Paul Phelan/CAIRNS
"It is an uncertain market, because there are various people at different levels of desperation as a consequence of their position," warned Qantas managing director James Strong, explaining the impact of the Asian downturn even on carriers indirectly affected. The comment, made in August at the same conference at which the carrier had just posted its record A$304.8 million ($182.5 million) profit, served to sharpen the contrast between Qantas' performance and that of its less fortunate regional rivals.
Had Qantas not been preparing for privatisation in 1994, the Australian carrier may not have been so well equipped to cope with exposure to these regional misfortunes. The strategies which Qantas has developed over the last four years, while not completely insulating it, have heightened the group's flexibility to adjust, and even to make some gains by stepping in where other carriers have withdrawn.
Its position has been developed through an integrated corporate strategy which is reviewed at least annually and which projects three years ahead, re-examining every facet of the company's activity. Says Strong: "When you looked at Qantas as a business, clearly its commercial performance was very unsatisfactory, not only in terms of the level of return, but also in terms of consistency. It was also obvious that the operating environment, both domestically and internationally, was going to keep changing; but that the rate of change was going to accelerate markedly."
The government's resolution to sell the airline made fundamental change an even more pressing issue for the new board and management. "Early indications of the first attempt [to sell the airline] were that it was probably not saleable. There had to be a lot of change fairly quickly to convince potential investors that this business could perform commercially. That added the extra note of urgency in the case of Qantas," he explains.
In that newly deregulated environment, Strong's vigorous pursuit of new efficiencies engendered community and workforce culture shock over initiatives which, only four years later, business reformers are finding to be relatively plain sailing. "A lot of the things that were classified as cost-cutting were really what I would just call making the business more efficient. But, besides increasing efficiency and productivity, there was a very deliberate marketing and product strategy as well. By August 1994, we had also developed our first major investment in our product; the biggest product overhaul the company had ever done," he says.
Some major landmarks in the process of boosting Qantas' core performance since 1994 have been:
an impressive increase in aircraft utilisation, both domestically and internationally, to levels of 14-15h a day for the Boeing 747-400 fleet, and more than 11h for the Boeing 737 fleet; the sale of expensive and non-performing assets, including several holiday resorts; fleet rationalisation, with the disposal of Boeing 727s and Airbus A300B4s; gearing reduced successively from 71% to 40% over the period; a continuous boost in revenue-passenger-kilometres per employee, from 1.93 million to 2.34 million; divestment of regional and route development operations to low-cost subsidiaries - three of which are wholly owned, while the fourth wet-leases British Aerospace 146s from a third-party operator; complete overhaul of labour arrangements (the passenger and baggage-handling staff at each of the airline's seven major airports recently successively won competitive tenders to retain their jobs and to remain in the company's employment).Separately, under Australia's new pay bargaining guidelines, Qantas has now virtually sealed a three-year salary deal covering most of its non-flying employees, fixing pay rises at 3% for each of the coming three years, with performance incentives via company shares.
Early in the reform process, Strong's new management team recognised that reducing costs had the potential to draw customer service levels down a parallel, descending line which would ultimately meet rising customer disaffection. The process was thus developed around an empirical balancing of each initiative against possible negative commercial impact; a process which it now continues.
"Unless you balance the quality of the service you're delivering against running the business efficiently, you can do harm to it and we've gone to enormous lengths to avoid that. I think it's important to recognise that any short-term philosophy which is just based on cutting costs can be a dangerous long-term strategy, so we measure both against one another."
Strong indicates that the airline is close to stabilising at what it believes is an optimum gearing ratio. "The aim is to measure the correct trade-off position, considering the weighted average cost of capital to the business, between the credit you'll get from both the lending community and the investors in terms of the level of gearing; and the cost of getting debt down to that level.
"By a lot of analysis, we have defined the gearing level which seems optimum to us as being in the range of 30-40% of debt, to debt plus equity. We're now at the top end of that range, having been just under 40% when we last reported. We've also said to the market that we'll probably go a little above that in the immediate future, but we expect to be back within that range within our current three-year plan," Strong says.
In measuring the ratio, Qantas follows the practice of taking in off-balance sheet operating leases and the current foreign exchange position at current market rates, in line with accepted strategy in Australia and in the UK.
Strong insists that the British Airways commercial pact, which has recently been expanded into the oneworld alliance, has thus far brought more advantages to consumers than to the airline. But that was always expected.
"We've said right from the start that we don't see [direct bottom-line benefits] as a significant issue. We're actually investing money in the short term, with the aim of providing customer benefits, rather than as a source of short term profit benefit. We're spending money to make possible things like seat availability on linked services, through-booking, frequent flier benefits and access to lounges throughout the world. That's the primary objective for the first six months or so. There's no doubt that there will be revenue benefits longer term, and opportunities to improve costs in certain areas, but this is more a proactive marketing position than anything else - certainly in its early stages - so we haven't attributed any defined profit benefit to it, other than to say that it's an important part of our competitive position," Strong explains.
He is confident that Qantas is on track to survive the critical period which will inevitably end in regional recovery. Strong says: "It's a tough climate, but we had planned for it to be a tough climate and so we are running our business accordingly."
ANSETT
Since arriving from Cathay Pacific in January 1997, Ansett chief executive Rod Eddington's uncharacteristically low media profile had commentators speculating that he had found the task of rescuing Ansett Holdings a more daunting endeavour than he had expected.
Numerous decisions made under the chairmanship of Sir Peter Abeles in the 1980s had become financial booby traps for any management working in the newly competitive operating environment. An investment of A$600 million (at 1998 value) in Hayman Island, a luxury holiday resort, had become symbolic of the company's compounding problems, which similarly burdened its core operations.
Out of step with every other airline in the world, Abeles had succumbed to union pressure and installed flight engineers in the company's Boeing 767 fleet, at a capital cost of over A$1 million an aircraft (which would have added A$30-40 million a year to current operating costs).
The airline was uniquely saddled with two incompatible narrowbody fleets - 737-300s and Airbus A320s - and for a lengthy period also operated 727-200s on the same domestic network, presenting crippling inefficiencies in crewing, training, maintenance/spares, and loss of operational flexibility. Two regional aircraft fleets - Fokker F28s and BAe146s - flying on the same or overlapping networks, imposed similar handicaps on routes even less able to afford them. The group was also involved in numerous non-core activities ranging from the Australian Diners Club franchise to the manufacture of golf buggies.
Until last September, Eddington's public comment had barely gone beyond the widely published remark that "-Ansett is a great airline, but a poor business" .That reflected the carrier's buoyant domestic trunk route load factors and revenues, and the continuing high cost structure and excessive debt levels which had held down the group's results.
When he finally showed his hand, however, it was clear that Eddington had wasted none of the intervening time on introspection, but had made a comprehensive and analytical review of the airline's cost and debt situation, and had already launched the ordered development of tactical and strategic solutions.
Eddington asserted that Ansett's cost-based "business recovery plan" (BRP) - an integrated programme of more than 70 projects to be introduced progressively over the next three years to reverse the decline in the group's results - would be based on a profit target which, if achieved, would be expected to provide an A$400 million profit by 2001, says Eddington:
"We define success as achieving an operating result equivalent to 10% of turnover over the next three years. A 10% result will not put us in the top quarter of Australian companies, but it is at the top end of the scale for airlines around the world. The best place to get capital is to earn it as profit. We have identified and implemented a very wide range of changes," he says.
These included the sale of Hayman Island and the neighbouring island airport which serves it, rationalisation of Ansett's retail business, the suspension of services to Jakarta, Kuala Lumpur and Seoul, the conversion of the cockpits of its early 767-200s from three to two crew and the outsourcing of the airline's data centre.
Eddington adds: "More recently, we have just finalised the regulatory and legal issues relating to our new co-operative alliance with Air New Zealand and Singapore Airlines. We have become an observer status member of the global Star Alliance and hope to offer customers the benefits of full membership by early next year." Eddington joined the group on the News Corporation payroll, for secondment to Ansett as executive chairman, with the mission of restoring financial performance, which had steadily receded since deregulation in 1989. At an early stage of that tenure he was also appointed to the News Corporation board and, more recently, became deputy chairman. The message, however, from Ansett is that he is definitely not destined to switch to newspapers in the near term, and that his prime mission will remain the salvaging of the Ansett group through restructure.
That process was well and truly launched with the decision to leave a series of loss-making regional and route development operations which had been costing the group over A$1 million a week. Although this was the first major initiative of the BRP, several other "quick win" moves have already been implemented as part of the same strategic plan.
By September last year, having already studied the group's problems in depth, Eddington had appointed Bain International, seconding about 60 senior specialist managers to work on the BRP, and giving general manager Lyell Strambi executive committee status.
The BRP, which was set up formally in September last year, was charged with:
reviewing every process within the airline, and benchmarking it against what the review identifies as "world best practice"; reviewing the corporate strategy; identifying "quick-win" projects capable of rapid implementation and of providing a revenue boost or cost cut in the short term.The "quick wins" brought early success in the form of dozens of tactical initiatives, worth A$30 million in revenue benefits or cost cuts in the remainder of that financial year, and adding up to a collective benefit of A$173 million to the airline. Besides the initiatives detailed by Eddington, the study identified that the airline was losing more on Saturdays than it was making on Fridays, because of empty capacity on traditional business routes, and schedules that were adjusted to lower capacity.
A weight reduction programme on airframes was combined with a revised fuel policy review for improved payload and reduced operating costs, when the airline found (for example) that its 747-300s were routinely landing at Hong Kong carrying 20-30t of fuel over their mandatory reserves. One aircraft whose lease carried a high-cycle penalty, but was found regularly to be flying 50-60min sectors, was rescheduled to 3h flights.
Ansett has not yet quantified the financial benefits of the New Zealand-Singapore alliance, having only recently gained regulatory approvals. The airline will not be detailing them when it does, says Ansett.
Internally, Ansett is now proceeding with a basic restructuring of the airline. "We take a blank sheet of paper and ask ourselves: if we're now committed to a particular strategy, what is the best management structure in terms of job description to support that strategy? We hope to finalise that structure by the end of November," the airline says.
Debt reduction is equally important, Ansett adds. "Under Sir Peter Abeles we carried a debt to equity ratio of 85:15. Now it's about 70:30 and reducing," the carrier says.
Ansett's total costs in the last financial year increased by only 1.3%, compared with cost increases of 7.3%, 9.4% and 7.9%, respectively, in the preceding three years. Structurally, the carrier has 555 fewer staff, and its financial performance is on a strongly improving path. A target profit equivalent to 3% of turnover has been set for this financial year.
Although the airline has only the first three months behind it, it is tipped to break the A$4 billion revenue barrier this year. Furthermore, it is quietly confident of achieving that and maybe a little better.
Source: Flight International
