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Jan 10, 2014

Qantas junked? It's too late to save the flying kangaroo

Australia's airline has been junked by two credit ratings agency. So what can Alan Joyce and the Qantas board do about it? It's probably too late to save the flying kangaroo now.

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How does a company in as much trouble as Qantas rid itself of group CEO Alan Joyce and a board chaired by Leigh Clifford in order to reverse or remove a set of ruinously bad strategic mistakes?

The question came back into the spotlight when Moody’s belatedly followed S&P in downgrading the airline’s debt risk to junk status.

Qantas is already working to a sometime in February deadline to complete a structural and strategic review in which all options are on the table, naturally raising speculation of full or partial spin-offs of the loyalty program, the Jetstar low-fare franchise, and if Anthony Albanese is serious in his comments as the minister on whose watch Qantas abandoned key routes to Emirates, the loss of QantasLink on rural routes.

Part of the problem had been the behaviour of Joyce in making a serious of emotional and entitled but vague and shifting demands on government for relief from the competitive pressure being brought on Qantas by Virgin Australia and its corporate structure, in which three international carriers — Air New Zealand, Etihad and Singapore Airlines — are now substantial equity holders.

Joyce was silent and invisible when the Moody’s announcement came out. He appears to have been kept out of the spotlight in recent weeks since he managed to annoy or frustrate the government by his demands for imprecise relief from the Virgin menace.

Threats appear to be at the heart of the Qantas campaign for “relief”. This could extend to cancelling its extremely low-priced options for the Boeing 787-9 version of the Dreamliner, a much better jet it seems than the initial -8 version that Qantas flick-passed to Jetstar.

Or it could cancel its remaining orders for another eight Airbus A380s, except that cancellation would be very costly, and the current more capable version of the jet is by far the best airliner to use on the Sydney-Dallas Fort Worth route, which it very inefficiently serves today with an ageing 747-400ER that can’t carry a high payload non-stop in either direction.

But threats or high-profile stunts like shutting down the airline in October 2011 to browbeat Fair Work Australia, or alleged death threats that caused the New South Wales Police to set up a special taskforce — which was shut down at Qantas’ request before police could discover the source of such threats — aren’t going to cut it this time.

QantasLink is not the rural monopoly it was. As for Qantas International, there seems to be an inverse relationship between the successful growth of Australia’s inbound tourism industry and the retreat of Qantas as an international carrier this century.

“… Qantas means less for the future of Australia with every passing day.”

Indeed, part of the boost comes from Qantas telling its customers that it is perfectly OK to fly Emirates for its superior connections to all sorts of markets it withdrew from with the enthusiastic endorsement of the Gillard/Rudd government, dumping Brisbane, Adelaide and Perth as unworthy of its services on flights to London and Frankfurt.

Labor’s capacity to say anything useful about Qantas has been massively compromised by past indifference and inconsistency in its policy pronouncements and settings concerning air transport in this country.

The real challenge may prove not to be how to save Qantas, but how competitors like Virgin Australia, or possibly new domestic entrants, who might buy Qantas some assets, could grow fast enough to replace it.

Qantas, under its current management and board, cannot be saved. It is a management and board without answers, which has done extraordinary damage to a stock that was once a trusted and reliable performer in many funds in the five years since Joyce and Clifford set up a confrontational rather than collegiate approach to managing the painful changes all large airlines faced in recent times and circumstances.

Joyce has made Qantas an object of ridicule in Asia by bragging about how he was going to set up a premium low-cost, single-aisle carrier based in Kuala Lumpur, Singapore, anywhere, using puppet Asian managements to ensure the profits cross-subsidised the full-service international Qantas brand. They were some of the most cringe-worthy statements ever made by a major Australian company with Asia ambitions, none of which proved of any substance.

Following reports on Crikey blog Plane TalkingAsia and Australian mainstream media is following the saga of delivered but idle A320s purchased for Jetstar franchises in Hong Kong or Japan that in the case of the former hasn’t been granted a licence, and in the latter hasn’t yet secured approval for an expansion of an existing operation that has already spent much of its seed money and taken recourse to a further cash injection.

These jets, which Qantas insists are “operational spares”, attract monthly lease charges of close to $400,000 a month each, number between seven and 11 and are parked, at not inconsiderable daily fees including some share of fixed costs, at various airports including Toulouse and Tokyo Narita. That amounts to at least $3 million in vanity losses for a Jetstar franchise that seemed to believe its own hype, and is devastating the Qantas bottom line.

Unravelling these errors, and finding net relief in sell-offs of assets over which Qantas doesn’t in some cases have immediate or effective control, is a tall order. For a management and board that denies any culpability for this disaster, this is an even taller, if not impossible, order.

Brace for some previously unthinkable “solutions” or “remedies” from Qantas.  But don’t worry too much — Qantas means less for the future of Australia with every passing day.

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