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Matt O'Sullivan
June 11, 2011 .
Alan Joyce
The next few months will be vital in shaping the legacy of beleaguered Qantas boss Alan Joyce.
ALAN Joyce was his jocular self but in no mood to talk about the deal. Flanked by two of his senior executives, Qantas's boss quipped 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 he was 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 the fact that the Singapore Airlines alliance was secured in super-fast time by Virgin's chief executive, John Borghetti.
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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, US carrier Delta Air Lines and Middle Eastern airline Etihad. The deals are central to the motor racing fan's plan to take Virgin upmarket and challenge Qantas's stranglehold on the lucrative corporate travel market.
For Joyce, who served his apprenticeship at Ireland's national airline, Aer Lingus, Ansett and Jetstar, it signals the beginning of a critical period for his leadership at the national carrier. The next few months will shape the Irishman's legacy at an airline that has long formed part of the national identity.
Described as Qantas's worst nightmare, Singapore Airline's dalliance with Virgin piles even more pressure on the 44-year-old as he grapples with a damaging stalemate with key unions representing long-haul pilots and licensed aircraft engineers. Then there are the high jet fuel prices, Qantas's loss-making premium international operations, the effect of natural disasters and consumers embracing frugality.
Their mark is plain to see. Qantas's share price slumped to fresh two-year lows this week. Qantas 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 planes narrowly avoided disaster soon 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 often when a chairman comes out to defend his chief executive, it raises the very questions such statements 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.
Then there is the Transport Workers Union, which represents baggage and ramp handlers, and catering staff. The union, which has frequently been at loggerheads 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 the "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.
Qantas's 35,000-strong workforce is one of the country's major bastions of trade unionism. The unions 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 in 1989.
''[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.''
Few doubt Qantas's premium operations are at a disadvantage to foreign airlines, which operate on lower-cost bases. Analysts at Royal Bank of Scotland estimate the cost base of Qantas mainline - the planes with the Flying 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 adversely affecting the product? That is made harder with a showdown just around the corner.
Ballots of the long-haul pilots and engineers over taking protected strike action will be completed early next month. They are expected to give their support, which will be the Qantas pilots' first industrial action in 45 years.
The pilots are unlikely to walk off the job, instead resorting to a work-to-rule campaign that includes stop-work meetings and refusing to do overtime. What appears relatively minor - such as not allowing 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 the airline's network into chaos.
Strange as it may seem, work-to-rule can be more costly than if the pilots did walk out because Qantas still has to pay their wages. And there's the flow-on effect: grumpy employees making clear to passengers their dissatisfaction, or travellers considering other airlines because of looming industrial action.
With both sides playing hardball, Qantas desperately needs what Joyce's predecessor, Geoff Dixon, often referred to as a ''circuit-breaker''. But it was not evident this week in Singapore, where Joyce said he would not pump any more funds into the international operations - the division dominated by the long-haul pilots - until they returned their cost of capital. Aiming directly at the pilots and engineers, he said Jetstar and the Frequent Flyer division "could just not continue to subsidise" the international operations.
Qantas has had a taskforce led by a senior executive, Lesley Grant, reviewing the options for the international business since January. It could include setting up a full-service subsidiary in Asia or adjusting aircraft orders (though it will not apply to the A380s or Boeing's long-delayed 787 Dreamliner).
Meanwhile, Borghetti has been quietly reinvigorating Virgin. He has won over Singapore Airlines under the nose of Qantas and has some time to prove to investors that his strategy is right. It is obvious why he wants more of Qantas's prized customers: business-class flyers make up less than 10 per cent of a plane's total passengers but can contribute about 40 per cent of the revenue.
Borghetti even claimed that Virgin's product was now ''better than our competitor's''. And not content with snaring more passengers in the domestic market, he wants to boost Virgin's international market share.
Qantas's share of international traffic to and from Australia has fallen from about 42 per cent when it was floated in 1993 to 27 per cent (about 8 per cent of which is Jetstar) today. But it would be unwise to underestimate the dominance of Qantas.
It is still one of the most profitable airlines and boasts an investment-grade credit rating that allows it to borrow more cheaply than its competitors.
Paul Fiani, managing director of Integrity Investment Management, says while Qantas needs to stay on the ball, he believes the threat from Virgin is overstated. ''Their ability to attract the business market is going to take a long, long, time. Virgin needs to spend a fortune to replicate what Qantas has in the business market and they don't have the money to do it,'' he says.
Despite Borghetti's new friend in Singapore Airlines, Virgin is still flying towards a second-half loss of up to $150 million because of fuel prices and a decline in yields from leisure travellers on domestic flights.
Some short-term relief for Australia's dominant airlines has come from Tiger, the Singapore ultra-budget carrier that last month shelved its ambitious growth plans in Australia because of mounting losses. Tiger has been a big irritant to Qantas offshoot Jetstar and Virgin since entering the market three years ago.
Its decision to drop some domestic routes raises speculation about whether it will eventually pull out of Australia. This would help ease the pain for Joyce and Borghetti.
The demands of Joyce's high-profile job are unrelenting. His time steering Qantas has been tough from the outset: he took over from Dixon in the aftermath of the global financial crisis.
And the short-term outlook is not rosy. Investment bank Goldman Sachs this week increased its forecasts for jet fuel - an airline's single-biggest bill - to $US136 a barrel this year, from $US117. And next year is worse - $US139.
''There are many things that impact on the airline business that are beyond the control of management - fuel prices, currency, the global economy. You just have to continue to manage the things you can manage,'' says Sir Rod Eddington, a former boss of British Airways and former chairman of Ansett.
Joyce, the maths whiz from the outer-Dublin suburb of Tallaght, now faces his biggest test managing the industrial relations headwinds buffeting the Flying Kangaroo.
The reporter travelled to Singapore courtesy of IATA.
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