If he has said it once, he has said it in a dozen ways: 'There's no use charging around the place; you don't just snatch at things overnight; we have to avoid over-reacting to short-term pressures.' And, 'much of the cyclicality in this industry has been the result of a management style in the past where people jerked this way and that as conditions changed.'
These are the maxims of James Strong, managing director of Qantas Airways, who has led Australia's former flag carrier out of the financial wilderness, through privatisation and public flotation, and now must face the challenges of living next to a troubled Asia.
Strong has seen more than his share of turbulence at the helm of former domestic carrier Australian Airlines and now Qantas. He was in the thick of Australia's deregulation - the start of a single aviation market with New Zealand and multiple designation on overseas routes. A steady-as-she-goes approach worked well through that turmoil, but the question is whether it is still appropriate when the storms battering Asia appear to bring changes that demand less deliberation and more nimbleness.
Strong may be cautious but he is no advocate of indecision. When traffic from Seoul plunged last December, Qantas suspended its flights promptly. It has since dropped all flights to Vietnam, cut services to Jakarta and Bangkok and announced plans to withdraw from Fukuoka. Yet, during Jakarta's riots, Qantas quickly added extra flights and, the day after Philippine Airlines said it was withdrawing from Australia, Qantas responded that it would double capacity into Manila.
One reason Qantas can respond so fast is its accounting, which lets it track the performance of each route continuously against costs, including capital.
Does that mean the decision to keep flying a route is made by a computer? Not quite. Qantas keeps a presence in China because of its potential, even though China has yet to show Qantas a profit. 'China reminds me of climbing a mountain,' says Strong, referring to one of his own pastimes. 'Each time you think you've reached the top, you find there's another crest just beyond.'
Qantas was equally decisive in recently buying used Boeing 747s from Asian neighbours which wanted to downsize. After reaching an impasse over used jets with Cathay Pacific, Qantas moved on quickly to clinch deals on three 747-400s from others. It is understood one is coming from Asiana and the other two are from Malaysia Airlines.
On more strategic decisions, however, Qantas remains cautious. The carrier is interested in buying a stake in Thai Airways and Strong admits he has been to Bangkok to discuss this. The International Monetary Fund has urged Bangkok to privatise a number of state-owned assets, and the Thai cabinet recently agreed to lift the foreign ownership lid on Thai Airways from 30 to 49 per cent. But nothing is imminent.
Would Thai's withdrawal from Star Alliance be a condition of any Qantas investment? 'No, it would be more a consequence,' explains Strong, who stresses that Qantas 'wants to be seen as offering a true partnership - not a big brother.
'We are not interested in just putting in a little money. Mutual benefits are important. We want a good Asian partner, which means addressing Thailand's national interest and the interests of both airlines.'
Qantas's interest in Thai Airways is highlighted by its agreement with British Airways earlier this year to codeshare over Bangkok on each others' Australia-UK flights. Bangkok offers Qantas and BA an alternative stopover to Singapore, where Singapore Airlines is strengthening ties with Qantas rivals Air New Zealand and Ansett, and looking more and more like a southeast Asian replacement for Thai Airways in the Star Alliance. Strong will not be drawn on the possibilities of a joint Qantas/BA bid for a Thai stake. Both carriers have strategic motives for such a move, but Strong is cautious: 'We have expressed an interest in Thai Airways, but we are a long way from knowing any details.'
Qantas is equally careful about opening new routes to absorb the capacity it is pulling out of Asia. Instead of new routes, it is adding frequencies or capacity on current routes. Some of those are domestic - putting 747s on high-season long- hauls from Sydney to Cairns and Perth. Some are within Asia - daily service to India and more flights to Singapore and Bali. But most are on US and UK routes.
The only new routes being considered are to Latin America and continental Europe but they are still in tentative or early stages. Qantas has been discussing links with Aerolineas Argentinas and LanChile. Strong sees a 'high likelihood' of arrangements with one or both but predicts nothing about Latin American flights by Qantas.
In western Europe, Strong admits Qantas is looking for a continental hub and has narrowed the candidates to Paris and Zurich. But studies continue with nothing yet decided. Thus, in the only two regions where Qantas is thinking about new routes, caution prevails.
Such caution could carry a price. Since the beginning of the year both Qantas and Air New Zealand have shifted capacity from Asia to existing US transpacific routes and Qantas is thinking of adding more. Asian carriers have also shifted the emphasis from Asia to other routes, such as Europe-Australia, where they see stronger demand.
Geoff Dixon, Qantas executive general manager commercial, accuses some Asian carriers of dumping capacity on Australian routes, but everyone is doing the same thing. Asians may be shifting to Australia, but Qantas is transferring capacity from Asia to everywhere else it already serves.
'You just can't add this much capacity in such a short period of time on good routes without making them go bad,' warns Peter Harbison, managing director of the Sydney-based Centre for Asia Pacific Aviation. Describing what he calls 'the yield pollution spiral,' Harbison warns that moving capacity to the better performing routes will reduce yields everywhere. The best hope for Qantas is a surge in inbound traffic due to recent declines in the Australian dollar. The problem Qantas faces in opening new routes is mostly geography. 'Being at the end of the line complicates our position,' Strong complains. 'Australia is not a hub. Our location and small population put us at a disadvantage against airlines from larger countries with strong geographic hubs. We have to rely on third parties for rights to fly where their airlines already fly.'
Asian rivals exploit sixth freedoms over their own countries between Europe and Australia. Hard numbers are elusive, but Qantas claims it only carries 40 per cent of all passengers in and out of Australia. It has previously estimated that 21 sixth freedom airlines transport over half of all Europe-Australia traffic. Yet Australian efforts to secure fifth freedom and third country codeshare rights between Asia and Europe have been a constant battle. 'In the past we've had capacity limits out of Bangkok, and Hong Kong is still a major problem,' Strong complains.
Its strategic alliance with BA is the closest Qantas has come so far to counter these obstacles. Strong praises the BA-Qantas alliance as a world leader. Yet, this alliance currently does not include an Asian carrier. Qantas codeshares with Japan Airlines, Korean Airlines, and Vietnam Airlines on specific routes, but lacks closer links with any of those carriers. Qantas and BA need a strategic Asian partner to feed traffic at its hub and, more immediately important, help smooth the way for rights beyond that hub. This underscores the interest of both Qantas and BA in an alliance with Thai Airways. It also explains the quiet, on-going talks by Qantas, British Airways, American, and Japan Airlines with Cathay Pacific. Others predict a deal is imminent, but Strong will only say of talks with Cathay: 'We have a positive attitude.'
The urgency in finding an Asian partner was underscored in June when the Australian Competition and Consumer Commission (ACCC) tentatively approved the proposed alliance between Ansett, Air New Zealand, and Singapore Airlines. Once this approval becomes final it will allow those three to codeshare and engage in joint marketing and pricing in and out of Australia. Not only does this boost competition with Qantas/BA on the Kangaroo route, but it links Ansett and Air New Zealand into SIA's vast network.
The three applicants had argued this approval was needed to sustain Ansett's viability and keep pace with the Qantas/BA alliance. Qantas countered that the proposed alliance was 'a de facto merger' of Ansett and Air New Zealand, and any alliance between them and Singapore Airlines had to be seen as part of the growing Star Alliance. From this perspective, Qantas argued, BA-Qantas was comparatively small. Harbison reads the result much the same. With the ACCC's decision, he thinks, 'Qantas has slipped a bit behind. The balance is now in favour of these three carriers [Ansett, Air NZ and SIA], particularly when Ansett and Air New Zealand have a memo of understanding in place to join Star next year.'
With considerable understatement, Strong's reaction to the ACCC approval is: 'It certainly raises the ante.' Analyst Harbison is more emphatic: 'The ACCC's decision creates a competitor for Qantas which is far, far stronger than the sum of the parts.' Australia's approval of this tripartite alliance increases the need for Qantas to secure at least one Asian partner to offset the strength Singapore Airlines now brings to Australia though its alliance with Ansett and Air New Zealand. Strong may proceed cautiously with the Asian mating dance, but there is no doubt now about the need for it.
At least Qantas can talk from a position of relative strength. On an Australian dollar basis, its operating revenue and profit have climbed consistently for the past five years. At press time Qantas had not announced results for its financial year ending 30 June. However, Strong predicted the company would hit its target of A$500 million (US$310 million) in cost savings for the year. The recent drop in the Australian dollar could make results appear slightly worse than the year before, but in local currency Qantas expects a profit at least as good as last year's US$197.8 million on revenue of US$6.1 billion.
Asia's crisis has not hurt Qantas as badly as it might. 'Asia has always been something of a contradiction,' Strong says. 'It was the fastest growing market, but it also brought poor returns. Capacity was always ahead of demand. Except for Japan in the '80s and early '90s, and more recently Hong Kong, we always had a better return on non-Asian routes.'
Thus, the loss to Qantas in Asia was not present profits but the prospect of future profits, which are now even more remote. Harbison predicts, 'It will take at least until 2000 to get back to traffic levels at the beginning of 1997. Growth rates from there on will be slower than they would have been without the crisis.' In his view, the prospect of profit growth from Asia has been pushed out four or five years.
Despite Asia, Strong says, 'I'm pleased with the progress to date. We paid down A$3 billion in debt in the last three years despite an economic downturn. We've made significant progress on cost avoidance, even though that simply allows you to stay still rather than getting ahead. After we sell our four Airbus A300s, we'll have an efficient, streamlined fleet consisting of Boeing 737, 767, and 747 aircraft. We have a very good relationship with BA and the prospect of further developing that with American Airlines and other carriers. But it's a big agenda and the urgency is growing.'
Strong remains sanguine despite the need to keep reacting to events beyond his control. 'Whenever you get a persecution complex, you need to go talk to some other people in and outside your own industry. Globalisation is a universal trend. It's putting enormous pressures on business. You literally wake up on Monday and don't know what the week's going to bring. In its own way it's quite an exciting environment to work in, but it's a very demanding one.'
Looking beyond the immediate demands of responding to Asia's crisis and mounting competition from rivals both near and far, Strong thinks the biggest challenges Qantas now faces are the same as those which confront other airlines: 'Enormous pressures on the margins due to liberalisation, how to manage the cost-revenue interaction, and how to get a reasonable return on capital.' Yet, he is impressed with what he sees as a growing financial discipline among airline executives around the world.
'This business is going to become more like any other business,' Strong predicts. 'We are moving away from the Chicago Convention era to an open, very mobile, quick-response industry. We need a company that's able to compete in that sort of an environment.' The trick will be balancing that need to be nimble with the steadiness that comes from a well founded sense of caution.
'This business is going to become more like any other business,' Strong predicts. 'We are moving away from the Chicago Convention era to an open, very mobile, quick-response industry. We need a company that's able to compete in that sort of an environment.' The trick will be balancing that need to be nimble with the steadiness that comes from a well founded sense of caution.
Source: Airline Business
