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Qantas’ future up in the air after the great divide

There are some difficult questions left unanswered about the future of Qantas as an international Australian flag carrier in the restructure that splits the airline into two separately-managed businesses for domestic and international services from July 1.

The large majority of Australians who fly Qantas on domestic routes choose to fly non-Qantas airlines on international routes, not necessarily because they prefer carriers such as Emirates, Singapore Airlines or Cathay Pacific, but because Qantas doesn’t have anything to sell on a multiplicity of routes into China, greater Asia, and Europe beyond London and Frankfurt.

Before this week’s announcement of the decision to reinvent the divide that existed when Qantas was entirely the state-owned international carrier, and Australian Airlines was entirely the state-owned domestic carrier, Qantas had taken deliberate steps to reduce its exposure to world routes. Not only by slashing flights in its own right to London, but postponing two Airbus A380s and endorsing the refurbishment of ageing, inefficient old-technology jets with a core fleet of Boeing 747-400s that will burn more fuel and require more maintenance than any type of airliner being flown by its much more successful global competitors.

It did this in part for the stated purpose last year of investing in a premium shorter-haul, single-aisle Asian airline based in Malaysia or Singapore, which, despite all of the premature rhetoric, failed to materialise.

Now, in the aftermath of the removal of Bruce Buchanan as CEO of the low-cost Jetstar group, and a rival to Alan Joyce as current Qantas group CEO, the expansion of that franchise in Asia has been paused in order to consolidate its gain.

Pressing the pause button on Jetstar and Qantas long-haul after failing in the much-hyped Asia-based premium carrier venture, and eliminating two future contenders, the other being Rob Gurney, group executive, commercial and freight, Qantas Airlines, for the position of Qantas Group CEO, raises the reality of a carrier twisting and turning onto different headings as its falls toward Earth, descending into record low altitude when it comes to share price for a stock that shows no signs of breaking a three-year dividend drought.

This isn’t a popular thing to point out in the generally supine media game of pumping up Qantas or making apologies for it, but it is the reality.

The statutory net profit after tax for Qantas in the six months to December 31 was only $42 million, a decline of  83% compared to the corresponding previous half year of $241 million if attention is paid to the real, rather than larger sums, claimed for underlying profits, none of which were considered by the company to represent money capable of being used to prudently pay dividends to its owners.

The issues that are ignored by the Qantas announcement involve the extent to which its international brand contributes to the value of its frequent-flyer loyalty program, which is the largest money earner for the group, and depends in part on minting however many reward points the company decides to issue to those third parties that buy them at whatever price Qantas sets.

To what extent is international important to the highly profitable domestic business? Will the official losses on long-haul Qantas be to some extent the result of transferring funding and operational costs for aircraft to that division even though they will also be used on domestic services, as seen today with transcontinental 747 flights to Perth,  or some of the ageing 767 fleet?

What exactly is going on in Qantas in terms of  accounting for assets that straddle the international/domestic divide? How will hitting the pause button, even when it comes to the Jetstar franchise, allow Qantas as a group to address the Asian traveller expansion, which is showing up in the statistics released by the various gateway airports as double-digit growth figures.

For those wondering about the future for Qantas, there is no guidance as to how standing still compared to the growth that continues to be evident in the Asia-Pacific is going lead to be a more prosperous future.

There is no guidance as to how the technological advances that have significantly reduced the fuel burn of contemporary airliners are going to rescue a Qantas that isn’t buying them on the scale originally intended, while its competitors all continue to re-equip to larger extents, and it continues to complain about rising fuel costs.

If Joyce’s own words are carefully considered as a guide to the future of Qantas, it is likely to be one in which the international division will either be bankrupted, or sold off, or essentially white-anted by having a much-reduced overseas network flown under less-costly domestic division workplace agreements, or by offshore entities that the company has foreshadowed it may set up to provide it with the services of a much delayed fleet of 787 Dreamliners, one of which coincidentally begins a Qantas-sponsored visit to Australia today.

There are obstacles to some such envisaged reforms in the Qantas Sale Act, but it now looks like a fatally flawed set of legislated obligations because it was framed with no knowledge of the rise of the  low-cost business model, no anticipation of how subsidiary investments might be used to thwart it,  and no comprehension as to what might happen if the parent company falls on, or even embraces, hard times, and looks to sell out, as it already tried to do in 2006, to private equity interests promoted by its own management.

It is no secret that this management like its predecessors, is determined to overthrow the restrictions of the Qantas Sale Act when possible, or by the use of offshore entities not specifically prohibited in the legislation.

There are very good reasons for that act to be repealed. But there are no good reasons to believe that this management is long-term in its objectives for Qantas, or that strategically important approaches like that of Emirates this week to consider ways in which an agreement to code share with Qantas might be struck will not be seen as an opportunity to move closer to the exits when it comes to Qantas international.

4
  • 1
    AR
    Posted Thursday, 24 May 2012 at 8:23 pm | Permalink

    For purely nostalgic, patriotic reasons I would happily fly Qantas o/s but the service is woeful, the prices too high and the options crap, compared to the hungry & perfectly turned out competitors. No doubt on slave wages but, hey, as a retired wage slave I gotta watch the pennies!

  • 2
    drsmithy
    Posted Thursday, 24 May 2012 at 10:11 pm | Permalink

    I’ve never had a complaint about QANTAS service, but their prices for international travel have become progressively more ridiculous, even more so for flights originating in Australia (ie: it’s cheaper to fly, say, LAX-SYD-LAX than it is to fly SYD-LAX-SYD, even with the same flights and class).

    I recently booked some “return” flights from London to Australia to return home after an upcoming holiday (getting there via the “return” leg of another flight booked from the US). It was half the price to book Premium Economy through BA rather than QANTAS, even though the “BA” flights are actually QANTAS codeshares (ie: same flights, same planes, same class, same points & SCs, just booked through ba.com instead of qantas.com).

    There are few things in the world more opaque than the charging models of airlines.

  • 3
    A. N. Onymus
    Posted Friday, 25 May 2012 at 7:41 pm | Permalink

    DRSMITHY,

    Waiting in line for the toilet on a Qantas/Japan Airlines shared flight in late 1993 from Cairns to Tokyo (Narita), my companion overheard two passengers discussing their travel. The one who had booked with Qantas had paid two or three hundred dollars more than the one who had booked with JAL.

    The charging models were not so opaque then — at least not to the traveller.

    Another thing to be grateful to the Internet for — the ability to make personal comparisons of airline charges.

  • 4
    eric
    Posted Sunday, 27 May 2012 at 6:41 pm | Permalink

    The death of the half OS owned Qantas International will be all their own doing and I for one wont shed a tear.

    The Commonwealth Govt should never have privatised the company in the first place.

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