce reminded his distracters that “we expect to achieve that goal this year, on target.”

For an industry that is highly capitalised, competitive and weighed down by long implementation lead times, up to five years may not be considered that long a time to expect sustainable results. But investors are apt to be impatient people. Mr Joyce’s problem may have to do with the lack of certainty in the direction towards recovery from 2011 till now. In June 2011, Qantas expected deeper losses for its international division for the financial year in question, affecting group’s profits with a forecast dip by as much as 90%. The red ink was later confirmed with the carrier posting a net loss of A$244 million, largely because of the deepening loss of A$450 incurred by international operations. The much hyped Qantas-Emirates tie-up could not save the Australian carrier.

The following year, Qantas bounced back with improved results for the first half (July to December 2012), helped by reduced losses for the international division. A pleased Mr Joyce, said then: “We are now beginning to realise the benefits of the tough decisions we have made over the past 18 months.” This was a direct reference to the transformation programme that includes additionally the restructure of the airline operations into autonomous domestic and international divisions. Full year results showed that losses for international operations shrunk by half to A$246 million. Mr Joyce pointed to the strategic alliance with Emirates as contributory. 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.” Few observers would dispute that.

Then came another setback as Qantas announced at the end of 2013 it was expecting a half-year loss of up to A$300 million for the Group, so much so that Standard & Poor downgraded its credit rating to below-investment level. The only way forward was more drastic cost-cutting measures that would include shedding 1,000 jobs. Mr Joyce said: “We will focus relentlessly on cutting costs and improving productivity, while maintaining our competitive advantages as a business.” The confirmed loss later of A$252 million was worse than the loss of A$91 million a year ago. What much more new could Mr Joyce say but the promise of more “tough decisions” ahead? Was the transformation package really working? One thing that it may have failed to adequately anticipate or address is the growing competition posed by rival Virgin Australia. At that material time, Virgin CEO John Borghetti was quick to point out that although both airlines lost money, Virgin outperformed its rival in key measures of growth such as yield and load factor.

What happened next was the carrier’s biggest loss in Qantas’ history – A$2.84 billion for the year ending June 30, 2014. The uncertainty that has marked its road to recovery might cast doubt on its future even as its most recent report card showed yet again a turnaround. Will history repeat itself? Given that the original transformation programme is running out its five-year course, are the positive results finally here to stay, attesting to its success? One may be cheeky to ask if indeed Mr Joyce had been forced out following the dismal performance last year, would Qantas have achieved the same result any way in a year helped by the recovery of the global economy and the unprecedented fall in the oil price that has benefitted not just Qantas but other airlines as well?

But all’s well that ends well, and give credit where it is due. Qantas’ transformation success, according to Mr Joyce, may be quantified by a: lower cost base; free cash flow and revenue growth; an improved fleet, product and service; strengthened customer satisfaction; reduced debt and strengthened balance sheet; improved return on invested capital, the youngest fleet age in more than 20 years; and fleet simplification from eleven to nine aircraft types, aiming for seven. He said: “What sets this program apart is that we are reducing costs permanently, while at the same time delivering Qantas’ best ever fleet, product and service.”

Moving forward, the real test must be performance consistency to instill confidence. Mr Joyce added: “We now have a strong foundation for sustainable growth.” For that, popping the champagne is in order.

This article was first published in Aspire Aviation.

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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