Flying into trouble
Matt O'sullivan
June 11, 2011
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Flying into trouble
It's always tough for an airline to make money, but Qantas finds itself in a particularly bumpy patch, writes Matt O'Sullivan.
Alan Joyce was his jocular self but in no mood to talk about
the deal. Flanked by two of his senior executives, the Qantas boss joked that he would limit his views on the strategic alliance Virgin Australia had sewn up with Singapore Airlines hours earlier to a ''full stop''.
The Dubliner might have laughed it off in the foyer of the Marina Bay Sands, Singapore's answer to Dubai's luxurious Burj Al Arab, but it was obviously a big blow - and in full view of airline executives from around the world who had flown in for the annual gathering of the International Air Transport Association.
No doubt adding to the pain was that the Singapore Airlines alliance was secured in super-fast time by Virgin's chief executive, John Borghetti. A 36-year veteran of Qantas, Borghetti lost out on the top job at the national flag carrier three years ago to Joyce. His coup this week overshadowed talk from Joyce about the possibility of Qantas forming closer ties with Malaysia Airlines.
Borghetti, the former third-in-charge at Qantas who spent years grooming its premium product, had already won approval for strategic tie-ups with Air New Zealand, the US carrier Delta Air Lines and the Middle East airline Etihad. The deals are central to the motor-racing fan's plan to take Virgin upmarket and challenge Qantas's hold on the lucrative corporate travel market.
For well-heeled flyers, the prospect of a dogfight between Qantas and Virgin is a win-win. Competition is already intense between the budget airlines for leisure travellers. But looming industrial strife at Qantas also raises the possibility of travel plans thrown into chaos.
For Joyce, who served his apprenticeships at Ireland's national airline, Aer Lingus, Ansett and Jetstar, this is the beginning of a critical juncture for his leadership at the national carrier. The next few months will shape the Irishman's legacy at an airline that has long formed a part of the national identity.
Described as Qantas's worst nightmare, the Singapore Airlines dalliance with Virgin piles even more pressure on the 44-year-old as he grapples with a damaging stalemate with unions representing long-haul pilots and aircraft engineers. Then there are super-high jet fuel prices, Qantas's loss-making premium international operations, the impact of natural disasters, and consumers embracing frugality.
Its mark is plain to see. Qantas's share price slumped to fresh two-year lows this week. It has lost more than a third of its market value - or $2.26 billion - since early November, when it was forced to temporarily ground its A380 fleet after one of the superjumbos narrowly avoided disaster shortly after takeoff from Singapore. The Nancy Bird-Walton remains locked in a hangar at Changi Airport, about 20 minutes' drive from the Marina Bay Sands, awaiting repairs expected to cost well in excess of $100 million.
The confluence of events has led to Qantas's no-nonsense chairman, Leigh Clifford, publicly denying suggestions of a rift with the man he hired in favour of Borghetti and Qantas's former finance boss, Peter Gregg. But situations where a chairman comes out to defend his chief executive often raise the very questions such actions attempt to quash.
Resolving the dispute with the 1700 long-haul pilots and 1600 engineers will be crucial to restoring the faith. Yet both sides are no closer to sorting out their differences.
''
They are being hard-nosed,'' says Barry Jackson, the president of the Australian and International Pilots Association. ''The current management has lost focus. We believe that they really haven't concentrated on the [premium] mainline business.''
Then there is the Transport Workers Union, which represents baggage and ramp handlers, and catering staff. The union, which has frequently been at blows with Qantas, has already threatened industrial action even before its collective employment contract expires at the end of this month.
Joyce intensified his attack on "rogue unions" on the sidelines of the IATA gathering in Singapore this week, laying most of the blame for the fall in Qantas's share price on them.
He again made clear he would not give in to their demands for pilots and engineers working in offshore subsidiaries such as Jetstar Asia and New Zealand's Jetconnect to be covered by the same conditions as their Australian-based colleagues. To do so would leave Qantas in "huge difficulty", Joyce told reporters.
Qantas's 35,000-strong workforce is one of the country's bastions of trade unionism. Those representing the pilots and engineers retain a big influence over the airline relative to their size.
''This is really heading to '89 territory here,'' says an airline executive, referring to the pilots' strike of that year. ''[Qantas management] will struggle to go forward unless they can find a way to convince everyone that they are not crying wolf. Doing nothing is not an option because they are getting outdone internationally.''
Joyce's predecessor, Geoff Dixon, was well known for regularly accentuating the negatives. But Qantas's management rejects suggestions it is resorting to hyperbole to push the unions into a backdown - the international business
is losing bucketloads of cash, it insists.
Joyce emphasised it again this week: "The international losses are just something we can't sustain. We know we can't give into the outrageous demands of some of these rogue unions.''
Few doubt Qantas's premium operations are at a disadvantage to foreign airlines which operate on lower cost bases. Analysts at the Royal Bank of Scotland estimate the cost base of Qantas mainline - the planes with the kangaroo on their tails - is about 50 per cent higher than Virgin's.
But the
challenge has always been: how do you lower costs without harming the product?
That is made harder with a showdown just around the corner. Ballots of the long-haul pilots and engineers to vote on taking protected strike action will be completed early next month. They are expected to give their support, which will be the first industrial action by Qantas pilots in 45 years.
The pilots are unlikely to walk off the job, instead resorting to a work-to-rule campaign that includes flying slowly, stopwork meetings and refusing to do overtime. What appears relatively minor, such as not allowing for as much time as usual to travel to airports in preparation for flights or demanding a plane be checked for minor technical issues, can throw an airline's network into chaos.
Strange as it may seem, a work-to-rule can be more costly than a pilots' walkout because Qantas still has to pay their wages. And there is the flow-on effect: grumpy employees making clear to passengers their dissatisfaction, or travellers considering other airlines because of looming industrial action.
In 2008, the engineers' industrial action disrupted the plans of thousands of passengers for 10 weeks.
The dispute seriously dented on-time performance. The airline took months to recover after the dispute because of a large backlog of engineering work. Qantas estimated the dispute cost it $130 million.