Proposals to base more cabin crew offshore have upset the unions, but people should look closer at the real story from Qantas
Qantas CEO, Geoff Dixon was huffing and puffing Wednesday about more
cost shavings by re-locating cabin crew offshore. And after he talked
to the National Press Club in Canberra, down in Sydney someone else,
probably one of the airline’s unions, dropped a document or two to the
media about those very plans.

Very ho-hum. Savings of an estimated $20 million a year on locating up
to 350 cabin crew overseas, possibly London according to the news
reports.

That would be a quarter of its international cabin crew based in London, with savings on hotel, transport and meal costs.

An expected reaction by an airline management to the turbulent times in
airlines, particularly given the way fuel prices have risen, terrorism
and the Middle East war.

But with Qantas, experienced observers know there’s usually one public
message, but several ‘real’ stories that the airline doesn’t like
seeing out in the public gaze.

The following announcement was made by the airline on May 18. Read it
closely. It contains one of the ‘real stories’ about the cabin crew. It
was missed by most media.

“Qantas said today that it had applied to the International Air
Services Commission (IASC) for the right to operate additional services
to the United Kingdom. Executive General Manager Qantas Airlines, John
Borghetti said that the new flights, if approved, would increase Qantas
services to the UK from 21 to 28 per week over the next two years,
including via Hong Kong for the first time. The additional seven
services include four via Hong Kong and three via Singapore. Mr
Borghetti said that if the application were successful, Qantas would
operate 17 services to the UK each week via Singapore, seven via
Bangkok and four via Hong Kong. Qantas has also applied to add a
further three weekly services via Hong Kong to the UK. These flights
will not operate until April 2006.”

So what’s this say? Well, if you think the airline’s business on the
so-called Kangaroo Route is going gangbusters, you’d be right, even
with Middle East war, terrorism warnings and all that. Do the numbers –
an increase from 21 to 28 flights a week over two years is a ONE THIRD
increase in capacity. Is that the sign of an airline in any sort of
financial problems from indifferent operational efficiencies or low
profits?

It is certainly not a sign of an airline under pressure and needing to
make cost cuts, or else, no matter how Mr Dixon might paint decisions
like this.

And this is an airline who is obsessive about yield management and over-capacity on the very profitable international routes.

The Kangaroo Route is considered one of the main ‘pillars’ of Qantas’
international profitability (the other being the Trans-Pacific Routes
to the US).

They are capacity constrained duopolies and yield huge earnings for the airline.

The Kangaroo Route is operated with British Airways through the Joint
Services Agreement, which is signed off on by the ACCC, which allows
for controlled competition, code sharing, joint use of ground services,
and cost savings, which translate into very nice profits.

The Kangaroo Route is based around the Sydney-Singapore-London route.
The routes to London Via Hong Kong and Bangkok are covered by other
deals but sort of mesh with the main route to London via Singapore.

The common destination is London, hence the decision to look at a new cabin crew base there and nowhere else.

The extra flights include the new route for Qantas of Hong Kong-London,
approved two months ago. By 2006 Qantas believes that route will be at
least as important as the Bangkok-London operation.
This is the optimism of a highly profitable business looking to the
medium term for growth options internationally. Qantas would not be
doing this if there was no money in it!

So with a one third increase in Australia-London flights over the next
two years, its understandable the airline would want to make sure the
cost base was right from the start. Hence the plan for a cabin crew
base in London, staffed mostly by locals. This was not understood by
all the media who accepted the ‘drop’ from whoever leaked the proposals
for the London base. They just didn’t go and look at what else the
airline was saying and put the two together.

And whatever Dixon says about these only being ‘proposals’, the extra
capacity will not be as lucrative if the London base idea is negotiated
away in any discussion with the unions.

Qantas is basing its expansion plans on cost savings. The mantra is
apparently, get the cost base low from the start. So if a new route
from Australia won’t work in cost terms with local crews, then try and
make it work with (cheaper) crews based overseas (but not Australian)

The increase in London traffic should also be seen in tandem with the
proposal to look at a cheap airfare airline based in Singapore and
revealed about six weeks ago.

While some will see the two as separate with different airlines,
staffing levels and locations, what has to be understood is that Qantas
already has a cabin crew base in Bangkok. There is also another in
Auckland for the Trans-Tasman and Trans Pacific operations).

The scope for Qantas and its staff contractor (the Swiss firm Adecco
has been used to recruit people for Jetstar locally) to mix and match
staff in Asia across airlines based on cost will be much easier the
more staff are based in places like London and Bangkok.

The London-based staff would be used on the London flights to and from
Singapore, Hong Kong and Bangkok. Australian flights would use
Australian crews to those cities and return.

The other agenda to be kept in mind is the absolute obsession the
Qantas board and Dixon have with the foreign shareholding cap for
Qantas. It limits all foreign shareholdings to 49 per cent and while
British Airways was rich and ambitious, its foundation stake of 25% did
restrict other foreign holdings.

Now BA is weak and poor, that holding has fallen sharply to around
17-18%, meaning more room for other foreigners. But with airlines a bit
on the nose for big international investors, there’s not much interest
in Qantas.

But that’s not the reason for the obsession. The reason is that it
limits the ability to merge with another carrier, but more importantly
puts Qantas at the mercy of the Federal Government, particularly the
Federal Treasurer.

If a merger is proposed, not only is FIRB’s approval needed, but also
the separate agreement of the Treasurer to remove the cap, which would
probably require legislation to run the gauntlet in the Senate.
The present Treasurer, Peter Costello is on record as ruling out any
change. The legislation was put in place at the time of the
privatisation in the mid 90s by the then ALP Government. If Costello
can’t be persuaded to change his mind, what hope is there of changing
the mind of a Treasurer in a Mark Latham-led ALP regime?

The board and chairman, Margaret Jackson (reportedly a John Howard
pin-up girl for a while) have tried to no avail with the Prime Minister
and Federal Transport Minister John Anderson.

Hence the move for the ‘partial’ merger with Air New Zealand. That deal
was rejected, which still rankles with the Qantas board and Dixon who
strongly believe the guff that they are a national ‘Icon’ or champion
and should be entitled to different rules.

So the question to be asked about Dixon’s trip Canberra, what else was
he down there for? Who else did he see? Yet another fruitless attempt
to get the shareholding cap changed? No chance, you’d have to believe
in an election year with Prime Minister Howard behind in the polls and
voters not listening to him.

But for shareholders, investors and others interested in the affairs of
Qantas, they should remember that when news leaks out about cost
cutting, poor profits, operational impediments and union problems,
there’s usually another side to the story that’s probably closer to
reality at the Flying Red Roo.

Peter Fray

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