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Airline Mismanagement

Qantas - once one of the world's best airlines - is struggling to make 'also ran' status these days.

There are a number of problems Qantas currently faces, and a number of reasons for these problems.

Happily, there is also an exciting new opportunity if it chooses to re-invent itself and its routes.

 
 
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Will Qantas Survive? Can it Survive?

Within its Problems Lies an Opportunity
 

A massive profit warning delivered much too late saw a third knocked off the Qantas share price in a single day this week.

 

 

Qantas, founded in outback Australia in 1920, is the world's oldest continuously operating airline.

But will it survive to its centenary in eight years time?  This is a question that five years ago seemed ridiculous to even ask, but which now seems very relevant and with an uncertain answer.

The last five or so years have seen one of the world's truly greatest airlines by any and all measures become a hollowed out shell of its former self, and even Qantas management seem barely able to create any credible enthusiasm for what the future holds.

Is Qantas a victim of world events, or a victim of internal mismanagement?  And - most important of all - what should it do to turn itself around?

Qantas - Once the World's Best Airline

Longer time readers will know that we have only a very few airline favorites (in addition to all the ones we dislike).  For the longest time, our most favorite of all airlines has been Qantas.

Since its privatization in 1993 (and probably prior to that time too) Qantas has been consistently an excellently managed airline, with a passion for excellence not just in its renowned safety record, but in customer service, and general management, and profitability.

By the late 1990s Qantas still enjoyed a massive market share of international traffic in and out of Australia and virtually owned the market between the US and Australia.  It had one of the youngest fleets of planes in the world, all of which were impeccably maintained without cost constraints, and was Australia's most respected brand.  In past years we've delighted in reporting on its huge profits - it has regularly been one of the world's most profitable airlines - and its ongoing success.

James Strong - Qantas' first CEO since its 1993 privatization, was a good leader, and was replaced by another excellent manager, Geoff Dixon in 2001.  The two of them successfully guided Qantas' transition from a complacent cost-encumbered government organization to a lean mean competitive and very successful airline.

But in late 2008, Dixon in turn was replaced by Alan Joyce, and - coincidentally or not - at about the same time, things started to go wrong.  Qantas has been steadily losing market share, both domestically within Australia and internationally on routes to other countries, and it seems all it can do to respond is to offer increasingly weak excuses for why its dwindling market share isn't its fault, and to float increasingly far-fetched turnaround plans.

Its fleet of planes is getting older and more worn out, with associated penalties in operational economics (such as fuel efficiency).

Qantas has now contracted out its engine maintenance, one of its notable points of former excellence, and - again by apparent coincidence - the old Rolls Royce engines on its 747 fleet are becoming alarmingly unreliable and problematic.

As for the new Rolls Royce engines on the few A380s Qantas has accepted (before deferring future deliveries), they have also had some headline causing problems that nearly resulted in tragedy and the complete loss of an A380 in November 2010.

Qantas Routes in Decline

Qantas has turned its back on its once most important market - what was known as the 'Kangaroo route' from Australia to Britain; so much so that many of its flights now only go halfway to Europe, with passengers then having to transfer to a British Airways flight for the remainder of their journey.  We have yet to be convinced of the rationale of an airline not flying its own planes on a profitable route, and passengers for sure dislike the change of plane and airline halfway through a flight.

 If someone were to fly on a major Qantas competitor such as Singapore Airlines or Emirates, they could go from many Australian cities to many European cities with only one change of plane, and staying on the same airline all the way.  But with Qantas you'll likely have to change airlines plus change planes twice, including backtracking from London back east to wherever in Europe you actually want to travel to, on a much more time consuming total itinerary.

As for North America, Qantas recently ended its decades of service between the US and New Zealand, and also surprised most commentators by withdrawing from San Francisco (for a second time) in favor of a problematic route from Dallas (problematic in the sense that the distance is right at the limit the 747s can fly, so on occasion, passenger bags have to be left behind due to weight restrictions).

Market Share Loss

Historically, back in 1976 Qantas had a massive 46% market share of international traffic in and out of Australia.  By 1996 this had moderated slightly, down to 39%.  Market share continued to drop, and by 2000 it was down to 35%.  Nowadays, it is at about 19%, although this 19% share is joined by the market share now claimed by its low-cost subsidiary, Jetstar (about another 20%).

It could be argued that by adding together the market shares of Qantas and Jetstar that the Qantas group as a whole has maintained its hefty market share, but that's not the point of setting up a second brand - to cannibalize and take share from the parent brand.

The purpose of a second brand is to get more market share from other market segments which the parent brand can't reach without compromising its core image, allowing the now twin branded company to keep its existing market share under its primary brand and to seek additional market share from a secondary brand.  By this measure, Jetstar has achieved credible success as a second brand, but the prime brand - Qantas - has suffered massively.

Qantas has struggled with low cost carrier issues, and has entered into some ill-advised and short lived partnerships with other Asian carriers, while also making extravagant and hard to believe claims about future partnerships.

Unsurprisingly, none of which claims have yet to get anywhere close to reality, and we again feel that in seeking new partnerships and new ventures, Qantas management is closing its eyes to its core brand and the fundamental problems it has created for itself.

Qantas' Dreadful Week of Despair

In the last week or so Qantas has panicked by both the announcement of a 4% shareholding by Etihad in its major Australian competitor, Virgin Australia, and Etihad's intention to grow it to 10%.  Apparently this trivial share of Virgin Australia that would now be owned by Etihad is thought by Qantas to give its competitor magical powers that Qantas itself will be unable to respond to.  If this is even remotely true, it reflects very poorly on the diminished management capability of Qantas.

Qantas has also announced its plans to split itself into two airlines (one domestic, one international) which reverses its earlier union of its historically separate domestic and international operations.  All this seems likely to do is double up on management structures and overhead, for no clear good purpose (other than perhaps helping Qantas sell more of itself to international partners).

And, worst of all, Qantas has given a very last minute profit warning that due to the sudden surprise and substantial nature of it (a 90% drop in projected profit compared to the previous year, announced a mere three weeks before the end of its fiscal year), saw its shares lose a third of their value in a single day.

None of the reasons for this profit cut were new or sudden.  They had been steadily evolving and unfolding all year long, but Qantas management waited until almost the end of its fiscal year to update its profit guidance.  This appalling level of communication seems to be getting dangerously close to violating the rules of the Australian Stock Exchange, and investors responded by dumping Qantas shares, which lost a third of their already depressed value in a single day.

Relations between its unions and management - never very smooth - are these days about as bad as they can get, and it seems that its relations with its customers are no longer much to write home about, either.

Qantas' lack of respect for both its customers and its staff was most vividly shown in October last year when it suddenly announced a world-wide halt to all its flights, which it claimed was a sudden decision forced on it by the unions, but which in reality seems likely to have been plotted in advance, and was designed to pressure the Australian government to intercede in its union negotiations.

The sudden stranding of passengers all around the world ended up costing Qantas $100 million in above the line costs; beyond that, one can only guess as to the longer term impact on its reputation and its loss of market share from people who have decided they'll never again trust Qantas with their travel plans.

As for its marvelous safety record, Qantas continues to 'roll the dice' way too many times, with the most spectacular recent event being one of its Jetstar subsidiary pilots being distracted by using his cell phone and mismanaging a landing approach (with his co-pilot passively doing nothing to correct the matter) such that for two minutes neither pilot did any of the things they should have been doing to get the plane ready for landing - see this damning report here.

A Future for Qantas?

So what for Qantas' future?

Frankly, the airline's future looks terrible at present.  Qantas suffers a major route weakness in its chosen partnership with fellow Oneworld airline BA, forcing passengers to overfly all European cities and travel on another hour or two more west on to London before then changing planes and flying back east, another couple of hours or more, to the European city they actually want to reach.

Qantas is probably prevented from operating its own flights from a midway point such as Singapore or Bangkok and on to major European destinations (or even from a collector/feeder point in eastern Europe) due to the restrictions on international airline route treaties.  If this were possible, it would be Qantas' best bet.

However, looking at what is possible, Qantas would be better advised to work with, for example, fellow Oneworld airline Cathay Pacific (Hong Kong is reasonably directly en route from Australia to Europe) but even that would only give it about a third/half as many destinations in Europe accessible via two flights as are offered by Emirates or Singapore Airlines and a number comparable to that offered by Etihad, and still involves Qantas passengers both changing plane and airline halfway through their flight.

An interesting precursor to the announcement of Etihad buying into Virgin Australia was speculation that Emirates might be interested in buying into Qantas.  Certainly there's palpable rivalry between the two UAE airlines, and an Etihad participation in the other main Australian airline may indeed spur Emirates to respond by taking up a slice of Qantas.

But, just as the Etihad small ownership in Virgin Australia has little impact on Virgin Australia, an Emirates 5% - 10% ownership in Qantas would have little impact on that airline.  What would be more meaningful would be if Qantas were to supplement or replace its current close relationship with BA and instead start feeding passengers through Dubai and on to Emirates flights, and that's a decision that doesn't need any shareholding, just a willingness on the part of Qantas management to turn their back on a frankly not-very-useful relationship with BA and replace it with a much more useful one with Emirates.

Most of all, Qantas needs to stop whining about how the world is unfair.  Qantas was formerly one of the world's most successful and most profitable airlines.  The world hasn't changed.  The only thing that has changed is Qantas' management.

If Qantas is to turn itself around and return to its former glory, it clearly needs to have another management change to make this happen.  We hope this will happen urgently quickly while there is still some airline left to save.

Our Recommendation

Assuming that air treaties do indeed prevent Qantas from operating flights from another country and on to Europe, it should operate long haul flights from Australia to as close to Europe as possible, and then set up a subsidiary airline as a joint venture so as to qualify for the necessary traffic rights in and within Europe to carry passengers the remaining shorter distance.

This would give Qantas most of the travel (and most of the profit) on its own long-haul planes, and would allow for a fleet of smaller narrow-bodied A320/737 type planes to service multiple European destinations from this new hub.

One obvious location for such a hub might be Kiev in Ukraine - 9300 miles from Sydney, and closer for Brisbane and Melbourne.  This is at the far range limits of the new A380 and 777-200LR planes, but should be feasible, so Qantas could have high capacity flights from Sydney, Melbourne and Brisbane feeding in to Kiev, then fanning out on smaller planes to most European cities.  Other possible hub cities would be Moscow (9000 miles) or possibly Minsk (9400 miles) depending on the practical reality of the range achievable.

Any/all of these three cities are more or less on the direct shortest route between much of Australia and much of Europe, so they are efficient effective choices of hubs.

From Kiev, Moscow or Minsk, nearly everywhere in Europe is no more than three hours flying.  The only exceptions are Portugal and Madrid.

Flying these under 1500 mile routes is a trivial distance that can be handled by almost any type of plane the new Qantas partnership airline might sensibly choose to operate.

Qantas would have turned its current strategic route weakness into a strength and would be able to offer better service between more points in Europe at one end of the route system, and Australia/New Zealand at the other end of the route system, than could any of its competitors.

The current 'strength' of its major competitor routes - having the half way stopping point in the competitor's home country and network hub - becomes a weakness, because the Qantas competitors can't then operate smaller planes to more destinations in Europe.  They are necessarily restricted to larger widebody planes and so can only go to major destinations where there is sufficient traffic to support them.

While competing airlines are operating 300 - 500 passenger planes to major cities, Qantas could be operating smaller planes with 100 - 200 passengers, and in its new joint venture airline, would not only be feeding people in/out of its long flights to Australia, but could pick up business around Europe to its regional hub city too.

Yes, this is a bold plan, but if Qantas doesn't make some bold plans, it faces an uncertain and increasingly diminished future.

 

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Originally published 07 Jun 2012, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 
 

 


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