Biting now
Kap
DJ/PB went where no other Australian 737 (or equivalent) operating carrier has gone before, and slashed its conditions (relative the industry benchmark prior to it coming on the scene), knowing that it could do so to capitalise on the desperation of thousands of unemployed pilots in this part of the world.
Absolutely it gave them a job, but quite frankly - you show me why, by slashing the wage standards 'respected' by all other Australian carriers for xx number of years, and by targeting the mass of unemployed pilots out there, they have been anything but cunning.
Now, as a result of DJ/PB achieving such a low cost-base partly as a result of their decimated pilot remunerations, it therefore means that on routes where QF (who have maintained their pilot remunerations to benchmark levels) and DJ/PB run head-to-head on key routes in 737s, DJ will need fewer people in its planes to 'break even' on those routes. As a result, it can offer extensive discounting and the like on a number of seats, and still make an absolute killing. Those attracted by its discounting will be taken off QF 737s, which cost more to run and as a result need more people on board to break even. On a marginal flight, DJ's ability to out-discount Qantas will mean that Qantas will make losses on many such flights unless the company changes a few things. Remember, were it AN vs QF (or another same-cost-base competitor), there would be no pressure to reduce crew operating costs - the discounting would come from other areas.
Now - AO. On routes where QF is going head to head (directly or indirectly) with government-owned or subsidised Asian carriers, the same applies. These carriers, with a lower cost-per-pax-per-km, will out-discount mainline QF almost every time. Couple that with the number of leisure destinations in Asia, where a vast number of pax will be on discount economy packages (read 'break even' for the airline), it's clear that the airline will either be making a loss or a bare-bones break-even on routes. In this case it'd be better to deploy this capacity onto other more lucrative routes, even if it only makes 1% more yield by doing this, it's still a better use of capacity.
And so AO was formed, with a view to reducing unit costs, and enabling it to still offer discounted Y-class packages, but this time make some yield from these pax. My understanding from various AO crew I know is that it's a great environment - their remuneration is far removed from the doldrums of DJ/PB, and the AO tech and cabin crew I know all love their job.
The choice for the company was either a) continue to make a loss or break-even on leisure routes, or b) make money from leisure routes principally by reducing the cost of doing business. Management at AO is barebones, contrary to popular belief, and technical crew remuneration is still considerable were you to take DJ/PB as a benchmark.
You be the judge, but the company (QF) was forced into reducing costs ('Sustainable Futures') by a) the unprecedented move of DJ/PB slashing labour costs as a means of reducing its unit costs, offsetting the reduced desirability of working for them with the sheer number of unemployed and desperate pilots out there, and b) by its rapidly contracting international network as a result of government-owned and subsidised carriers being able to out-discount it on leisure routes. AO was launched to counter this, and after adjusting for SARS etc has done extremely well in its first phase of operation. Hopefully next year will deliver a more normalised indication of how it might work out.
Lastly, an Australian public company is expected to deliver profits proportional to its size. Qantas is no exception - it must deliver $600-700m if it's going to get its shareprice back up above $4.00, which in turn will enable it to borrow/raise money more easily etc. It'd be nice for the company to run at break-even, and distribute the wealth amongst the employees, but that just can't happen for the above reason - investors expect a dividend, and a healthy, 'firewalled' balance sheet. Qantas delivers that year after a year, and only this year has investor confidence started to falter as a result of increasing pressure from low-cost entrants (DJ/PB). As a result, from an investors point of view, Qantas MUST lower costs and improve that area of its balance sheet. If it does, people will buy the stock again, allowing Qantas to more readily finance projects etc as required.
Cheers, ED