Qantas chief executive Alan Joyce is savouring the sweet taste of success following his transformation of the Australian national carrier.
Joyce could not be accused of ducking a challenge. The former Jetstar boss, installed in November 2008 at the helm of one of the industry’s oldest and most iconic airline brands, has taken decisive action to deal with the legacy issues that were challenging its financial sustainability.
The changes at the carrier have been wide-ranging, but are best symbolised by the call in September 2012 to drop its long-standing joint venture with British Airways on the Kangaroo route in favour of teaming with one of its largest competitors. Its partnership with Emirates signalled not only a change in strategy for its international business – Joyce describing it as an inflection point for the unit - but seemingly a wider shift towards pragmatism across the company.
That approach polarised opinion. Indeed, former Qantas executives – including Joyce’s predecessor, Geoff Dixon – questioned the strategy, andd at one point there was talk of a potential takeover. Joyce faced further pressure when its net loss ballooned to A$2.8 billion, inflated by one-off costs related to its fleet writedown, in its 2014 fiscal year as it worked through its restructuring.
Only one year later, it had turned that into a net profit of A$560 million, marking the biggest turnaround in Australian corporate history.
Qantas followed that stellar result with a A$925 million underlying pre-tax profit over the half-year to 31 December 2015.
Although low oil prices certainly helped Qantas, Joyce tells Airline Business that a large part of the turnaround can be attributed to the Oneworld carrier’s two-year-old transformation programme.
“What we’ve seen in the outcome is the financial performance, driven by revenue increasing and costs coming down, getting to record levels in the first half,” he says.
On a calendar-year basis, Joyce says that 2015 “was the record year for Qantas in its 95-year history”.
Transformation is nothing new in the airline industry, but the pace at which Qantas has progressed with its A$2 billion programme over three years has turned heads. By the end of December 2015, the airline had achieved A$1.4 billion of that, helping to reduce CASK ex-fuel by around 8%, and is on track to meet its goal of a 10% reduction by the end of June this year.
The progress it has made already has allowed Qantas to reduce its net debt load by A$1 billion, resulting in a return to investment-grade credit ratings from Moody’s and Standard & Poor’s.
Joyce says Qantas has always looked at ways to improve, but several factors coalesced in 2013 that forced it to accelerate its change programme.
“We had the massive rise in oil prices, we had the Australian currency go to levels that were very disadvantageous for us, and we had a capacity war in the domestic market,” he says. “We had a perfect storm and the business needed a change to be able to cope with it, and that is why we launched the big transformation initiative.”
Another key objective was to get the Qantas group to a more sustainable footing and less susceptible to events outside its control.
“Our aim… has been very clear: we want to achieve a return on invested capital over 10% through the cycle. That covers our weighted cost of capital. At the moment, we are achieving over 20%, 23% return on invested capital which is a fantastic return, but we are very conscious of making sure that these businesses iron out the peaks and the troughs.”
HARSH MEDICINE
Key parts of the transformation announced in 2014 included 5,000 redundancies, cuts to capital expenditure and delivery deferrals of Boeing 787s and Airbus A320s as the airline scaled back growth. It also accelerated the retirement of its older 747-400s and 767-300s, closed its Avalon heavy maintenance base and implemented wage freezes on all executive positions.
The carrier also set about selling back the leases on some of its airport terminals in Australia to unlock value and assist with debt reduction.
Further cost improvements came from changing engineering work practices, reducing waste and greater savings in procurement and fuel efficiency. It also re-geared its operations to boost aircraft utilisation and overall efficiencies. This included lowering aircraft turn-times, re-timing some of its scheduled services, and more back-of-the-clock flying across its carriers.
In large part, the cost cuts aimed at narrowing the gap between Qantas and its main domestic rival, Virgin Australia, and key international competitors Singapore Airlines and Cathay Pacific.
“We had a big revenue advantage over a lot of our competitors, but we knew we had a cost-base disadvantage,” says Joyce. “We knew there were a lot of inefficiencies.”
Another key task involved rejigging the company’s culture, and re-energising its workforce. In turn, that meant working together with the same unions that Qantas battled in 2011, when Joyce made the call to shut the airline down for three days, forcing the government to intervene in contract negotiations.
“I think there was a lack of trust built up over a period of time, and [the relationship] needed the trust built back up into it,” says Joyce.
Workforce relations have improved since that time, even though the company’s transformation programme brought thousands of layoffs.
As an example, Joyce points to how employees at its Melbourne call centre responded when it was announced that it would be shut down and its functions consolidated at a centre in Hobart. One week before the shutdown, Joyce visited the site to explain to the staff why it was necessary, and received a warm reception.
“They were so engaged, because I think our guys there got the communication right. They explained why we were doing it and made sure that it wasn’t anything to do with the people there, it was just that the world is changing.”
He adds that Qantas’s yearly staff surveys show that even with all that has happened, staff engagement is at record levels. Joyce pays tribute to their efforts to re-engineer the business: “They really got behind us and helped us make the changes.”
Subsequently, service has improved across the Qantas-branded carriers, and Joyce says that its net promoter scores have been reaching new records over the past few months.
FRESH INVESTMENTS
Not every effort has focused on cutting costs. The airline has also made investments intended to grow revenues through offering better products and services, opening up new business areas, and co-ordinating more with budget unit Jetstar.
Qantas International has been a major effort. With its market share being gobbled up by Asian and Middle Eastern competitors, its losses had overshadowed the profits of Qantas domestic and Jetstar.
Major schedule changes were made to optimise the international unit’s fleet utilisation. This included some consolidation of its Asian network around the key destinations of Singapore, Hong Kong, Shanghai and Tokyo.
Qantas also ditched its long-running joint business agreement with British Airways on Europe routes in favour of a major deal with Emirates, resulting in its Australia-Europe services now using Dubai as a hub. The carrier also entered into deeper partnerships with American Airlines covering US routes, and China Eastern Airlines on China routes.
The carrier took a A$2.6 billion writedown on the value of its fleet in 2015, which was one reason for its heavy loss that year. As a result, however, Qantas freed itself from around A$200 million per year in fiscal drag due to fleet depreciation.
Accordingly, the results of the international division have rebounded strongly. From steady losses, the segment reported earnings before interest and tax of A$270 million over the six months to 30 December.
Joyce adds that strategically, Qantas International is in a much better place now.
“Our cost base now is competitive against Cathay’s and Singapore Airlines. Who thought that would be the case?”
Joyce points out that the “unsung hero” in that turnaround has been its investment in hard product. It has revamped lounges in Singapore and Hong Kong, and will remodel its London Heathrow lounge. Similarly, it is part-way through a refit of its Airbus A330 fleet, which has involved the addition of lie-flat seats in business class, putting it on par or ahead of its regional rivals.
Qantas has also been active on the domestic side with improvements aimed at pushing the business forward. Its core 737-800 fleet is midway through a refit programme that is adding new lavatories and galleys, while also allowing an extra row of economy seats to be added. It is also reducing turn-times from 45 to 30min, helping to raise productivity.
Further improvements are coming to the domestic fleet from later this year, as Qantas starts equipping the 737s and some A330s with in-flight wi-fi connectivity. Leveraging a new communications satellite, the airline aims to offer free connectivity to all domestic passengers at speeds that will allow passengers to stream entertainment seamlessly.
DUAL BRAND
While much of the transformation of Qantas has been happening under its mainline-branded operations, Joyce’s long-standing dual-brand strategy with budget unit Jetstar is continuing to deliver for the group.
He says the Qantas and Jetstar brands now provide more feed to each other’s networks, while Qantas’s partners, Emirates and American Airlines, are working with the budget carrier to provide feed and connectivity in markets such as New Zealand, Southeast Asia and Japan.
In the latest half-year results, the Jetstar group contributed its strongest ever EBIT of A$262 million, surpassing even its best full-year results. A large part of that has been driven by stronger yields at its Australian operations, as well as positive contributions from its joint ventures in Singapore, Japan and Vietnam.
Joyce admits, however, that any further expansion in the region is on hold.
“All of the Jetstar businesses in Asia together are making money for the first time, so it is on the path but it is still a lot of growth to digest, and we’ve always said that we wanted that to happen before we would consider other ventures and other businesses in the region,” he says.
Joyce remains bitterly disappointed at Hong Kong’s decision last year to reject Jetstar Hong Kong’s application for a licence, which he blames on protectionism and the lobbying of rival carriers.
“It’s very clear that we met the rules of a Hong Kong operator better than Cathay Pacific did, and it’s very sad that protectionism has drifted back in,” he says.
That aside, Joyce sees further room to tweak the dual-brand approach.
“We’re becoming a lot more sophisticated with how we use Qantas and Jetstar in different markets,” he says.
Recently, that has seen the Qantas brand return to some leisure routes that had been given over solely to Jetstar, with the two brands now flying side by side to destinations such as the Gold Coast, Sunshine Coast and Bali.
“There’s a lot more that we can do in that space. It’s an amazing structural advantage and it’s something that I think every airline around the world would love to be able to replicate.”
PUSHING FURTHER
With Qantas now firing on all cylinders, Joyce is upbeat about the future of the Flying Kangaroo, and points to exciting growth opportunities ahead.
The next big change for the international business will come in 2018, when the airline takes delivery of its first Boeing 787-9s. Although Qantas was early to order the type, at one point it had cancelled the bulk of its orders.
Joyce says that the order for eight 787-9s announced last year came after it managed to secure a new agreement the Australian & International Pilots Association. He praises its president Nathan Safe for getting it through.
“He and our team negotiated a deal for pilot productivity. That was a step-change for us that allowed us to go on and order those aircraft and give a future of growth for the pilots in Qantas International,” he says.
As a result of that, the airline is planning to recruit 170 new pilots, while hundreds more promotion opportunities will also open up for existing pilots.
Qantas is deciding where it will deploy the 787s. Current thinking seems to be focused on long-haul services. Joyce says that Melbourne and Brisbane to Dallas-Fort Worth are particularly exciting prospects, as is the potential for nonstop services from Perth to London and other points in Europe.
“The 787-9s allow us to fly routes that we could only have ever imagined before,” he says.
Such long-haul services appear to be a big part of Qantas’s thinking for its future growth.
“Down the line with the 777-8X and aircraft like that, that technology could potentially open up even more destinations like Sydney-New York, Sydney to Europe direct, Melbourne to Europe direct,” says Joyce.
“For Qantas in particular, where you want to have a network reach that allows you to have a competitive advantage, these are fantastic technology changes that are very exciting.”
More immediately, however, the airline has committed to keeping two 747-400s that were due to be phased out this year, as retaining them offers more growth options.
Joyce says the decision was a “no-brainer” because strong inbound tourism demand and low fuel prices made them more economic to operate.
Airlines aside, Joyce is also keen to leverage the Qantas brand further and is seeking out entrepreneurial opportunities for the carrier.
Qantas Loyalty, which runs its Frequent Flyer programme, continues to perform strongly and has added a number of new business units, including a greater focus on customer analytics. Later this year it will enter into the health insurance market, and Joyce is upbeat about more opportunities ahead for that business.
In the meantime though, Joyce is overjoyed that the carrier has been able to deliver on what he calls the “trifecta – stronger earnings for shareholders, outstanding customer feedback and high levels of engagement.
“I think most airlines that have gone through that transformation wouldn’t say that they’ve got all three of those right at the same time. That trifecta has been the real success of the programme.”
Source: Airline Business
