Qantas has set a controversial goal to cut costs by A$1 billion ($663 million) over the next two years. Part of this restructuring could be the launch of a low-cost domestic carrier.
Prompted by concerns over the cost of capital, growing domestic rivalry from Virgin Blue, and the airline's first ever half-year loss, Qantas chief executive Geoff Dixon has announced plans to spin off eight divisions into standalone units - including flight operations, engineering and maintenance, and catering. Each will have its own managers, budget, and profit targets. The carrier is studying the feasibility of a low-cost unit, which would be separately managed. It expects to come to a decision on this in November.
Merrill Lynch calculates that Qantas must cut operating costs by 10-15% to compete on costs and regain its leadership in key markets. Dixon warns: "This is an industry in meltdown," and that Qantas must "get rid of some of the inefficiencies that have been in place over the past eight years".
Unions have reacted by accusing Dixon of using or creating a crisis as a smokescreen to push through changes. Labour leaders are especially sceptical because the proposed restructuring calls for half the cost cuts to come from labour.
No-one, however, disputes that Virgin Blue is a growing concern. As Merrill Lynch warns, Virgin Blue "has been relentlessly winning market share" and could become a full-service product "if not stopped now". Virgin claims that its market share over the past 12 months has climbed from 17% to 28%.
Dixon doubts that Virgin can keep growing at that pace, but he has previously warned that Qantas would not idly watch its rival expand. The proposed low-cost Qantas unit seems a project designed to draw a line in the sand on market share. "We believe that about 65-70% is what Qantas must defend and we're going to defend it," Dixon declares.
Analysts are divided on the low-cost plan. A discount carrier will cannibalise Qantas traffic, they predict, but it may be needed to stop Virgin Blue and discourage other potential start-ups.
Virgin Blue has also been moving away from a traditional low-cost model. Business lounges, interlining with more codeshare partners, and preferred seating have lured business passengers from Qantas. Analysts foresee renewed interest by Singapore Airlines in domestic Australia, with a chance that it would align itself with Virgin Blue as the latter becomes more like a full service carrier. Qantas recognises it is necessary to act now to curb Virgin Blue's growth before the rival expands further.
DAVID KNIBB SEATTLE
Source: Airline Business
