Ansett didn't see the writing on the wall, Qantas now facing the same problems.
The Age 18th August 2003
Qantas must remake its frills into a cushion against discount airlines
Stephen Bartholomeuz
The chief executive of Qantas Geoff Dixon, is being characterised as a scaremonger, cynically raising questions about the airline’s future to coerce employees into painful concessions. He is, and he isn’t.
There is little doubt that Dixon’s recent string of public references to the matter of the airlines survival has an immediate purpose. With extensive job-shedding planned as part of a cost reduction program aimed at taking $1 billion a year of costs out of the operation within two years, he needs to soften union resistance.
The cynics would say, and are saying, that as chief of one of the world’s most profitable airlines, with $2 billion of cash in the bank, Dixon is talking up the survival issue to take advantage of the difficult environment for international airlines and boost already strong earnings.
The problem with such a view is that although the airline’s profitability is a rare achievement in the industry, the earnings are not all that strong, and indeed they have been weakening at a time when Qantas faces a $13 billion-plus capital expenditure program to renew an ageing fleet.
The effects of September 11, the war in Iraq and the SARS virus — all of which have been factors in the $US30 billion ($A45.7 billion) of losses incurred by the global industry since 2001 — could be dismissed as aberrations. International traffic is recovering and Qantas dues have its dominant domestic position to fall back on.
The airline’s real problem is not its near-term capacity for making a profit.
The collapse of Ansett secured the immediate future of Qantas, and domestic dominance has bought it time to contemplate a far greater and more threatening challenge that does, indeed, pose a threat to its survival. However, the grace period that Ansett’s failure provided, would be measured in years, not decades.
Even without the series of events that released torrents of red ink throughout the industry in the past two years, there would still be a debate about the long term future of Qantas, and that debate has taken on greater clarity and urgency because of Virgin Blue’s success.
The airlines in trouble, in an industry that is chronically unprofitable, are full-service carriers such as Qantas.
In the United Stares, more than half the big airlines operating 20 years ago have disappeared, including Pan Am and TWA, two former giants of the global industry. United is in Chapter 11 bankruptcy protection and American has only narrowly escaped that fate after extensive employee concessions.
The full-service carriers have high fixed costs, immensely complicated business structures, and lots of legacy expenses and practices. That makes them extremely sensitive to relatively small shifts in volume and yield. It has also left them exposed to the emergence of a very different type of competitor, the proliferating value-based airlines such as Virgin Blue that emulate the strategies pioneered by Southwest Airlines in the US.
Those no-frills discount airlines have great cost advantages — Virgin Blue’s operating costs are 20 per cent lower than those at Qantas — and are taking volume from the full-service carriers
The response of the incumbents has been fairly consistent. They have all been trying to slash costs to become more competitive. Yet there doesn’t seem to be a single instance of any substance of a full-service airline arresting the erosion of its business by a value-based carrier.
Virgin Blue, also helped by the demise of Ansett, has gone from an eight-plane start-up three years ago to a 31-plane operator with 30 per cent of the domestic marker. Next month, the first of 10 extra planes will come into service. Some of those planes won’t be deployed on the domestic routes, Virgin Blue recently gained approval to fly to New Zealand, Fiji and Vanuatu.
To the extent that the planes fly elsewhere, it provides little, if any, relief for Qantas, It spreads the competitive pressure throughout the region and gives Virgin Blue a wider playing field on which to exert the leverage provided by its superior cost structure.
If left unchecked, Virgin Blue will erode and ultimately decimate the core Qantas franchises. Dixon’s cost-cutting plans may have near-term consequences for the bottom line but one suspects they are more about trying to narrow the competitive gap and slow the rate of erosion while Qantas develops strategies for reinventing itself.
The Qantas airline Jetconnect (formerly Qantas New Zealand) will enable Dixon, if he chooses, to bring a New Zealand no-frills cost structure to bear on Virgin Blue on the trans-Tasman and Australian domestic routes.
That threat, and the receding prospect of the Qantas/Air New Zealand alliance being cleared by regulators, has caused Virgin Blue to accelerate plans to fly to and within NZ. It had previously avoided committing itself to flying the NZ routes to ensure that its entry did not alleviate the regulators concern about competition policy.
The problem for Dixon and the reason his fears for the long-term survival of Qantas cannot be dismissed out of hand as purely a public relations and industrial relations stunt, is that the future involves value-based airlines. Virgin Blue and the Qantas no-frills offering will undermine the fragile economics of conventional services.
If Qantas s to survive and prosper in the long term, Dixon has to reinvent it as something that doesn’t exist now — a full-service airline that can successfully compete with discount operators