Qantas – How we got to this

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A little history might show why Qantas is where it is now, and what could happen.  How did we get to this?

Qantas was distracted in 2006 by a takeover attempt. A consortium called Airline Partners offered $5.45 per share.  The board endorsed the offer but shareholders rejected it.  Today the shares are trading at around $1:15 so it was a great opportunity for shareholders but nobody could sell the deal.  Since then they have gone from a profit of $671 million before tax in 2006 on revenue of $13.6 billion to $5 million profit in 2013 on turnover of $15.9 billion.  So revenue is creeping up slowly but profits have fallen in a hole.  In 2012 they made a loss of $244 million.  How is this happening?

Whilst other airlines have invested in newer, more efficient aircraft, Qantas has not upgraded at the same rate.  Internationally the bulk of the fleet are older Boeing 747s.  According to Planespotter.net their international fleet consists of 747s (65), 767s (39) and only 12 A380s and 36 A330s.  Emirates on the other hand has only six 747s.  Their fleet is the more fuel efficient A380s (45 with 14 more on order), A330s  (29) and 777s (134).  Their average age is 6.2 years whereas Qantas is almost 10 years.  Why is this important?  Two key reasons.  Newer aircraft require less maintenance (hence less engineers required) and use less fuel.

The conclusion is that Qantas has dropped the ball on fleet upgrade in order to show profit figures each year.  In the last few years it all caught up with them.  This is surely a management and board issue.

The next historical issue to look at is the creation of Jetstar.  Qantas has always been heavily unionised.  A number of people have told me that Qantas has taken many small steps to reduce the influence of unions.  The unions claim that Qantas wants to wind back the standards for work performed by their members.  Anecdotally I have heard of a significant drop in standards at both the engineering and flying ends of the business.  Does this drop in standards pose a threat to safety?  I am not qualified to say.    Perhaps the standards were too high in the first place.  Managing a business requires trading off costs and benefits.

Which brings us to Jetstar.  It was set up as a budget airline, and also a far less unionised airline.  In effect, it seems a way of Qantas moving the business away from the unionised workforce and into an non-unionised workforce.

Now imagine you are a board member with the goal of killing off any union impediment to reducing costs.  What would you do?  A simple way is to move costs from Jetstar to Qantas so Qantas looses money and dies on the vine while, over time, Jetstar grows to be the majority of the business and profit.  There has been a lot of talk that this is what has happened.  Reports of people doing work for Jetstar and getting invoiced by Qantas.  There are bound to be gray areas in where costs are allocated, and unless there are two sets of accounts, we will never know if there was bias in one direction or another.

So now Qantas wants something from Government.  They wanted government guarantees on their borrowings but some parts of the government were not keen on that idea.  Qantas want to relax their ownership rules.  In essence, maintain Qantas international as one arm which is predominantly Australian owned, and the Jetstar/Qantas domestic operations as open to anyone.  Where is this likely to lead?

Qantas international is currently wearing a fair chunk of the group losses if we are to believe the rumors.   So if it is retained, the predominantly Australian owned, part is likely to fade into obscurity over time.  On the other hand, it is highly likely an overseas owned, Qantas domestic/Jetstar would look at how it becomes more profitable.  In other words, continue the move of business to Jetstar.  Other cost cutting areas could include taking maintenance offshore, employing contract, non-union pilots, reducing unprofitable services.  There are a host of things they could do if the government removes restrictions on them.

Imagine they have an obligation to service a rural centre under the current environment.  How could that be continued at less cost under a new owner?  Maybe reduce weekly services from four to three.  Maybe do away with direct flights and make it one stop on a flight that stops at half a dozen towns.  A short flight may become a very long flight.  There are lots of ways to bend the rules to suit your profit motive.  Under the current ownership regime this is hard to do.  With foreign ownership, it is much easier.

Finally, we have to ask why keep Qantas Australian?  Is it just an emotional thing, or are there good reasons for Australia to own Qantas?  What does it deliver?  If we did not have an airline, we may have to find someone else when the government wants to evacuate large numbers of people as we do once or twice a decade.  Is this so bad?  We would have to charter non-Australian aircraft to fly teams and equipment to disaster areas such as after the Asian tsunami.  In terms of strategic importance, Qantas is not a key part of the equation as it once was.  Maybe letting it go would not harm Australia.

Qantas’s problems are similar to most airlines.  Too much competition,  Government sponsored airlines, GFC, fuel prices, etc.  What makes Qantas’s problems worse comes down to management decisions over the last decade.  If I were the government I would be asking Qantas to open their books.  Also doing an audit on their working and safety conditions before making any announcements.  Maybe the time to retain Qantas as Australian is past.  The problem is we don’t know enough about the health of the company today.

It is somewhat ironic that the government that tries to hide immigration details from the public so they cannot make any informed judgement, is now having to make a decision on Qantas without any of the relevant information.  Karma.