Qantas’s major A$2.8 billion ($2.6 billion) net loss for the 2014 fiscal year is the price it has paid for holding to a strategy that, arguably, has been set by its competitors and has failed to achieve its objectives.
In its key domestic market, the airline has been in a capacity battle as Virgin Australia expanded to appeal to the lucrative corporate market, following its long-held mantra of keeping to a “profit-maximising” 65% line in the sand. Qantas chief executive Alan Joyce has now softened his rhetoric around that line, while capacity is being kept flat until the end of the year – much to the relief of shareholders.
The pain Qantas is suffering domestically is a result of its failure to really take seriously the Virgin Australia threat to its mainline business. It decided to negotiate the hazard with Jetstar, but Virgin has bolted up-market as Qantas now tries to close the stable door.
The bigger problem, however, has been its international business, which has been bleeding from the major capacity added to the market by carriers in Asia and the Middle East. Qantas, which arguably had one of the most powerful and recognised brands in the business, failed to really build that into a competitive advantage.
As it works to lessen its international pain, the airline has been able to gain some more points on its virtual network via the tie-up with Emirates, but it is becoming abundantly clear that the Dubai carrier has been the bigger winner.
“Is it working for us? Yes,” Emirates Airline boss Tim Clark told Airline Business last year. “We’ve seen growth in all our segments year-on-year pre-Qantas/post-Qantas, so it’s actually quite a good story. I hope it works for them.”
The solution for Qantas appears to be to split out into its own holding company that will allow up to 49% foreign investment. But with an uncompetitive cost base and product offering, as well as a shrinking network and niche fleet, not even best friend Emirates wants to buy in.
Qantas – like other legacy network carriers – faces the problem that its international business is too high-cost to compete with foreign carriers. But it now lacks the reach to be relevant to most travellers. The network changes leave it with a fleet too weighted towards big jets: Qantas currently operates two-dozen Airbus A380s and Boeing 747s. Meanwhile, its Airbus A330s have an outdated product and lack the range to truly allow Qantas to open up new city pairs.
Qantas’s record of investments in Jetstar’s Asian franchises is also looking rather pale. Despite 10 years in Asia, the offshoots in Singapore, Vietnam and Japan have underperformed in the face of stiff competition from Tigerair, AirAsia and more latterly VietJet, while the future of the proposed Jetstar Hong Kong operation remains in limbo.
Nevertheless, Joyce maintains that there is “tremendous opportunity” in Asia – just how far away Qantas is from realising that is anyone’s guess. To most, the ongoing investments in those offshoots just appear to be good money going after bad.
To be fair, the A$2 billion cost-cutting programme Joyce is implementing should sharpen Qantas’s competitiveness and help to deliver the projected return to profit during the first half of the next fiscal year. But deeper than that, as with any business in a highly competitive market, Joyce and his team must look at innovative ways to gain a competitive advantage over its rivals and start growing revenue again.
Qantas has been boxed in, and instead of leading the way, its strategy is being set by competitors – both domestically and internationally. Put simply, Qantas needs to become proactive and lead the market, rather than be led by it.
But thinking outside of the box rarely comes from within it. Perhaps efforts to secure an investment partner can help inject fresh ideas into the flying kangaroo.
Source: Airline Business