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ANALYSIS: Striking the right balance on labour

Qantas Airways chief executive Alan Joyce and his management team won the first hand of a highly risky gamble after its high-profile grounding of the airline in response to increasingly aggressive industrial action by its unions.

Flights resumed after the country's industrial tribunal gave the sides three weeks to thrash out a deal or be bound by the tribunal's arbitration. This ended several months of anguish for Qantas and its unions, which failed to reach an agreement despite several rounds of talks.

Yet analysts say the reverberations on the Qantas business could continue for some time.

Ratings agency Moody's placed Qantas on a review for a possible downgrade, saying the losses from the grounding and cancellations by customers could have an impact going forward.

"While the decision to terminate industrial relations actions by Fair Work Australia will potentially lead to enhanced certainty of industrial outcomes between Qantas and the three unions concerned, incremental earnings loss and impact on Qantas forward bookings, are likely to exert additional pressure on the ratings," said Moody's senior credit officer Ian Lewis.

Standard & Poor's revised its outlook on Qantas to negative from stable, citing the "severity of the negative impact" of the grounding and protracted labour dispute. "The industrial relations dispute presents possible downside risk to the rating, given the potential for on-going negative reputational damage to the airline and, more importantly, the potential impact on the airline's market position as a result of customer reaction or competitor response. Further, Qantas's relationship with employees or unions, if not improved, we believe raises uncertainty over Qantas's cost structure over time," said S&P analyst Danielle Kremzer.

Many applauded Joyce's tough stance. AirAsia chief executive Tony Fernandes weighed in on twitter, saying: "You have to salute Alan Joyce for doing what he's doing. This is not about workers vs management. It's about survival in the modern world."

Others, however, are a bit more sanguine. The chief executive of a leading Asia Pacific airline, who did not want to be identified, said: "This was a high-stakes poker game. The Qantas management threw in all they had to get the government to step in and the unions in line. The tribunal gave them what they wanted, but at what cost? This has soured the relationship with the employees, it has damaged the brand, and it has made the government angry. I'm not sure if Qantas needed to go to the brink."

Qantas is far from alone in facing labour issues and Joyce is not the first to take a hard stance. There were echoes of another Irishman, Willie Walsh, when he grounded Aer Lingus in 2002 while facing down strike action by pilots. And the issue is particularly strong at legacy carriers.

"If you are an established airline, over the years in a unionised environment cost and productivity terms will build up that make it very difficult to change," says CTAIRA analyst Chris Tarry.

"There are all sides to every story, but what we are looking at is the world has moved on and business as usual is not an option. So it's a question of how can they compete and survive?"

"Intensely frustrating" is how Mark Darby, ex-Baboo chief executive and one-time head of Caribbean operator LIAT, describes labour relations when they hit a brick wall.

"It's frustrating because airline management think [they] are entirely in the right but by the time you have got to the kind of stage Qantas had, it has become the final straw.

"There is a sense of frustration, partly from a management point of view, where you believe you have acted reasonably, but you believe groups of your staff have lost sight of reality.

"It's very easy to get caught out by stealth," Darby adds on airline labour costs. "You look back in around five or ten years and say, how did we get here? We used to be efficient. The only companies that have been able to change the game are those that come in with a fresh model and have been very rigid in terms of their model."

Tarry adds: "Fuel is not controllable. Labour should be, but it's not. Progress has been made in a lot of areas, but labour is often one of those insurmountable elements."

He adds: "In the case of Qantas, clearly the view has been taken that the prize is worth going for.

"Yes, there will be a cost attached, so you have be convinced you get the payback quickly and that they are tangible and not illusionary," he says.

"There is a challenge - how do you win them [passengers] back? It's about attractive offers." Qantas has already been prominent here, with its free flights offer to passengers hit by the grounding.

Ultimately, however, winning this battle with the unions is only the first step for Joyce and Qantas. The bigger challenge is to revamp its loss-making international business, and increase its focus on Asia via its upcoming premium carrier that will be based in either Singapore or Kuala Lumpur and a Japanese low-cost joint venture with Japan Airlines.

Qantas also needs to deal with a resurgent Virgin Australia on the domestic front, especially as its rival makes a play for its lucrative business market and ties up with Singapore Airlines, Air New Zealand, Delta Air Lines and Etihad for feeder traffic.

S&P cited these very reasons for a possible lower ratings, saying this would happen if the Qantas business profile "weakens over a prolonged period" or if there were "any major missteps in executing the new international strategies, in particular the new Asian premium airline".

Read our cover interview with Alan Joyce from 2010 on the challenges facing Qantas

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