Qantas 'flying into heavy weather'
Mon "The Australian"
Qantas 'flying into heavy weather'
Steve Creedy
January 17, 2005
QANTAS boss Geoff Dixon's warnings of potential calamity in the face of record profits have earned him a reputation as a man who could find a cloud for every silver lining.
In a world where many airlines are either pulling out of the financial mire or are still in it, Qantas has managed to remain fleet-footed enough to stay profitable, delivering a record $648.4 million net result in 2003-2004.
The airline still expects to better that result in 2004-2005 and is in the midst of a multi-billion-dollar aircraft replacement program as its executives earn big bonuses and it continues to grow.
Nonetheless, Dixon uses every opportunity to drive home the point that Qantas is not invincible, that it has to adapt to a changing global aviation environment and that it is not operating on a level playing field.
"People say: 'You're always doom and gloom'," he says. "Well, I don't think I'm a doom-and-gloom merchant. I think I'm a realist. This is tough, it's unrelenting, it chews people up."
The warnings about the urgent need for cost-cutting and productivity increases are not about to stop. Dixon still believes there are too many airlines, too much capacity and too many governments propping up ailing carriers.
He believes staff will need to make more changes to work practices and that, even then, more Qantas jobs and services will have to head offshore if the airline is going to compete.
His most immediate concern, however, is to head off the campaign by Singapore Airlines to get permission to fly between Australia and the US.
He argues that not only would that leave Qantas facing four Star Alliance carriers on the Pacific, it would also mean giving away valuable rights without removing some of the obstacles Qantas faces out of Singapore.
But even as he continues to warn that Qantas's future is far from assured, he has been restructuring the airline in a massive program aimed at splitting operations into separate businesses and making those units more accountable.
With the changes now under way for 18 months, the Qantas boss believes the move towards segmentation is paying off and giving management a clearer picture of how the parts contribute to the whole.
The segmentation program essentially splits Qantas Group into five airlines – Qantas international, Qantas domestic, Australian Airlines, Jetstar and QantasLink – as well as related businesses such as Qantas Catering and Qantas Holidays.
The aim, probably in the next 12 to 18 months after IT systems have been bedded down, is to have the units report their results separately.
"The general view – certainly my view – is that already it's working to the extent it's really given us a much better handle on where our costs are and much more clarity in where we should make our investments," Dixon says. "That said, I would have liked to have been able to go more quickly, but that's no one's fault, it's just a very, very big job."
The process has already thrown up some interesting results, with some business management, believed to have been performing well, now exposed as being subsidised by the other operations. An example, Dixon says, is the airline's catering unit.
"It's becoming pretty obvious to us that while catering has been vastly improved, it needs to make massive adjustments," he says. "It was and has been subsidised by the airline to a greater extent than we would have thought until we started this process. In other words, it's been charging the airline too much."
While Dixon says the aim of the exercise is not to make it easier to sell off businesses, he admits this is one side-effect. However, there are no proposals to sell units and the airline is not in discussions about any of its units.
"We're a pretty integrated airline-transport company at the moment and that's the way we're going," he says. "Certainly, when segmentation is finalised and purring along the way we want it to be, we'll make assessments on how efficient the businesses are and whether they should still be part of the Qantas Group. But I don't want to give any impression that there's anything we want to sell at this point."
One concern Dixon does have about the segmentation process is the level of collaboration between the businesses. This need for the various units to work together and underpin the performance of the group as a whole was emphasised by consultants advising on the segmentation processes.
"While I think individually the people in all the segments certainly believe in that, I'm finding that the collaboration is not quite what we basically need," he says.
"By that, I don't mean that anybody's necessarily not wanting to collaborate, but I've got a group of pretty strong individuals in all the areas and what they really want to do is just get on with it.
"And we're saying, hang on, although we're segmenting the business it is a network business and one group cannot go off and do something without ensuring that it's not going to have an adverse impact, or indeed making sure that they know what the impact is, on other segments."
Where there has been good collaboration, Dixon says, has been in the airline sectors.
He believes this is the main reason for the group's strong positioning in the domestic market and the success of Jetstar.
The decision to start up Jetstar in the face of a history of failures by other legacy carriers to establish similar offshoots raised eyebrows when it was announced and prompted predictions it would meet a similar fate.
One common worry was that it would cannibalise and compete against Qantas mainline.
Despite criticism and some teething problems, Dixon believes Jetstar has been an outstanding success and puts this down to discipline within the start-up and collaboration with Qantas mainline.
The strategy has been to make the two complementary, with Qantas focusing on higher yield routes while Jetstar focuses on marginal routes.
The main thrust of segmentation is to allow the airline to better target its investment and see where further cost-cutting and productivity increases are needed to provide an adequate return on investment.
He warns that the group will have a hard time justifying investment in those segments not prepared to boost productivity.
"Our investment decisions and our growth decisions for the various segments of the business will more and more be made on efficiencies and where we can best employ our resources," Dixon says.
Asked whether that means favouring lower-cost vehicles Australian and Jetstar ahead of Qantas airlines, he says there is no doubt Qantas will move into new markets with its low-cost carriers.
He describes Jetstar's growth potential as unlimited and believes Australian will continue to be a vehicle to service routes where Qantas cannot make a proper return or has no intention of flying.
"But our basic plan at this stage is to continue to grow in our traditional markets of the US, UK, Japan, South-East Asia and North-East Asia, provided once again we can get the costs efficiencies okay and withstand the pricing competition from Chinese carriers." The division between the five carriers has still to be worked out but Dixon says the company would be derelict not to strongly support the Qantas brand.
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