http://www.heraldsun.com.au/business...-1227044388847
Joyce cops false rap over Qantas’ massive loss
ALAN Joyce has been getting a bum rap over Qantas’s massive $2.8 billion loss. It’s also quite wrong to see the loss as life-threatening for the airline.
The core reason for both statements is the same. That first, the official loss grossly overstated what might be termed the “real” red ink at the flying roo.
And then secondly, that “real” red ink was almost totally concentrated in the international arms of both the parent Qantas and the discount offshoot Jetstar.
On a deeper level, you need to also understand the exact nature of the two quite separate tsunamis that have been coming at Qantas, and how Joyce has — in my judgment, both boldly and effectively — crafted a sophisticated and integrated operational strategy to respond to them.
Now obviously, no CEO could expect to get a billion frequent flyer points as a bonus after unveiling a loss approaching $3 billion. Indeed, not even after unveiling the more modest “real” loss of $646 million.
But the calls for Joyce to be sacked in consequence, or even just to be “preparing” his departure, say, next year, are not only unfair but show a yawning ignorance of the domestic and international aviation realities, and in truth, Qantas’s actually pretty impressive success in responding to them.
Plus critically and really fundamentally, there was no alternative to what Joyce did — starting with his controversial grounding of the airline to force some reality into industrial relations negotiations. Without which he really would have had no choice but to ground international, permanently.
More broadly what he has done has been to respond aggressively to the equally aggressive efforts of his opposite number at Virgin Australia, John Borghetti, to win market share in the domestic space: Joyce’s famous “we’ll add two planes for every one of yours”.
Then, in the international sphere, Joyce sought to savagely prune Qantas’s operational footprint, but at the same time making the key decision not to walk away entirely — squaring the circle so to speak, through the relationship with Emirates.
Let’s start with the all-important numbers. As has been pretty well explained, most of the $2.8 billion loss came from a drop in the value of Qantas’s international fleet.
It bought the planes when the Aussie dollar was 68c, so each $US10 million spend required $14.7 million. Now that the Aussie’s US93c, each $US10 million worth of those planes is worth now only $10.8 million.
This currency change is completely out of the control of any CEO. He had to take the currency as it was when he (and his predecessor, Geoff Dixon) bought the planes; equally, they have to take the Aussie value dollar into the accounts as it is now.
The “real” — the operational — loss was “just” $646 million. That “just” is actually reasonable when you understand that at least $630 million of it came from the two international operations. Qantas said it lost $497 million on Qantas international. The Jetstar group lost $116 million, but the domestic part was in profit so Jetstar international must have lost at least $135 million.
So the “Qantas problem” was focused on international.
That flows from a combination of the huge legacy cost of the main airline’s operations into the fierce competition from much better placed traditional carriers like Singapore and the new Middle Eastern hub airlines, and the start-up costs of Jetstar’s discount moves.
Looked at narrowly, Qantas had two choices — close international or try to make it at least wash its face. It — sensibly — chose the latter; and that meant doing two things; cut costs and then cut them again.
What I means is, there had to be “two types” of cost-cutting: the conventional one, captured in slashing its staff numbers by 5000; and the unconventional one of replacing perhaps half the former direct Qantas flights with Emirates hubbing out of Doha.
Why did I say “sensible”? Because it is critical to the airline’s overall dynamic — and, hopefully, future growth and profitability — to keep the international arm as one of the three interlocking business elements. International, domestic and frequent flyer. Think of it as the exact reverse of what Virgin and its three international backers have been doing — building domestic capacity (and a FF program) to sit beside its international operations.
If Qantas walked away from international, it would win some short-term relief from red ink, but at the cost of undermining both its domestic arms and the — very lucrative — FF program.
The FF program was the jewel in the crown, generating $286 million of profit. Based on the $330 million Jetstar got for selling a one-third share of its FF program, the Qantas one is worth at least $3 billion.
All this is also why critics of the Joyce strategy of defending the 65 per cent domestic share line in the sand demonstrate only their inability to understand its critical role in the overall integrated necessity.
If Qantas allowed Virgin to get a firm grip over 40 per cent plus of domestic, it would not simply threaten the profitability of both Qantas and Virgin domestics; but destabilise the delicate mix with international and the FF program.
Critically, Qantas flew through the savage domestic price war with both the main airline ($30 million) and Jetstar domestic ($20 million plus) still in the black.
While it is Virgin, which lost around $60 million on domestic, that has been forced to call for peace. But just maybe too late. It will struggle to get back into the black, while Qantas group domestic could very well surge.
In sum and in short, Joyce has actually steered the airline through some pretty tough times. But more than that, he has also been crafting an effective — crucially, integrated — long-term growth strategy.