Sky's the limit as Qantas takes off (Robert Gottliebsen)
Sat "Weekend Australian"
Sky's the limit as Qantas takes off
Chief executive Geoff Dixon plans a massive reorganisation and expansion of the Flying Kangaroo writes Robert Gottliebsen
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August 26, 2006
"YOU won't recognise Qantas in four years time," says chief executive Geoff Dixon. And then he details his incredible plan for the airline up to 2010 - one of the biggest reorganisations to be attempted in recent years by a prosperous Australian company.
And what makes it even more remarkable is that it is being undertaken by a 66-year-old chief executive in his sixth year in office.
Probably the nearest match to the Qantas revolution was the dramatic change that took place at BHP under chairman Don Argus and chief executive Paul Anderson. It is no coincidence that Paul Anderson is now on the Qantas board, along with another BHP director, John Schubert.
Among the changes Dixon is looking at make at Qantas by 2010 are:
* A dramatic widening of its freight operation with a view to responding to the Toll/Patrick merger. He has already had talks with Lindsay Fox and his Linfox land transport and logistics operation, while the K&S group would be another possible target. By 2010 Qantas freight will be a separate public company.
* Jetstar will expand fourfold or fivefold. While there is no concrete plan to float it as a separate public company, the option has not been ruled out.
* The base Qantas international and domestic airline business will be substantially reorganised to meet two enormous challenges.
* The engineering business is looking to expand and take on more non-Qantas work.
* Qantas Link will be expanded and could float.
* Longer term, the airline will deal with its service providers, including catering and airport handling, on the basis that in time it can go to another provider if the old Qantas business is not competitive.
In its heartland business - passenger airlines - the company plans to spend $20 billion on new aircraft between now and 2016, led by the Airbus A380 and the Boeing Dreamliner. The new aircraft will substantially lower costs.
Much of that investment will be financed via aircraft leases, leaving Qantas with the opportunity to allocate some of its substantial cash flow to the planned thrust into freight, where negotiations are taking place to form a group that "can provide a degree of competition with Toll", Dixon says. "Toll, with the takeover of Patrick, has established an incredibly strong position," he adds.
One problem Qantas faces in extending its air freight business into the wider transport arena in competition with Toll is that freight businesses are now selling at very high prices, as was shown by the Linfox acquisition of FCL.
Nevertheless, perhaps encouraged by former Patrick boss Chris Corrigan, Dixon is focusing on the plan.
"We are talking to Lindsay Fox every week and will continue to talk to him. Obviously we would like to be in general freight," Dixon says.
Asked if he would buy Linfox, Dixon says: "It is possible."
Asked whether he could put the two businesses together, Dixon says: "Over a good bottle of red - and he (Fox) has a wonderful cellar - we have discussed those sorts of things."
Of course, adding an extra dimension is Toll's stake in the airline business via its interest in Virgin.
Dixon says: "The Virgin business would have to change dramatically for it to be any sort of player in freight. Low-cost airlines are not freight carriers."
Dixon admits that at the moment Qantas doesn't have the management skills to run a large general freight business, but "we certainly have a lot of assets" and it is one of the real diversification opportunities for Qantas.
Two or three years ago the base Qantas international airline business was globally competitive but three dramatic changes have left the Australian airline with a cost base that is now too high.
First, a series of international airline mergers and/or realignments, including KLM and Air France and Cathay and Dragon Air, have lowered the costs of several major players.
Second, in the US most of the airlines have gone into Chapter 11 bankruptcy, which has enabled them to substantially cut their costs.
Third, governments are pouring money into airlines, where they have a substantial equity, often promoting the continuation of sub-economic activities. These moves have left Qantas in a position of having higher costs than many of its global competitors.
The latest reorganisation of Qantas is the equivalent of a prosperous company making the sorts of changes that a bankrupt American airline might do using Chapter 11. It won't be easy to achieve the proposed gains.
Qantas plans to only travel on international routes where it is competitive. Jetstar will often take over the routes where the conventional airline can't match the costs.
Dixon stresses that Qantas will not withdraw from any air route where it can meet its competition. But he sees Jetstar as not only flying a series of Asian routes, but taking the group back into some of the European destinations that Qantas previously abandoned. Jetstar will fly to most Australian destinations. Dixon says that the low-cost airline model has not been used in long-haul routes by any other carrier, but he believes that the Dreamliner aircraft will make this very successful. Domestically, Jetstar has costs that are about 10 per cent lower than Virgin but Virgin costs are 20 per cent below Qantas.
Qantas does well domestically because it can sell its tickets at a 35 per cent premium over Virgin, but Dixon admits that the Virgin thrust into the business markets is a serious threat.
In a message partly for Virgin chief executive Brett Godfrey, Dixon says: "I think that taking on Qantas in the corporate market is a hard road for them. History will show whether I am right or wrong.
"Obviously if they got it right Qantas would have to make a lot of moves because, if they were able to gain a large slice of the corporate market with a cost base that is significantly less than Qantas, we would have a real problem.
"The restructuring is aimed to narrow the difference. We will never be able to get down to their costs, allowing for the product differential, but I don't believe the union movement or anybody can sit there with two airlines - Virgin and Jetstar - with substantially lower wages and conditions for doing the same work as the other airline.
"I hope that by 2010 Virgin and Qantas costs would be very much aligned. That would come not just from Qantas slashing its costs. Virgin costs are increasing at a considerably higher rate than Qantas and there is a convergence happening," Dixon says.
At the moment Qantas is regarded by most domestic investors as an income stock. Geoff Dixon clearly believes that overseas investors understand that it has considerable growth potential, which is why he wants the limit on overseas investment removed.
The key to the future of the base Qantas business is to be able to develop a competitively costed airline that can compete in the premium product business.
Globalisation depends on aviation and Qantas has one of the top brands and images in this arena. But if Qantas is to emerge as a growth stock, it will become a holding company for a series of transport businesses, many of which will be floated.
If Dixon only pulls off three-quarters of what he plans to do, then the current Qantas operation will have been transformed.
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