Amidst the crisis of the last two years, Geoff Dixon has quietly steered Qantas into one of the strongest strategic positions of any major carrier
Qantas Airways chief executive Geoff Dixon must be the envy of most of his counterparts around the world these days. In a period in which most carriers are deeply in the red or facing collapse, the Australian flag carrier is fresh from reporting solid profits for the first half year to December, and appears likely to continue along this path for some time, despite recent troubles caused by the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome in some of its key markets.
Since the September 2001 collapse of rival Ansett Australia, Dixon has found himself overseeing an airline with a 70% share of a growing home market and which has dramatically increased its operations, both domestically and overseas. Today Qantas operates in a stable domestic duopoly - with itself serving all of the country and low-fare carrier Virgin Blue offering no-frills services on major domestic routes.
But Dixon is not one to sit back and relax. He believes Australasian carriers can only truly compete long-term in the global marketplace by gaining scale. So in November, Qantas announced an agreement to buy 22.5% of Air New Zealand (ANZ) and form a major operational alliance with the struggling New Zealand carrier. The two airlines are still seeking regulatory approvals on both sides of the Tasman Sea and expect the deal to be firmed up later in the year.
ANZ's collapse in 2001 provides a sharp relief to the rise of Qantas. Its downfall stems in large part from an ultimately ill-fated venture into the Australian market. The plan had been to use Ansett Australia to compete head on with Qantas, but the subsidiary collapsed in September 2001 and came close to taking its new parent with it. ANZ was only saved by a 2002 government bailout that left the state with more than 80% ownership. Dixon himself knows a thing or two about consolidation in the Australian market. His airline career began at Australian Airlines, the state-owned domestic carrier, which was merged with Qantas in the restructuring and privatisation of the country's airlines in the early 1990s. He went on to work at Ansett as marketing director in happier times before joining Qantas in 1994.
Alliance conditions
Dixon, whose personal charm belies his reputation as a shrewd business operator, holds no illusions about the potential risks and benefits from the current opportunities for consolidation. He warns that a firm deal with ANZ will not be signed at any price. "If the regulators, in their wisdom, want to force so many changes to what we want to do, or put so many restrictions on what we want to do, we will walk away from it and so will Air New Zealand," said the Qantas chief, talking to Airline Business in mid-March in Singapore while on a round-the-world trip meeting investors in Asia, Europe and North America. Dixon and his senior executives make such trips after each release of first-half and full-year results.
On 10 April the New Zealand Commerce Commission and Australian Competition and Consumer Commission (ACCC) issued draft rulings opposing the proposed alliance, calling it anticompetitive and not in the best interests of consumers. Dixon hopes the tie-up will ultimately be approved in final rulings that are expected in June, although this will depend on what concessions the carriers are able to offer to the regulators.
"We don't want to be threatening about it, but there must be something in it for us," says Dixon, who has had more than a few run-ins with the ACCC over competition issues in recent years. "There is a price you can pay, and it's not just the monetary price we pay for the shares, it is also the price the regulators might want you to pay. And what we are trying to say to everybody is: Look at what is going on out there, look at what is going on in the industry. The USA is in total meltdown, Europe is having huge problems. We need scale. We have an opportunity to have a trans-Tasman airline that is viable. The regulators should not force us into a situation that we cannot accept."
Dixon adds: "We are the first to admit that part of this could be seen to be anti-competitive, but there's something to be said for the fact that what you need in the airline industry is viability, consistency, reliability and also, we believe, to still give good fares. Scale is important in this industry, and we believe there are natural affinities between us and Air New Zealand and that working together we can make it a bit more viable down in our part of the world."
New Zealand support
The New Zealand government, which supports the deal, will see its ANZ stake diluted if the deal goes through, although it will retain majority ownership. Qantas will have 22.5% and two seats on the 10-seat board. It will be the Australian carrier's second overseas airline investment, the other being its 46% holding in Fiji's Air Pacific.
For its part, ANZ is still recovering from a near-collapse, which resulted in it being forced to write down its investment in Australia's Ansett, which was handed over to administrators and later shut down. It admits that it needs the deal to go through more than Qantas does, fearing it may otherwise shrink further and become a small regional player.
The New Zealand government agrees. In December, it gave in-principle approval to the buy-in, allowing Qantas to subscribe immediately for redeemable convertible notes equivalent to a stake of nearly 5% for which it paid NZ$98.2 million ($54 million). ANZ will retain that money even if the rest of the NZ$550 million deal fails to achieve the necessary consents.
The government has said it understands the proposed alliance will reduce competition within New Zealand, where both ANZ and Qantas operate domestic services. The same is true across the Tasman to Australia, where the two carriers and ANZ subsidiary Freedom Air are the dominant operators. However, it feels the benefits outweigh the negatives.
In making its position public in December, the New Zealand government noted that this was particularly true given ANZ's own assessment that the most likely scenario, if the alliance were rejected, was that Qantas would "enter a war of attrition against ANZ which the New Zealand carrier would be hard-placed to win".
Dixon says Qantas will indeed continue to compete "vigorously" with ANZ if the deal is blocked, but he quickly adds "that doesn't mean we are going to go out there and be frenetic about it and try and destroy Air New Zealand". He makes no apologies for the success of his airline, but he gets more than a little agitated when Qantas is branded a monopoly operator. "The biggest joke or misnomer going on with Qantas is that it's a monopoly," Dixon says. "Qantas has around 35-36% of the international market in Australia, but has over 40 airlines every day competing against it - most of them government-owned. Most of them can't go broke and are subsidised by their governments. We are nothing like that. We have 70% of the domestic market - that is hardly a monopoly. In countries all around the world there are airlines like Air France, for example, that have 80-85% of their home market. We are nowhere near a monopoly."
Virgin Blue challenge
Dixon believes the current domestic market share split between Qantas and Virgin Blue is likely to remain in the long term, with Qantas controlling around 65-70% and Virgin Blue most of the remainder. "It's not going to change very much as far as I am concerned," he says with a laugh. "I have heard Virgin Blue say that they can get 50%. I have heard some nonsense, but that is nonsense."
Virgin Blue, established by the UK's Virgin Group, launched services in August 2000 in a market which then had three key players: Ansett, Qantas and Impulse Airlines. The latter only months earlier had transformed itself from a regional carrier with small turboprop equipment into a low-cost operator flying Boeing 717s on trunk routes. A price war broke out and it became clear casualties would follow. Impulse was the first to bail out by agreeing in May 2001 to a takeover by Qantas. Troubled Ansett collapsed months. Only 18 months earlier ANZ had bought out News Corp to take full control of Ansett, but had to leave its Australian subsidiary to its fate in order to save itself.
In the maelstrom, Virgin Blue survived and prospered, and is now still half-owned by the Virgin Group and 50% by Australian transport group Patrick Corp, which acquired its stake for A$260 million ($154 million) in March 2002.
Dixon believes Virgin Blue's survival is largely due to the fact that it was "very, very lucky" its competitors failed first. But he concedes that "they do run a good airline," and the market is now a stable one with just the two major players.
"What's wrong with a duopoly? A monopoly upsets people and when you have a duopoly that also seems to upset people," says Dixon. "This is an industry that is in meltdown in many parts of the world. Capital costs are out of control. A viable duopoly is something people should be very, very happy with, particularly if it is a duopoly that is competing very, very aggressively.
"Obviously the previous structure - when you had airlines coming in and there were price wars all the time - didn't work. But the important thing to note is this: airline seats in Australia are some of the cheapest in the world. And that is not just us saying that, it's proven. And that is by both Qantas and Virgin. The important thing is you now have airlines with enough money to invest. We are investing billions of dollars in new aircraft, our friends at Virgin are buying new aircraft, so the industry looks like it has got some chance."
Australia maintains a highly liberal international air services regime in addition to allowing 100% foreign ownership of domestic carriers. Singapore Airlines has been among the outside rivals that has considered entering the domestic market, but Dixon does not believe a third major airline will be established to operate on trunk routes. "It's self-serving, but I don't think the market is big enough for a third player," he says. "The market has only ever been able to have two, and usually when it had two only one was decently profitable. Now you've got a situation where you can say that we have got two, but they are different models, which is important. They're efficient, there's a plethora of cheap fares out there and they're both profitable.
Dixon adds that if another player were to enter the fray then Qantas would "fight fiercely but not illegally" to defend its position and he assumes that Virgin Blue would do exactly the same. "I am not sure any more that there are people lining up in Australia wanting to get into it. After the last 10 years, anybody in the current environment who is seriously thinking of starting an airline in Australia probably needs to have a very good lie-down."
International strength
Qantas has significantly expanded its domestic operations since Ansett's collapse with dozens of additional aircraft, including its first Airbus A330s and Boeing 737-800s, plus additional 717s and Bombardier de Havilland Dash 8 turboprops. It is not neglecting its international side either, which performed well in the first half of its financial year to December, turning in an operating profit of A$263.9 million, compared with a loss of A$15.5 million for the same half a year ago. Overall pre-tax profit jumped to A$513million from A$231 million, on 9% revenue growth to A$5.88 billion.
Qantas has been adding Boeing 747-400ERs to its international fleet since late last year and has 12 ultra-large Airbus A380s on firm order for delivery between 2006 and 2011. In October, it launched Australian Airlines, an international "leisure" carrier based in Cairns that operates four single-class Boeing 767-300s, to some points that are not viable for the mainline carrier to serve with its higher cost base. Destinations include points in Japan as well as Hong Kong, Singapore and Taipei, and it is being expanded with two more 767s that will serve Bali in Indonesia from July, and possibly later in the year Kota Kinabalu in Malaysia and Shanghai.
"We are happy with it," Dixon says of the subsidiary's early days. "It will never be a very big carrier, but we are hoping it will be a very important part of the package that Qantas provides, which is a big regional operation, big domestic operation, quite a big and viable international operation and then this lower-cost leisure operator inbound, which is good for the Australian tourism market."
Meanwhile, Qantas has begun seeking regulatory approval for an extension of its successful joint service agreement with oneworld partner British Airways, which owns a 19% stake in the Australian carrier. The tie-up covers joint operations on flights between Australia and Europe, with stops in Bangkok and Singapore.
Australian approvals expire in July and the renewal process began recently. Dixon says Qantas, which has been told by BA that it is committed to maintaining its sizeable minority stake, sees no reasons why an extension of the existing approvals should not be granted. The ACCC is widely expected to extend the approvals, although it has indicated it will be considering the renewal request alongside the proposed Qantas link with ANZ.
Dixon adds that while BA ties will be maintained, decisions have still to be taken about future multilateral alliance ties for either Qantas or ANZ. The New Zealand carrier has said it should "not be assumed" it will leave the rival Star Alliance if the deal with Qantas is approved. But as Qantas is much larger and as it has strong operational links with several oneworld partners, most observers believe the New Zealand carrier will indeed leave Star.
For his part, Dixon gives no hint at what direction the two carriers would go, post-equity link. He says that "at some stage we'll have to make a decision on it", but he feels regulators should not be concerned about the alliance issue. "It may sound a little bit rude, but I don't think it has anything to do with them," he says. "Let's take Canada, for instance, where oneworld has no presence at all - there are many countries like that. There's no oneworld carrier in France. There's no oneworld carrier in Germany. Why is this such a big issue?" he asks.
"Our main alliances are bilateral alliances, not multilateral. We happen to be in oneworld, they happen to be in Star. I'm not sure what that's got to do with regulators. These things change around all the time. These are not mergers, these are not people taking equity stakes. These are people trying to co-operate to try and get some scale in an industry that lacks it. I take my running orders from my board, not from anybody in oneworld. We are in oneworld, but it is there as a marketing relationship," says Dixon. "We don't know what alliance we are going to be in because Air New Zealand is in one and we are in another. Under no circumstances would Air New Zealand or ourselves leave our alliances before we knew whether we were going to be able to have a deal. Why would we do that? It puts both of us at risk."
ANZ is known to have studied whether there is a way for it to remain in Star and Qantas to remain in oneworld even if the deal goes through, but Dixon does not believe this is feasible, as "it would be very difficult to co-operate" by remaining in different alliances. "But what we could do is be in one alliance and certainly help out members of the other alliance with pro-rates and things like that," he says.
Not bullet-proof
While the outlook at Qantas appears generally rosy, Dixon says that Australian government officials who continue to give foreign airlines ever greater access to the country should recognise that "we are not bulletproof". He admits to being highly disturbed by recent trends towards government bailouts or state ownership of airlines that puts Qantas - which has been fully privatised for nearly eight years - at a disadvantage.
"This industry today is in meltdown. There are too many aircraft, too many airlines, too much government interference. There are too few opportunities for rationalisation - that means airlines going out of business when they should. Governments should not be interfering in the way they are. Unless something happens with this industry it is going to be totally distorted," he says.
"You wonder at the end of the day why the governments don't take the whole industry back if they are going to do that. They just distort it. It is a very, very difficult environment. There are not many like us out there," he adds. "We have no government ownership, and we have got to stand and fall with what we do ourselves. We're at the mercy of the market and our own ability to manage the place."
Source: Airline Business
