The boss of Qantas, Alan Joyce, is about to face his toughest challenge since he took the top job in 2008: compromise with the unions and reduce margins or face some damaging industrial action.
The spectre of messy industrial action comes at a time the airline is suffering from a battered image following a string of midair emergencies last year, low staff morale and discontent that the Qantas brand is being run down to skimp on costs and promote its budget airline, Jetstar, which is less unionised and has cheaper pilots.
Talks with some unions, including the Australian Licensed Aircraft Engineers Association (ALAEA), reached a dangerous point yesterday. The boss of the association warned that it would strike on Friday. The Transport Workers Union is also holding talks, as is the Australian and International Pilots Association, over a deal for its long-haul pilots.
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These three unions represent a big swag of the group's staff and could make life difficult for Qantas - as well as for customers. On one side, staff feel disengaged and poorly treated, and want more security; on the other, management is looking at its numbers and the impact if it bows to union demands.
The problem Joyce faces is that Qantas pilots are paid more than some regional counterparts, and in cases where other pilots are paid more, their productivity is believed to be higher. The only way Joyce will be able to convince the board that he can justify a pay increase is if he can get agreed productivity gains. If the unions don't buy this, there will be industrial fireworks.
Qantas pilots and engineers have wage claims - but are offering no productivity gains - which Qantas says mean a 25 per cent rise in pilot costs over three years and 36 per cent for engineers.
Aviation analyst Kevin O'Connor, who wrote a report on Qantas before leaving Merrill Lynch last week, says it is crunch time for the company. In his report O'Connor concludes that Qantas is the most expensive airline in the region.
"Margins have been protected by it also having the highest yield, but rising competition means we think it must improve productivity," he says.
Qantas unions have scope to offer productivity gains, and Qantas has powerful levers, via its low-cost Jetstar operation and the incoming 787 fleet, with which to extract productivity gains, O'Connor says.
But the clock is ticking. Qantas is neck and neck with Air New Zealand for having the highest cash operating expenditure among its regional peers. Its saving grace to date has been its yields, which are among the highest in the region. They have enabled it to offset costs and give it one of the highest margins per passenger kilometre among its peers. But its yields are under attack. Competition in the shape of lower prices, better quality products and a perception that the company is running down the Qantas brand, are forcing down its yields.
Competition intensified yesterday, when Emirates announced it would scrap its fuel surcharge on all flights.
If strikes and other forms of industrial action are thrown into the mix, customers will vote with their feet. The engineers took industrial action in 2008, causing disruptions for thousands of passengers.
Qantas meets the pilots' union this week over stalled talks on a new deal with its long-haul pilots.
Fireworks ahead if Qantas staff won't agree to link pay rises to productivity gains