Virgin Australia, Qantas, and its leadership crisis
February 23, 2012 – 4:55 pm, by
Ben Sandilands
Virgin Australia did its bit today to make news by adding to leadership tensions at Qantas.
Virgin Australia’s CEO and ex Qantas senior executive John Borghetti delivered astonishing first half year results, in which the smaller airline made more by way of statutory net profits after tax of $51.8 million than the entire Qantas group, which made only $42 million by the same measure in its results to 31 December as announced a week ago today.
Its tiny international operation made $35 million EBIT, compared to claims by Qantas CEO Alan Joyce that his group’s far larger Qantas long haul operation continues to lose more than $200 million a year, and unlike Qantas, Virgin Australia’s loyalty scheme earnings contributed comparatively little to the overall result, which was based overwhelmingly on profitably flying people rather than selling halo points to third parties like grocery chains or hotels.
If that wasn’t bad enough for Qantas, Borghetti also announced a plan to split the company into a domestic Virgin Australia Holdings company and a new unlisted Virgin Australian International Holdings unit with a view to greatly increasing investment in the domestic operations where both Qantas/Jetstar and its major competitor make most of their money.
The complex split plan, in which existing shareholders are given shares in the new unlisted international company by way of an
in specie dividend, has a rather simple but unstated objective, which is to facilitate any desire by Etihad Airways or other interested foreign airline or institutional investor to buy their way into the share register as significant and rich equity partners who will help fund a major assault on the Qantas Cityflyer domestic trunk routes as well as grow the connecting traffic Virgin Australia is bringing to Etihad’s hub at Abu Dhabi.
This will require FIRB approval, and it might well be fought tooth and nail by Qantas, but it potentially allows an already profitable challenger airline group to fund ambitious expansion plans.
For Qantas, the pressure points are obvious. Joyce is being outflanked where it hurts, and has a poorly articulated Asia savior plan for a part owned premium carrier that is somehow going to fund the recapitalization of a shrinking and loss making long haul Qantas operation with profits from a venture that will be substantially owned by Jetstar’s most potent Asian competitor, Air Asia and based in Kuala Lumpur, a centre from which it will compete with the existing Qantas investment in Singapore as a combined Qantas/Jetstar hub.
Investor doubts about the rationality and practicability of the Joyce plan, in its various iterations, and their inherent absurdities and conflicts are growing by the day, including the Qantas CEO’s guidance a week ago today that he now wanted it to be ‘capital light ’ with a fleet that Qantas paid for in the smallest possible measure.
The ‘hello Asia, we want a free ride to take your business away’ message is not going down well, either in Asia, or in Australia.
Borghetti said Virgin Australia was committed to keeping up the competitive pressure on Qantas domestic business class and full fare services with a growing investment in Australian based jobs, including lifting its heavy maintenance work to more than 50% based in Australia rather than offshore.
He said there would be more and better lounges, more pride in its Australian identity, more involvement with its Australian employees, and better, newer, more efficient jets than Qantas could afford.
“We have forced business friendly fares down to the levels of 1996 on many routes in as little as a few months,” he said, which of course coincided with the period in which the Qantas industrial disputes and its locking out of its own customers caused major inconvenience and brand damage to the flying kangaroo.
Borghetti said the ‘Game Change’ program that had been expected to kick in during the second half of the financial year had produced results ahead of schedule.
He emphasised that Virgin Australia had not been in any discussions with Etihad Airways concerning its plans to split the group into domestic and international components that would have different shareholders, but that it had for some months been working with financial advisers on ways in which it could increase institutional investment in its major domestic business without breaching the foreign shareholder cap of 49% which was a condition for retaining its status as an Australian flag carrier in terms of securing and retaining overseas traffic rights.
In the wider perspective the differences in leadership at Qantas and Virgin Australia are becoming increasingly obvious. Virgin Australia has a work force in which many would be prepared to die in a ditch for the company, while Qantas appears to want many of its legacy work force to, if not die in a ditch, go away and allow it to replace them with younger, cheaper and less skilled pilots, several of which clearly should never, ever have been employed to sit in the right hand seat of Jetstar A320s given recent safety scares.
This is not to agree with some of the views pushed by protectionist or change resistant Qantas employees, but a criticism of the hostile attitude of management to labor in the Qantas group, and the lack of staff engagement that this causes, compared to the much stronger sense of joint purpose that has characterised Virgin Australia and its Virgin Blue predecessor from day one.
The Virgin story in Australia isn’t one of unalloyed management-labor harmony and bliss, but its has been, comparatively speaking, far more constructive and effective, and it shows very favorably in its service delivery and commitment to being Australian, or if you wish, true blue.
It’s a difference which is a potent factor, as acknowledged by Borghetti today, in a profit result which hasn’t slayed a giant, but has kicked it hard in the … shins.
An earlier similar report appeared in the Crikey Daily Mail.