Inheriting a 90-year old brand presents a daunting challenge, but Qantas chief executive Alan Joyce believes diversity is the magic ingredient for success, writes Siva Govindasamy in Sydney
Whisper it softly, but some believe Qantas is on the wane. Alan Joyce gives his critics short shrift. He flags the group's A$267 million ($245 million) second half operating profit, when all around it were bleeding red ink. His secret weapon? A two-brand strategy, with full-service, premium Qantas on one hand and low fares Jetstar on the other.
Being able to tune the two brands differently depending on market conditions has given Qantas a major boost. And Qantas is virtually the only traditional airline with a low-cost subsidiary success story. Elsewhere, the Qantas Frequent Flyer unit made A$157 million, which, even after an exceptional boost of A$78 million, well in excess of Qantas mainline's A$60 million, demonstrating why it has been considered as a spin-off candidate. Meanwhile, Jetstar made a record A$121 million profit - double the mainline airline's result.
©All pictures Luis Enrique Ascui
"Qantas has an amazing brand that commands fantastic loyalty," says chief executive Alan Joyce, talking to Airline Business at the carrier's downtown Sydney office, which overlooks the city's famous harbour. "We retained the corporate market, despite the downturn, and that will grow in the coming years. A lot has to do with what we offer."
Yet the iconic brand, one of the most famous in the world, faces numerous challenges as it emerges from the devastating downturn. For example, cynics might suggest that Jetstar has eclipsed the mainline operation as a business.
Joyce disagrees: "We ask Australians who is the best for business and Qantas is miles ahead. Jetstar and Virgin [Blue] don't appear. That is why we have 80% of the corporate market. That is why Qantas provides 33 flights a day between Melbourne and Sydney, where there is huge demand for its premium product. We see little cannibalisation on the 26 routes operated by Qantas and Jetstar simultaneously. We see less than 1% of the corporate market travelling on Jetstar.
|Alan Joyce tells us about the Qantas strategy for facing up to competition on the Kangaroo and transpacific routes. Watch full screen.|
"Look at the product - we have always been consistently rated among the top five carriers in the world," says Joyce. "You look at market research and customer satisfaction surveys, and the first-class product has unbelievable customer satisfaction. Our lie-flat business class seats are fantastic. We have fantastic customer service and superb meals." Yet the premium market is under pressure and almost every full service carrier has suffered massive drops in first and business class since 2008.
Qantas' first Airbus A380 began operations on the Melbourne-Los Angeles route in October that year, just as the financial crisis began to hit the world. As the downturn unfolded, Qantas began to re-evaluate its plans and unveiled an A$400 million fleet revamp plan this February. This includes removing first-class seats from nine Boeing 747-400s, and changing to a three-class configuration that offers 58 business seats, 36 premium economy and 265 economy seats, with the amenities upgraded to the latest offerings like those available on the A380s.
Qantas' A380s, which include six in service and six more due for delivery up to mid-2011, will continue to fly with a four-class configuration. However, they will be refitted to reduce business seating and increase premium economy and economy seating. The remaining eight A380s, due for delivery from 2012, will come in a three-class configuration without first-class cabins.
For Ireland-born Alan Joyce becoming chief executive of Qantas 17 months ago was a proud moment. The softly-spoken 43-year-old, who is not married, came to Australia in 1996 to join Ansett Australia after several years at Aer Lingus. He then went to Qantas to lead the airline's network planning, schedules planning and network strategy teams. He became Jetstar's founding chief executive in 2003, and headed back to Qantas in November 2008, becoming the tenth chief executive in its 90-year history. "Qantas has an unbelievable history, an unbelievable brand. I'm very proud to be the custodian of this history going forward." Qantas employs 35,000 people, who "have an amazing passion for the brand", says Joyce. "We have the diversity of 92 different nationalities. In which other country in the world would you have one of its major brands led by somebody who was foreign born? That is something to be very proud of."
This is a radical revamp for Qantas, the airline that started business class. It remains a full-service carrier and there will be more premium economy and business seats after the revamp. But Joyce says hard-nosed business decisions based on a new reality are necessary. For instance the demand for first class has been falling for the last decade, and was virtually non-existent on "marginal markets" after the crisis began.
"If you look at the product, what you have in business class today is what we had in first class 10 years ago. Premium economy is business class 10 years ago. The difference has narrowed over time," he says. "We see business and premium economy rebounding after the crisis, and that is why we are growing those. We are committed to first class, just in a more limited way."
Competition has also intensified. Qantas' traditional rivals include Singapore Airlines and Cathay Pacific, but Gulf carriers such as Emirates, Etihad and Qatar are now slugging it out on the Kangaroo route between Australia and Europe, in particular London. On the transpacific routes, Delta Air Lines and Virgin Blue's V Australia now compete with Qantas and United Airlines. Mid-downturn, when capacity was being slashed everywhere, it increased by 10% into Australia.
"The impression that Australia has a protectionist air transport market is laughable," Joyce says with a wry smile. "Take the transpacific routes. Continental, Northwest and American Airlines all competed in the past. We have had an oversupply of capacity with too many players, everyone lost money, the market rationalises back to a couple of players, gets to a period of profitability, and a few more players come back in. It is a cycle."
Qantas and its partner British Airways have an advantage on the Kangaroo route, he adds. "Through our joint services agreement and profit-sharing agreement with BA we have strengthened our position. BA is by far the largest corporate carrier in the UK, and we have a strong domestic network. That gives us strength and presence. In good times, it helps us to make good returns. As the market recovers and people start travelling in business class again, there will be good returns again."
The domestic market has also become tougher, with Virgin Blue and the Australian subsidiary of Singaporean low-cost Tiger Airways fighting for market share. "Not many markets are open like this. There's a foreign ownership limit everywhere else - in the USA, in Europe, in Asia, in Singapore. Every other market has restrictions. We don't."
Airlines such as SIA, which owns 49% of Tiger, have long said that Australia still has some restrictions, citing its long-drawn out but still unsuccessful attempt to get transpacific rights. Joyce, however, says that there has to be a level playing field.
"We are all for liberalisation, but it has to be equal. Singapore is a fair example. We are keen to go from there to Paris or Frankfurt - both very logical routes for us. But we can't go past three a week because of the bilateral agreement. Take Hong Kong, we can't go very much to the UK from there. Or China, which can be a natural hub, but is not because of restrictions," says Joyce. "Some carriers complain that they can't fly on some Australian routes. Well, I can list half a dozen routes that I can't fly on. Everyone in Qantas wants to move to a fully liberal market. We are not afraid of competition. We welcome it. But let's have a level playing field."
It also irritates him that some Asian carriers, whose number include oneworld partner Japan Airlines, and Gulf airlines, get government funds while Qantas, as a publicly listed firm, has to raise capital on either the equity or the debt markets. "It distorts the free market and is not good for any commercial company," says Joyce. "There are a few airlines in the region that are run well, with good balance sheets, cash balances and credit ratings that don't get the advantage that they should. If there were a truly liberal environment there would be fewer airlines. But governments are protecting and propping up their own airlines during the crisis."
Joyce took over from former chief Geoff Dixon in November 2008 as the crisis unfolded and high oil prices pressurised airlines. Qantas cut capacity, grounded, cancelled and delayed the equivalent of 56 aircraft to manage expenditure, looked again at its fuel hedging, and reduced staff numbers. It also raised equity and built its cash balance by 75% to around A$3.5 billion, saying that the extra liquidity helps in an uncertainty debt market to maintain credit ratings.
|Mention Qantas and, aside from the iconic Kangaroo logo, the other thing that probably springs to mind is the constant labour strife that the airline faces. Every year one or another of Qantas' many unions seems to lay down a strike threat. Among the most vocal has been the engineering union, which vehemently opposes the outsourcing of maintenance work to overseas facilities. Some believe that Joyce, who appears more conciliatory to the unions than his predecessor, got the top job as much for his level-headed approach and temperament as the sterling job he had done since joining Qantas. To Joyce, the unions and the airline each have a job to do, but that does not necessarily always need to lead to conflict.
"We have a lot of labour groups, that's true, but we also have good relations with our employees. There still are going to be union groups that will take an aggressive stand - that's their job. We will always defend the company, we've managed our way through it throughout most of history and will continue to do so," says Joyce. "There is a constant negotiation of agreements, but that's not different from any other company in Australia, and most of our agreements are renewed without hassle. We see our employee groups as our biggest asset. We probably have the most experienced pilots in the group, we have the most experienced engineers in the group, we have unbelievable customer service delivered by cabin crew. So we see these as assets, we have to get the engagement right and are really focusing on getting that right."
"Our take from the crisis was that flexibility is critical. My predecessor used to talk about the constant shock syndrome. That is a fitting expression of what we have come through. You know there are going to be events that are outside your control and can affect your business. The only way to cope with that is to have diversity. We are unique in that we have a full-service airline, a low-cost carrier, a solid frequent flyer programme, a freight business, and a travel agency. We have the diversity that a lot of airline groups don't, in particular the balance between full service and low cost."
And its low-cost unit Jetstar has been a stellar performer. It took over some of Qantas' unprofitable New Zealand and Japanese operations, became a buffer domestically, and is a major Asian carrier in its own right. Joyce, its founding chief executive, is very proud.
"Qantas is the only full service airline with a subsidiary like this. It is one of the largest carriers in Asia in terms of revenues and must be one of the most profitable airlines as a standalone. We celebrate it and it is not a threat to Qantas at all. If I was one of my peers and I had the challenges facing Qantas, but without the benefits that Jetstar brings, I would be worried. Jetstar gives us extra earnings and cash, and the ability to continue to invest in Qantas. It is a strategic benefit," he says.
Within Australia, Jetstar will add over 700,000 seats this year by increasing frequency on 11 routes and adding 77 new weekly return services. Internationally, its operations will grow in tandem with Qantas. It is likely to increase services to Japan, where it is fast becoming a popular brand. It could also complement Qantas' Shanghai and Mumbai services and serve secondary Chinese and Indian cities. "We operate Jetstar when a route is only marginally profitable for Qantas. Out of Australia, Virgin Blue is our major competitor. They have a good brand and a good cost base. But Jetstar is dominant in the low-cost space and Qantas dominant in corporate space. That combination squeezes Virgin strategically," says Joyce.
Outside Australia, Jetstar has a Singapore-based associate, Jetstar Asia, and it picked the island as its main Asian hub in January. It will base its largest number of Airbus A320s in the region at Singapore's Changi airport, and plans to introduce long-haul services using Airbus A330s. Capacity will grow 46% this year, with the Japanese, Chinese and European markets all on the near-term radar.
"Singapore is a logical base for flights to Europe, and we also see opportunities into other markets with A330s where A320s do not have range. Singapore will do very well for us to join up the dots with all of our Asian operations and enhance Jetstar's performance," says Joyce. Growing Jetstar will not come at Qantas' expense, he adds. The full-service carrier will add 340,000 seats this year within Australia by increasing services on popular routes such as Brisbane-Sydney and Adelaide-Melbourne, and operating the larger Boeing 767s instead of Boeing 737s on others.
"Hidden within the results is the fact that Qantas' regional and domestic businesses are very good performers. Its yield premium surpasses its cost differential in the domestic market, and maintained that for the last five years. Unfortunately, it narrowed during the global financial crisis as the business market went down. But it is widening again, and we think by end of year we will be back with Qantas as the most profitable carrier in the domestic market," says Joyce.
"Yes, Qantas has faced enormous pressure on international yields. Yes, it is underperforming given the capital that is there - we are not returning the cost of capital, but I don't think any airline is. But I am also comfortable because I know that we have a plan to turn around Qantas as the economy recovers."
That could include strengthening existing partnerships, such as those with BA and its other oneworld partners. Jetstar also broke new ground in January when it announced a strategic alliance with Malaysia's AirAsia, the first in the world to involve two low-cost carriers. They plan to tender for work such as ground handling together, and perhaps even influence the future design of aircraft. Cynics say that the agreement would not amount to much, but Joyce disagrees. "There are lot of innovations and real benefits coming through. We have had alliances like oneworld between full service carriers for a long time, and you benefit in terms of revenues. The focus here is on reducing cost, which is very important for low-cost carriers, and there could be real benefits of significance here," says Joyce.
There are no plans to convert this into an equity alliance, neither is Qantas actively looking to invest in another carrier. "The same issues continue to arise - you have the bilateral restrictions and you have the issue in some cases of national ownership. So we are not active in this space."
Qantas, says Joyce, remains confident about its prospects. "We celebrate our 90th birthday in November. We say that we are the most experienced airline in the world, the oldest continuous operating airline. To have longevity, you have to be flexible and adaptable. We continue to have both."