Wirraway
16th Aug 2003, 00:58
Sat "The Weekend Australian"
Flying 'roo is crying wolf
By Steve Creedy and Michael Bachelard
August 16, 2003
THE Four Horseman of the Apocalypse may be running rampant through the aviation industry but no one seriously believes they are gunning for Qantas.
But that is unlikely to stop chief executive Geoff Dixon from mouthing another round of gloomy warnings at next week's full-year profit announcement.
Dixon has been a harbinger of doom for most of the year, to the extent that he was forced to emphasise in a recent speech he was not suggesting Qantas was in danger of imminent collapse.
But that was not before some sections of the media started questioning whether Qantas could survive.
"That's ridiculous," says Citigroup Smith Barney transport analyst Jason Smith. "It's still got arguably one of the best and strongest balance sheets in the industry."
Smith reckons Qantas will deliver a profit close to $325 million, compared to $428 million last year, when abnormals for redundancies and accelerated aircraft depreciation is taken into account. "If they report that number, they will still be the most profitable airline in the world for that period," Smith says.
Qantas, however, has not waited for the results announcement to release Dixon's plans for a sweeping corporate restructure.
Dixon informed the market yesterday that he would be dividing the airline, starting immediately, into three silos.
The three business units will be: flying business; flying services (engineering, maintenance and airports); and associated businesses (catering, freight and Qantas holidays).
Each silo will act as a stand-alone business, with its own management and leadership, budgets, targets, internal rates of return, and accountability – though they will be served by the corporate office, IT and HR functions.
The process will start straight away, with catering the sub-business to go solo.
This could be read as pre-emptive action to take the sting out of a worse-than-expected profit result. It also helps sustain a feeling of crisis in Qantas – and that, in the view of analysts and unions, suits Dixon's purposes perfectly.
Dixon's early career was in journalism, but then he spent years as a spinmeister, working in public relations for mining companies, the mining lobby group and then the diplomatic service.
His forte as a more junior executive in Qantas was marketing, and he personally came up with the iconic "I Still Call Australia Home" children's choir advertising campaign.
His campaign of pending doom is now seen partly as an elaborately staged PR schtick – an attempt to lay the groundwork for a major push on industrial relations reform.
Or, in the plain words of Australian Manufacturing Workers' Union secretary Doug Cameron, Dixon is "gearing up for another full-frontal assault on workers' conditions and wages".
Dixon has made no secret that he wants change. He says Virgin Blue's streamlined industrial relations structure is a key source of competitive disadvantage for Qantas.
The trouble is, the unions and their members are not buying spinmeister Dixon's pitch – or not entirely.
"I don't doubt his motives: he is very committed to continue the process of change in the company," says ACTU secretary Greg Combet. "It is a question of how he has been laying the groundwork, and I think that has been a little bit alarmist. I just think it's overplayed."
Australian Workers Union secretary Bill Shorten said Qantas had read the riot act two years ago when asking for a wage freeze – and then shortly afterwards announced a record profit.
"Qantas needs to be aware that balancing the guidance (to the market) and being tough runs the risk of depressing morale," he said.
Combet says that "creating unease in a service delivery company . . . is pretty risky".
In the past, Dixon has very effectively played a divide-and-conquer game with the unions. But they now say Qantas's push to institute mandatory drug and alcohol testing, including urine samples, for all staff, had united workers and galvanised them behind their unions to an extent not seen for years.
"I don't think strategically that was a smart move," Cameron says.
But unions are not ruling out any compromise. Combet says that restructuring in Qantas is important, including the corporate structure. But, like any company calling for change, Qantas will have to sit down with employees, lay out its plans, and negotiate an outcome, he says.
Neither unions nor analysts would argue that the next 12 months won't be tough for Qantas.
Part of the problem is due to external factors Dixon has cited. These have already led to the planned retrenchment of 2000 staff (at least 1200 jobs have already gone), the loss of other jobs through attrition and an increased use of part-timers and forced annual and long-service leave.
Qantas is also reducing expenditure this year by $1 billion, and has assigned Australian Airlines chief executive Denis Adams to cut costs by a further $1 billion over two years.
Some analysts expect the airline to reveal further cost cuts with its results on Thursday.
These cuts also have an effect on morale, which is said to have plummeted. Perceptions of falling service standards in areas such as punctuality have prompted Qantas to engage consultants to see what can be done to lift its image.
There is no denying aviation has been hammered by unprecedented and successive shocks including the collapse of Ansett, September 11, the Bali bombings, the Iraq war and SARS. The result has been staggering: 400,000 jobs shed in less than two years and debt-laden airlines set to lose another $US6.5 billion ($9.8 billion) this year.
Airlines across the globe are cutting costs and restructuring, some aided by government subsidies or under favourable bankruptcy protection laws.
Qantas has no such protection.
On a local level, Qantas faces new competition from Emirates and Virgin Blue on the important trans-Tasman route as well as fare cuts of up to 36 per cent from a leaner Air New Zealand.
There is pressure on international yields as airlines continue to discount to attract passengers as well as from the strengthening Australian dollar.
Smith estimates that a recent deal with ANZ Bank to renegotiate lower fees for the sale of frequent flyer points is costing up to $50 million, although he believes it is offset by the airline's 1 per cent levy on credit card transactions.
He says Qantas has lost major market share in the small to medium enterprise and corporate market and that passenger loads are "still pretty average" into Asia and the UK. Forward bookings to the UK are down 15 per cent while Hong Kong remains 40 per cent below last year.
"It's going to take six to nine months, I think, to get loads back up to where they were pre-SARS," Smith says. "It's going to take a good 12 months to get loads and yield up to pre-SARS.
"So the first half of fiscal 2004 is going to pretty tough. The second half will then depend on what they do with their cost initiatives, new fleet, what happens with Air New Zealand and so forth."
As to whether the situation is as bad as Dixon makes out, Smith concedes "it's in their interests to talk it that way".
"They're highly leveraged. They've only got to get a couple of things right and you could easily upgrade your numbers by a couple of hundred million," he says. "That said, we still rate it as in-line high-risk and expect it (the share price) to trade below $3 before it bounces back up to $3.50 short term." It closed at $3.15 yesterday – well down on highs of almost $4.90 this time last year.
Centre for Asia Pacific Aviation managing director Peter Harbison agrees that Dixon is striking while the iron's hot but says many of the problems are genuine. However, he believes the airline market is coming back faster than many airline executives expected, or even wanted.
He suspects some carriers would have been prepared to carry the pain of another quarter of losses if it meant they could make the long-term adjustments they need to make.
"And they do need to make them, there's no doubt about it," he says. "There's a recognition that there are going to be low-cost airlines coming into the market . . . that the Europeans and the North Americans are going to be pretty aggressive at a lower cost. So they will lose a lot of the operating advantage they had."
Harbison believes airlines cannot afford to continue "in the same old soft basis". But he worries there is a risk unions may become intractable if they see airlines will be able to make profits.
"One of the risks we're highlighting in the short term is the potential losses due to industrial disputes because the carriers have got to make these changes."
Virgin Blue's significantly lower cost base is often wheeled out by Dixon as an example of the raw deal Qantas gets from unions.
But Virgin boss Brett Godfrey believes Dixon is using his airline and staff as scapegoats. He believes the Qantas network, and the fact it has opted for a full-service model, account for more of the cost differences than staff outlays.
He believes there are frills such as food, drinks and in-flight movies that Qantas can cut – in much the same way Air NZ has – to save money before it lays off staff.
Figures from an industry source suggest a frequent flyer program, for example, costs about $3 per passenger and food, including business class, about $9 per passenger.
Godfrey says Virgin also has structural advantages such as a fleet with only one type of aircraft – cutting maintenance costs – and flatter management.
"There is a degree of crying wolf here," he says of Qantas. "Blaming their staff is not fair, given that they do have other choices. But they do like having yield premiums to us and if that's the case they will have higher costs than us forever."
But Dixon maintains he has been effective at finding alternatives to staff cutbacks.
"I would like to emphasise that we don't want or expect labour to bear all the burden of our necessary cost savings," he said in a speech last month. "It is perhaps not widely recognised, but . . . Qantas has worked very hard and, on the whole been effective, at finding alternatives to staff cutbacks."
============================================
Flying 'roo is crying wolf
By Steve Creedy and Michael Bachelard
August 16, 2003
THE Four Horseman of the Apocalypse may be running rampant through the aviation industry but no one seriously believes they are gunning for Qantas.
But that is unlikely to stop chief executive Geoff Dixon from mouthing another round of gloomy warnings at next week's full-year profit announcement.
Dixon has been a harbinger of doom for most of the year, to the extent that he was forced to emphasise in a recent speech he was not suggesting Qantas was in danger of imminent collapse.
But that was not before some sections of the media started questioning whether Qantas could survive.
"That's ridiculous," says Citigroup Smith Barney transport analyst Jason Smith. "It's still got arguably one of the best and strongest balance sheets in the industry."
Smith reckons Qantas will deliver a profit close to $325 million, compared to $428 million last year, when abnormals for redundancies and accelerated aircraft depreciation is taken into account. "If they report that number, they will still be the most profitable airline in the world for that period," Smith says.
Qantas, however, has not waited for the results announcement to release Dixon's plans for a sweeping corporate restructure.
Dixon informed the market yesterday that he would be dividing the airline, starting immediately, into three silos.
The three business units will be: flying business; flying services (engineering, maintenance and airports); and associated businesses (catering, freight and Qantas holidays).
Each silo will act as a stand-alone business, with its own management and leadership, budgets, targets, internal rates of return, and accountability – though they will be served by the corporate office, IT and HR functions.
The process will start straight away, with catering the sub-business to go solo.
This could be read as pre-emptive action to take the sting out of a worse-than-expected profit result. It also helps sustain a feeling of crisis in Qantas – and that, in the view of analysts and unions, suits Dixon's purposes perfectly.
Dixon's early career was in journalism, but then he spent years as a spinmeister, working in public relations for mining companies, the mining lobby group and then the diplomatic service.
His forte as a more junior executive in Qantas was marketing, and he personally came up with the iconic "I Still Call Australia Home" children's choir advertising campaign.
His campaign of pending doom is now seen partly as an elaborately staged PR schtick – an attempt to lay the groundwork for a major push on industrial relations reform.
Or, in the plain words of Australian Manufacturing Workers' Union secretary Doug Cameron, Dixon is "gearing up for another full-frontal assault on workers' conditions and wages".
Dixon has made no secret that he wants change. He says Virgin Blue's streamlined industrial relations structure is a key source of competitive disadvantage for Qantas.
The trouble is, the unions and their members are not buying spinmeister Dixon's pitch – or not entirely.
"I don't doubt his motives: he is very committed to continue the process of change in the company," says ACTU secretary Greg Combet. "It is a question of how he has been laying the groundwork, and I think that has been a little bit alarmist. I just think it's overplayed."
Australian Workers Union secretary Bill Shorten said Qantas had read the riot act two years ago when asking for a wage freeze – and then shortly afterwards announced a record profit.
"Qantas needs to be aware that balancing the guidance (to the market) and being tough runs the risk of depressing morale," he said.
Combet says that "creating unease in a service delivery company . . . is pretty risky".
In the past, Dixon has very effectively played a divide-and-conquer game with the unions. But they now say Qantas's push to institute mandatory drug and alcohol testing, including urine samples, for all staff, had united workers and galvanised them behind their unions to an extent not seen for years.
"I don't think strategically that was a smart move," Cameron says.
But unions are not ruling out any compromise. Combet says that restructuring in Qantas is important, including the corporate structure. But, like any company calling for change, Qantas will have to sit down with employees, lay out its plans, and negotiate an outcome, he says.
Neither unions nor analysts would argue that the next 12 months won't be tough for Qantas.
Part of the problem is due to external factors Dixon has cited. These have already led to the planned retrenchment of 2000 staff (at least 1200 jobs have already gone), the loss of other jobs through attrition and an increased use of part-timers and forced annual and long-service leave.
Qantas is also reducing expenditure this year by $1 billion, and has assigned Australian Airlines chief executive Denis Adams to cut costs by a further $1 billion over two years.
Some analysts expect the airline to reveal further cost cuts with its results on Thursday.
These cuts also have an effect on morale, which is said to have plummeted. Perceptions of falling service standards in areas such as punctuality have prompted Qantas to engage consultants to see what can be done to lift its image.
There is no denying aviation has been hammered by unprecedented and successive shocks including the collapse of Ansett, September 11, the Bali bombings, the Iraq war and SARS. The result has been staggering: 400,000 jobs shed in less than two years and debt-laden airlines set to lose another $US6.5 billion ($9.8 billion) this year.
Airlines across the globe are cutting costs and restructuring, some aided by government subsidies or under favourable bankruptcy protection laws.
Qantas has no such protection.
On a local level, Qantas faces new competition from Emirates and Virgin Blue on the important trans-Tasman route as well as fare cuts of up to 36 per cent from a leaner Air New Zealand.
There is pressure on international yields as airlines continue to discount to attract passengers as well as from the strengthening Australian dollar.
Smith estimates that a recent deal with ANZ Bank to renegotiate lower fees for the sale of frequent flyer points is costing up to $50 million, although he believes it is offset by the airline's 1 per cent levy on credit card transactions.
He says Qantas has lost major market share in the small to medium enterprise and corporate market and that passenger loads are "still pretty average" into Asia and the UK. Forward bookings to the UK are down 15 per cent while Hong Kong remains 40 per cent below last year.
"It's going to take six to nine months, I think, to get loads back up to where they were pre-SARS," Smith says. "It's going to take a good 12 months to get loads and yield up to pre-SARS.
"So the first half of fiscal 2004 is going to pretty tough. The second half will then depend on what they do with their cost initiatives, new fleet, what happens with Air New Zealand and so forth."
As to whether the situation is as bad as Dixon makes out, Smith concedes "it's in their interests to talk it that way".
"They're highly leveraged. They've only got to get a couple of things right and you could easily upgrade your numbers by a couple of hundred million," he says. "That said, we still rate it as in-line high-risk and expect it (the share price) to trade below $3 before it bounces back up to $3.50 short term." It closed at $3.15 yesterday – well down on highs of almost $4.90 this time last year.
Centre for Asia Pacific Aviation managing director Peter Harbison agrees that Dixon is striking while the iron's hot but says many of the problems are genuine. However, he believes the airline market is coming back faster than many airline executives expected, or even wanted.
He suspects some carriers would have been prepared to carry the pain of another quarter of losses if it meant they could make the long-term adjustments they need to make.
"And they do need to make them, there's no doubt about it," he says. "There's a recognition that there are going to be low-cost airlines coming into the market . . . that the Europeans and the North Americans are going to be pretty aggressive at a lower cost. So they will lose a lot of the operating advantage they had."
Harbison believes airlines cannot afford to continue "in the same old soft basis". But he worries there is a risk unions may become intractable if they see airlines will be able to make profits.
"One of the risks we're highlighting in the short term is the potential losses due to industrial disputes because the carriers have got to make these changes."
Virgin Blue's significantly lower cost base is often wheeled out by Dixon as an example of the raw deal Qantas gets from unions.
But Virgin boss Brett Godfrey believes Dixon is using his airline and staff as scapegoats. He believes the Qantas network, and the fact it has opted for a full-service model, account for more of the cost differences than staff outlays.
He believes there are frills such as food, drinks and in-flight movies that Qantas can cut – in much the same way Air NZ has – to save money before it lays off staff.
Figures from an industry source suggest a frequent flyer program, for example, costs about $3 per passenger and food, including business class, about $9 per passenger.
Godfrey says Virgin also has structural advantages such as a fleet with only one type of aircraft – cutting maintenance costs – and flatter management.
"There is a degree of crying wolf here," he says of Qantas. "Blaming their staff is not fair, given that they do have other choices. But they do like having yield premiums to us and if that's the case they will have higher costs than us forever."
But Dixon maintains he has been effective at finding alternatives to staff cutbacks.
"I would like to emphasise that we don't want or expect labour to bear all the burden of our necessary cost savings," he said in a speech last month. "It is perhaps not widely recognised, but . . . Qantas has worked very hard and, on the whole been effective, at finding alternatives to staff cutbacks."
============================================