10 Jan 2013
Ron Rosalky
Qantas has always attracted comment, but never more so than recently when it seems everybody in the industry has a view on the direction the company has taken and how it is managed.Many ex-Qantas people lament what they see as the passing of a great international airline they were privileged to be part of; and that has generated strong and sometimes emotional responses to the current strategies.So it was fitting that, at a recent Qantas reunion, a key speaker was the highly respected John Ward, who was Qantas Managing director and CEO for five years through to 1993.Ward reminded the audience that the airline commenced international operations in 1935, after being established in 1920.“During the following three quarters of a century of monumental change, Qantas and Australia have provided global aviation industry leadership in product innovation, technical excellence and managerial acumen,” Ward went on to say.“Qantas became an Australian icon by being synonymous with both pioneering and with aspects of the national interest. Until well into the 1970s its role was to overcome isolation, develop technological independence and put in place the air transport infrastructure necessary for trade, business, immigration, family reunion, tourism and cultural exchange with key markets in Europe, America, Asia and Africa. “It also increased the national capability while generating employment, wealth and skills formation.“Over the years Qantas flew from Australia to many places it no longer serves… The one constant has been restructuring the network to meet changing realities. This has not changed.“Since the 1970s, Qantas’ contribution to the national interest became increasingly judged primarily by its ability to generate so called welfare benefits through the provision of low fares. This accorded with the then new economic orthodoxy and provided a populist platform for politicians. This has not changed. Many other countries that owned high profile airlines viewed what was in their national interest very differently. This also has not changed.“Internationally there has never been a competitive level playing field due to subsidies effectively provided by some governments, the varying priorities and expectations of sovereign owners and commercial investors, differing tax and regulatory regimes and the geographic ‘sixth freedom’ hub advantage inherent in the way the bilateral regulatory system evolved. None of these realities have changed. Nor has the volatility associated with recessions, fuel price surges, large currency fluctuations, industrial disruption, wars and pandemics.“Privatisation meant that, unlike the situation with many of its foreign competitors, it was largely the appetite of the capital markets that would be the ultimate determinant of the size and shape of Qantas. Another reality was that the Group’s international operations often-long strategic and investment time frame was not compatible with the investment horizon and obsession with short term results gratification of the typical listed Australian non mining company institutional investor.“Realised merger synergies resulted in a substantially lower post merger domestic cost base and the potential for high profit generation. So Qantas’ initial post privatisation focus was on maximising the returns from its domestic network. And the stunning success from this masked the need for ongoing restructure of its international network for several years.“Until 1992 Qantas remained uniquely an international airline without a domestic network. While this had its challenges from a business perspective, it necessitated a focus on growing foreign markets and developing a wide-ranging intercontinental network. This lessened its revenue dependency on its home market. Indeed by 1992 over 60 per cent of the Company’s revenue was sourced outside Australia. This focus on growing foreign sourced revenue needs to return.“There is again renewed focus on transforming Qantas’ international operations to meet contemporary challenges and opportunities. It is again being tackled with the determination and vigour that has historically produced success. This should reinforce the need for the Group’s international operations to continue to be seen as part of an integrated network. Not as a resource intensive add-on to a domestic network.“Governments still control the treaty framework in which international aviation takes place. The Australian government’s policy continues to hold hostage much of the future of Qantas. Countries with highly successful international airlines provide an industry policy platform that both protects the interests of consumers and enables their international airlines to relentlessly pursue their own commercial interests. Current Australian policy falls short in this regard.“Jetstar has been a great success. Its pursuit of foreign based joint ventures has provided diversification and growth opportunities. In parts of the high growth Asia/Pacific region there are already moves towards the opening of markets to all regionally based participants. The pursuit of these significant opportunities by Jetstar is now starting to bear fruit. In some ways Jetstar is the embodiment of the pioneering spirit that once drove Qantas.“The commercial strategies pursued by Qantas over the years recognised that while superior cost management is a strategic advantage, superior revenue management is a tactical advantage. Both are necessary for success. Efficiency and productivity improvements are inherent to the pursuit of excellence which has been a hallmark of Qantas’ history.“Airlines are capital and labour intensive. For Qantas, the cost of capital is determined by the capital markets. This is not so for some high profile foreign government owned airlines and it is here that they have a real and sustainable advantage.“The main manageable cost differentiator for Qantas’ international operations remains that of manpower. Given Australia’s relatively high labour costs, the harsh reality is that continuing reductions in real unit labour costs through increased efficiency, productivity, real wage reductions and the increased use of cheaper foreign labour all remain part of the price of long term survival for the Qantas Group’s international network as other than as a niche operator.“Intrinsic to Qantas’ historical success has always been careful and early investment in new technology to secure competitive advantage or parity on both the product and operating cost dimensions. Today this translates into the need for capital market support. This requires superior cash generation and continuing investment credit rating metrics.“If properly structured, alliances are a means of achieving network coverage not otherwise possible under the current bilateral regulatory regime. They could also be a precursor to consolidation and amalgamation should real globalisation of the industry eventually occur.“Throughout its history leadership at Qantas has been the art of determining what is best for the long term future of the Company and having investors, employees, unions, governments, regulators, politicians and customers support you by providing them the knowledge base to embrace your conclusions and accept your strategies.“To remain relevant and succeed in the current environment Qantas needs the flexibility to become competitive and access capital and growth markets in an unhindered and competitive manner. This will again require the acceptance of reality, visionary leadership and coordinated and preferably cooperative strategic action on the policy, business and industrial fronts. “One lesson from the proud history of this company is that despite occasional periods of network shrinkage, most worthwhile transformations have occurred through both growth and the redeployment of resources. The Asia/Pacific Basin is where Qantas’ future lies and the time to open new routes must be imminent. Another lesson from history is that only by addressing contemporary issues head on with courage and a blend of shared focus, ruthlessness, teamwork and dedication can Qantas and Australia develop the right policies and strategies to adapt and again succeed.”John Ward spent 25 years at Qantas and has served on the boards of many private and public sector boards and government bodies. Those directly related to the Aviation industry include Air New Zealand, the Australian Tourist Commission and the Civil Aviation Authority. He is currently chairman of Wolseley Private Equity and a director of Brisbane and Adelaide Airports.
