Qantas Airways Ltd. must “adapt or die,” Chief Executive Officer Alan Joyce told Australian lawmakers last week as the nation’s biggest carrier confronts rising costs on unprofitable international flights. Peter Bentley, a customer for more than 10 years, agrees.
“They don’t have enough choices for what I need right now,” said Bentley, head of sales for Pikes Wines, a vineyard based in the Clare Valley of South Australia. “We are on the doorstep of Asia and that is where we have the growth, and yet we seem to have these outdated ties to ‘Mother England.’”
For Joyce, Bentley reflects a missed opportunity to parlay 44 million passengers and a domestic market share of 65 percent into a business that can compete on faster-growing routes to Beijing and Shanghai. Sydney-based Qantas is reducing flights to Europe, shifting maintenance to Southeast Asia and planning a new airline in Malaysia or Singapore.
The strategy has come too late for some investors. The shares plunged 35 percent in the past 12 months as Qantas contended with Chinese and Middle East carriers and more than a A$600 million ($644 million) rise in fuel costs. Moody’s Investors Service downgraded the airline to its lowest investment grade on Jan. 31, saying competition and jet fuel prices will continue to weigh on earnings.
“They either have to come up with a business plan with costs close to their competitors’ or they just slowly contract,” said Andrew Sisson, managing director of Franklin Resources Inc.’s Balanced Equity Management, Qantas’s biggest shareholder. “If you can fly people to Kuala Lumpur or Singapore you’ve at least got a natural market to draw on, but they won’t fly on you if you’re not price competitive.”
Setting up an airline in an Asian hub would let Joyce hire pilots and crew at a lower cost, and offer a greater choice of connecting flights to compete with rivals such as Singapore Airlines Ltd. and Cathay Pacific Airways Ltd. Personnel expenses eat up 27 percent of sales at Qantas, against about 15 percent at Singapore Air and Hong Kong’s Cathay Pacific. After retreating from markets in Europe, where it’s losing out to Emirates Airline and other state-backed Middle East carriers, Joyce is betting Qantas’s international business on Asia.
“He has to get it right,” said Neil Hansford, chairman of Sydney-based Strategic Aviation Solutions, which advises airlines across the Asia-Pacific. “The Asian carriers aren’t going to sit still. They will fight for every passenger Joyce tries to get.”
Qantas rose 1.3 percent to A$1.56 in Sydney today compared with the 0.3 percent advance in the benchmark S&P/ASX 200 index.
Also fighting Joyce are lawmakers and unions who see the new carrier as a ploy to shift jobs abroad and subvert 20-year-old legislation aimed at keeping Qantas Australian based and run. Proposed revisions to the law that seek to compel Qantas and its Jetstar budget unit to do most maintenance in Australia and to cap the growth of Asian affiliates “would strangle our capacity to run our business,” Joyce told the Australian Senate’s Rural Affairs and Transportation committee on Feb. 6.
“The purpose of the legislation is for Australia to have a strong, global national carrier, but there are loopholes big enough to fly an A380 through,” said Senator Nick Xenophon, who proposed the amendments to the Qantas Sale Act. “There is nothing to prevent Qantas shutting down its international routes and replacing them with a low-cost business, and I think there are real issues there for the national interest.”
A wave of strikes last year led Joyce to ground the Qantas fleet in October for about two days, stranding 80,000 people and forcing the regulator to intervene. Two of three unions are now in binding arbitration that will prevent them taking action for the lifetime of new contracts. Engineers signed a deal in December allowing new jets to be maintained in Asia.
The stoppages and fuel costs probably drove first-half earnings down 51 percent to A$117 million, according to the median of four analyst estimates compiled by Bloomberg. Qantas is due to report tomorrow.
Joyce is cutting routes to Europe and trimming cabin crew to help staunch about $200 million in annual losses on international flights. Still, six months after he first set out plans for the new carrier, he hasn’t announced a deal.
“I get the sense that it’s taking longer than even management were hoping,” said Russell Shaw, a transport analyst at Macquarie Group Ltd. in Sydney.
Qantas has been slow to follow Asia’s growth, with seven direct flights a week to mainland China against Air China Ltd. and China Southern Airlines Co.’s more than 50. When the flying kangaroo was first daubed on Qantas planes in 1947, more than half of Australians were born in the U.K. That proportion has halved, with Asians filling much of the gap, census data show.
The failure to adapt to changing demographics and rising competition from Middle Eastern carriers has seen Qantas’s share of arrivals slump to less than 20 percent from more than 35 percent a decade ago. The number of passengers flying to London was little changed over the past decade, while those headed for Beijing or Shanghai almost tripled.
“Asia will continue to play a larger part in the global economy,” Joyce said in an interview. “There is nowhere like it. It has massive untapped potential.”
Irish-born Joyce, 45, made his mark in Qantas with the 2004 start of the Jetstar discount carrier, which now accounts for almost 20 percent of group sales. To expand overseas, he formed Jetstar ventures in Singapore, Vietnam and Japan, ceding majority control to win flying rights from Asian governments.
“The thing with airline alliances is that you end up with the partnerships that are possible, not with the ones that you’d want,” said Mark Mackrell, a partner at Norton White, a Sydney-based law firm specializing in transportation.
To round out Joyce’s challenges, Qantas faces the biggest assault on its domestic operations in a decade as Virgin Australia Holdings Ltd. adds premium seats and lounges to escape its budget roots. Business class fares slumped to their lowest in 17 years as Qantas cut prices to defend its 90 percent share of corporate travel inside the country.
Franklin’s Sisson is keeping faith with Qantas, adding more than 16 million shares in September and October, regulatory filings show. Franklin funds hold an 11 percent stake in the airline, according to data compiled by Bloomberg.
“The reason we’re shareholders in Qantas is they have a very strong, viable Australian business,” he said.
Narrowing the cost gap and winning customers may still not end long-haul losses on Qantas-branded flights, according to Tony Webber, the carrier’s former chief economist. Middle East and Asian rivals are often less focused on making money.
“Some of these carriers have national-interest motivations while Qantas is shareholder driven,” said Webber, who worked at the airline for seven years before setting up a consultancy. “Qantas can’t compete with that, ever.”
Pikes Wines’ Bentley uses Qantas for three-quarters of his 80-or-so domestic and international flights a year. He plans more trips to Asia to meet rising demand in China, which accounts for 20 percent of exports from zero five years ago.
“Asia is just getting bigger and bigger for us,” he said. “If Qantas can give me more options they will get more of my business.”