Nice precis from Ben Sandilands at Crikey.
How could Qantas have done better in the 90s?
April 6, 2012 – 4:42 pm, by
Ben Sandilands
The question has been asked
here, and elsewhere, as to how Qantas might have pursued a strategy to retain market share and brand strength in the face of competition from the likes of Emirates and Singapore Airlines.
At the outset, the history of those times tells as that Qantas management was convinced that the Joint Services Agreement with British Airways, then a 25% cornerstone investor, was the key defence. It began in 1995, the year Qantas was listed on the ASX and it preceded by three years the formation of the oneworld alliance.
The JSA has always been more important to Qantas than oneworld. It has also been successful in leveraging good outcomes for what unfortunately was a nevertheless limited or Anglo-centric view of the future, which included a complete failure to recognize and deal with the vacuum left by the retreat of Lufthansa, Air France and KLM from the Australia-Europe routes, in the same decade that saw Garuda give up on such services where it had in fact made inroads, and the withdrawal of the old Soviet and post Soviet Aeroflot flights that for many years had been the source of unbeatable if at times scary bargains.
That vacuum began to be filled by Emirates and failure to recognize and act on the emerging commercial realities of those times has proven devastating for Qantas in the present, and will prove exceedingly difficult and time consuming to repair.
In the 90s the Qantas market share of international traffic peaked at close to 40%. On the routes to Europe its capacity rose to at least five 747-400s a day at its peak, including tandem services like Amsterdam plus Manchester. Today the Qantas capacity to Europe all the way in its own equipment is two A380 rotations to London and one 747 rotation to Frankfurt a day, having recently dropped two additional 747-400s daily in favour of trying to persuade its patriotic customers to connect for most of the way on BA flights.
The Qantas attitude to Europe is that of reducing the risks of having to compete by withdrawing from services, and then complaining that 82% of the international Australian market choses to fly with someone else, often because there is no Qantas service available.
Qantas does nothing to address in its own right the services its competitors with hubs in Dubai, Bangkok, Hong Kong, Singapore and Abu Dhabi offer to a wide and growing range of destinations in other eastern and western European cities, the Middle East, central Asia and the western, northern and eastern African economies, places it ignores at its peril, except that I don’t believe there is an atom of long term or broad scope strategic thinking in Qantas beyond short term possibilities to sell out of the main carrier or pursue the potentially lucrative expansion of its Jetstar low cost franchise.
There are many excuses offered for this including the lower cost of doing airlines everywhere but Australia, and being at the end of the line, and so forth. To the extent that these excuses are valid, there has also been no strategy to mitigate the loss of brand power or market share by actually doing things that might be more useful that demonizing staff, treating customers with contempt, and engaging in woe-is-me hang wringing.
But what might it have done? In the late 90s it could have invested in Boeing 777-200ERs to fly non-stop to Dubai and on to such destinations as Amsterdam, Manchester, and Rome as an alternative to closing them down and in effect giving the business to its competitors, because flying to them via London is not over a period of time something that will build brand loyalty, and customers will value getting where they want to go up to half a day faster when Thai, Singapore Airlines, oneworld partner Cathay Pacific, or Emirates offer it.
The -200ERs would not have been a replacement for A380s for routes with slot limitations, nor for A330-300s, which are unbeatable on routes like Sydney-Hong Kong because of the merits of an airframe that is as perfect as it can be for a nine hour flight in terms of fuel efficiency and payload to airframe weight matching.
But what the 777-200ERs would have done was protect the brand and prevent Emirates from an expansion in this market that was accelerated by not being opposed by competing product, city pair by city pair.
The 777-200ERs would also have made it easy for Qantas to transition to -300ERs with more seats, and better fuel economy, as what were once core Qantas services to Europe continued to grow.
These Boeings would have also meant that customers who wanted to fly Qantas from Brisbane or Perth, or Melbourne would have had more opportunities to avoid changing between Qantas domestic and Qantas international at Sydney, a factor that caused it to bleed market share.
The retention of more of a share in a strongly growing market would have also opened the very real possibility of negotiating a deal with Emirates, in that the purpose of Emirates like that of Singapore Airlines has always been to develop the respective economies of the Dubai and Singapore by encouraging traffic. There is an interesting divergence between the experience of Emirates and Singapore Airlines in this regard, in that Dubai is too successful at attracting more than 100 competing carriers to its airport, while Singapore Airlines failed to contribute to growth at Changi to expectations in recent years, and appears to be struggling in some measure to adjust to the opportunities of low cost air travel. Singapore Airlines is less relevant to Singapore than ever, while Emirates is highly relevant to Dubai, yet competitively challenged by Asia, Middle East and European brands determined to offer their nationals a flag carrier service to the Gulf economy cross roads.
Would this have made Qantas both more profitable and larger than it is today, even if Emirates hadn’t done a deal? I think so, but there is a further element that better management could have adopted to make that profitability increase more convincing.
And that is fleet financing. Qantas has clung to the once nearly universal view that it needed to own and maintain its fleet types for decades, rather than churn the aircraft through a mixture of leases and outright purchases with a view to keeping its average type age young. I can remember James Strong as CEO and Gary Pemberton as chairman saying that Qantas would buy its jets in small numbers and never place large orders, and sweat the asset, in the lovely phrase of the 90s. And, in the always perfect rear vision mirror view of history, they were wrong, or rather, became wrong. High fuel prices, the need for the very latest in fuel efficiency, and the need to avoid major aircraft age or cycle related maintenance schedules, are far more important now than then.
It is sad that Qantas is clinging on to 747-400s, including the first, last, only and thus middle aged 747-400ERs, when its competitors will be retiring their first A380s for upgraded versions as this decade comes to an end.
It is true that depreciation regimes in some countries disadvantage Qantas, but so does the way Qantas persists in managing its fleet. It is next to useless to move to outsourcing jets to work shops in Asia if the jets concerned are so passé that some centres might only see them in freighter conversions in a few years time. Qantas has an old fleet of 747s and 767s, and had the old knowledge and experience to get away with it.
Squandering that resource was business school text book perfect, and dead stupid in an operational sense.
Had Qantas done things differently, and more ambitiously in the 90s it would still have lost market share to the likes of Emirates, because free or freer trade has enriched Australia in real net terms, and protecting the carrier is way, way down the list of national government priorities in the 21st century.
But in the process Qantas would have addressed internal reforms as to how it organized and managed its fleet, and its people, with less disruption and morale and brand damage than today, because it is always easier to reform a growing business than a shrinking business.
If Qantas was on 25-30% of international market share today it would nevertheless be a larger enterprise than it was on around 35-37% share of the smaller total market of the mid-90s.
Such a Qantas could still have the benefits of its Jetstar brand at its current size internationally, because unlike its domestic routes, its long haul route contraction has scarcely been driven by very long haul Jetstar activity, which remains negligible.
Jetstar has been successful on Japan-Australia routes, but is it in part illusory because we have a lack of evidence as to how many former Qantas full service customers have opted to fly via Hong Kong or Singapore on non-Qantas carriers, and because we don’t know the intentions of a post bankrupt Japan Airlines in relation to its full service ambitions on the route?
Low cost flights to Europe on Air Asia X have failed. On flights to Singapore non-stop on A330s, from Melbourne and Auckland, Jetstar seems to have wobbled a bit, with frequencies being cut. And this is before Scoot clocks on in June.
Qantas in the 90s, and thus into this century, could have stood its ground and built itself a hub in Dubai or Abu Dhabi, and fostered a profitable but not
wildly profitable relevance to Europe. The airline is unlikely to become fabulously profitable until something extraordinary happens to its fortunes, but it could have done better, much better.
Had the airline kept some of the advantages of size it would have also commensurately increased the quite remarkable contribution to profits of its loyalty program. It would have saved on costs, and it would have inhibited or even completely discouraged the international adventures of what is now Virgin Australia.
There are a quite a few billion dollars at least in additional profits this century in such consequences of this reverse hypothetical, as well as from the benefits of Qantas managing its fleet and market planning and opportunities more optimally than it did since the mid 90s.
A bigger, more successful, more relevant, and less ideologically obsessed airline could have been really good for its staff, its shareholders and its country.
Instead it’s an embarrassment, and fixing it is problematical.
My starting point is to be straightforward. I’ll call it as I see it.