A perfect storm for Qantas

It was a perfect storm for Qantas, with all the elements ripe for the anticipated drama. The Australian flag carrier lost A$252 million (US$225 million) for the FY2013/14 first-half ending December 31st and 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 3 Boeing 787 Dreamliner aircraft for budget subsidiary Jetstar.

Qantas chief executive Alan Joyce said: “We must take actions that are unprecedented in scope and depth to strengthen the core of the Qantas Group business.”

All this cannot be new to Joyce, who went on to say in a statement issued by the airline: “We have already made tough decisions and nobody should doubt that there are more ahead.” One may then wonder if the dismal performance of Qantas is more about the singer than the song.

The latest reported loss of A$252 million worsened from the previous loss of A$91 million. Joyce attributed this 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 the usual 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.

The drama lies not in the loss per se but rather the deeper plunge that came at a time when the global economy was 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 (IATA), and that it should come in spite of a series of positive indicators presented by the airline that its restructuring plan launched in 2011 was working or so as it would have observers believe although not everyone was convinced. Something seemed to have gone amiss along the way.

A brief recapitulation of the events in the flying kangaroo’s recent history will make a clearer picture.

Asia was to have been the answer to avert what Joyce referred then to as an Australian “tragedy”. The plan was to launch a premier regional carrier based in Asia code-named RedQ, which never took off, and to extend the reach of Jetstar, which it did meet with some success. Jetstar Japan based in Narita was launched in 2011 jointly with Japan Airlines and Jetstar Hong Kong founded jointly with China Eastern Airlines much to the displeasure of Cathay Pacific. It was a sound strategy to focus on the growth in Asia that 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 Pacific. According to 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. Even Jetstar, once the star performer, was reporting a loss. Did 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 Joyce is reiterating the call for renewal he made 2 years ago when, announcing a 52% dip in half-year 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 in 2011 and the results for SIA were just as lacklustre. To avert further losses incurred largely by its international arm, Qantas split its international and domestic operations into separate autonomous units in May 2012. 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 Airline 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. The tie-up expands Qantas’ accessibility to Europe, the Middle-East and Africa through Emirates. While Joyce admitted that the alliance had cushioned present losses somewhat, 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. 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 Joyce, one has to take a long-term view of the strategy and recognise that external and unexpected events can affect the initial plans adversely and avert the desired results, and that a change of course would be expected of any dynamic organisation. So one should cut Joyce some slack lest one becomes too hasty in one’s judgement of the supposed “Qantas transformation programme” which he would now accelerate to achieve a cost reduction of A$2 billion by 2016-17.

But after all that sound and fury, the stage looms large with uncertainty. It is not quite clear how Qantas would move ahead as the added measures that include relinquishing certain routes appear to be short term and expedient, and thus 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, 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. 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 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.