Savouring the profit sweet spot

Orient Aviation’s 2016 Person of The Year, Qantas Airways CEO, Alan Joyce, said the company is in a “sweet spot” after earning record profits in the last 18 months and nearing completion of a billion dollar plus transformation program.

by TOM BALLANTYNE REPORTS FROM SYDNEY  

December 1st 2016

Print Friendly

The worst of times and the best of times. That is the sum of Alan Joyce’s last five years as Qantas Airways CEO. Back then, in 2011, bitter union disputes and record losses had taken the iconic Flying Kangaroo to its lowest point in recent history. Read More »

Remarkably, through it all, Irish-born Joyce (50), remained publicly stoic as he fought to turnaround a carrier that was in a lot of trouble.

'If Perth-London works we have the traffic rights to do Perth-Paris and Perth-Frankfurt. Opening up key European destinations becomes a possibility through that Western hub. It’s a natural hub for us. We have all the domestic cities linked to Perth automatically and adding the operations into Europe would be phenomenal. We think it could work'

Alan Joyce Qantas Airways CEO

His determination, despite public constant criticism of his competence, to put Qantas on sure ground for the long term has paid off. In 2016, Qantas is in a “sweet spot”, he told Orient Aviation last month.

For the first half of the fiscal year, ending December 31, the group is expected to report a profit ranging from A$743 million to A$788.375 million (US$593.6 million and US$630.7 million).

“It would be the third best result in our history, if we achieve in that range. Considering most of our peers are down 50% to 80%, with a few exceptions, Qantas is outperforming just about everybody in the region,” he said. “For us, the most important goal is to maintain that outperformance so we can continue to invest in aircraft and product, invest in and reward our people and provide a return for our shareholders.”

Roll back two years and the news was not so good. At the 2014 results announcement, Joyce faced the media and his shareholders with the news that the group had lost $2.1 billion for the fiscal 2014 year. It was the biggest bad number in the history of the 95-year old carrier and the criticism of his leadership was crushing.

A big part of the loss was the decision to write down the value of much of the fleet and implement a radical transformation plan that management and the Qantas Board believed would return the group to sustained profitability.

By 2016 Qantas had climbed out of the rough. It reported the biggest profit in its history, $1.2 billion, for the year to June 30. Qantas Domestic, Qantas International, the budget Jetstar stable and Qantas Loyalty all reported record results.

Joyce said the group had achieved permanent cost and revenue savings of $1.23 billion in the last two years and expected the savings to reach $1.56 billion when the three-year transformation program ended next June. This year, 25,000 staff received a one-off bonus of $2,225 and some $370.8 million was returned to the carrier’s long suffering shareholders.

Joyce, using a horse racing analogy, said Qantas hit the trifecta this year for three main reasons. “The first is having the best financial performance we’ve ever had, which meant we could pay down a huge amount of debt, record profitability and strengthen the balance sheet for the company,” he said. “Then it was getting the fleet to its youngest age in our history. That is investing in the hard product of seats and aircraft.

“What was also really special about the transformation was that we saw the best customer ratings we have ever had across all of our businesses. And nearly every month we are still seeing that good level of customer satisfaction.

“The third component, which is extremely important for us, is that our people engagement is at a record high. In our minds, we got the trifecta, getting our people, the customers and your shareholders, all of your stakeholders, into a very good position.”

Qantas has ordered eight B787-9 Dreamliners, with purchase rights and options on another 45. “There is huge potential for growing. This is going to be a game-changing aircraft for Qantas,” Joyce predicted.

As well, two new businesses, Qantas Assure health insurance and a combined loyalty and cash card, Qantas Cash, have been launched. “The continued growth of our loyalty business and the launch of businesses that are an extension of our brand are innovative. I don’t think any other airline across the globe does these things,” he said.

The loyalty scheme has 11.6 million members and generates $240 million in annual earnings. “What that has done, along with the success of our Domestic business, is put us into a unique situation. Two thirds of the group’s earnings come from very stable domestic and loyalty businesses,” he said.

“It makes us unique from a profitability point of view. Many other carriers are subject to the volatilities of the global airline travel business.”

Joyce said after the transformation program concluded in six months, the group would not ease up on cost management. “We will go into an ongoing program. We know costs have to keep coming out of the business because airfares are always coming down. In the last decade, domestic airfares were down 30% and international down 40%. We have seen a hugely competitive environment in the aviation market,” he said.

'Joyce plans for more to run in the partnership. Emirates president (Sir) Tim Clark and Joyce, along with their teams, met in Australia recently to mull over new ideas. ‘There’s a lot more we can do to continue to co-ordinate and improve on the partnership'

“We know that will continue. You are going to have to use new technology, new ways of doing things to remain efficient in our business. So past this program, which was an accelerated transformation program, it will be a task that has to be the natural core of your business and has to be built into your business.”

What Joyce, his management team and staff have achieved has to be understood on a broader canvas than just losses and stratospheric oil prices. In 2011, a bitter labor dispute with pilots, ground staff and engineers over pay and conditions led to the unthinkable: Joyce locked out staff and grounded the airline’s entire fleet worldwide. Stranded passengers across the world went ballistic.

“The union action had been very effective. Under Australian legislation they could call disputes, giving us 72 hours’ notice about the action. We would cancel flights. Once the flights were cancelled the unions would call off the action,” he said.

“We ended up having to pay the employees who were taking the action but we had no revenue during that four hour period. The impact on the airline was unbelievably significant.”

From the group’s point of view there was worse to come. The unions said the campaign of disruption could go on for months, even years. Qantas was losing around $20 million a week and the peak Christmas season was approaching.

At airport lounges Joyce “found staff crying because of the abuse they were receiving from customers who did not understand why we were so unreliable. They also were crying because they could see our best customers walking down the road to our competition. We knew we couldn’t survive”.

There were three choices: continue and essentially bankrupt the airline, concede to the unions or take the lock-out action. Planes had to be grounded. As key staff were locked out any safety issues that emerged during the lock-out period could not be addressed. In the end, the dramatic coup de grace ended the dispute within days.

Joyce said he could not have taken the decision without Board backing. “We have a fantastic Board and chairman who always supported the strategy and the direction we were taking for the company. It’s about continuous communication. They are the best advisers any CEO or management could have,” he said.

Chairman Leigh Clifford came to Qantas from mining giant, Rio Tinto, where he was chief executive. “Mining is a very cyclical business. It also is a business with its own industrial relations issues so Leigh understood the stresses and strains that Qantas was going through. As a consequence, he was very understanding about our strategy.”

Leigh told Joyce that as CEO, grounding the airline was his call. “But I needed to know the Board was fully behind me,” said Joyce. “He spoke to each of the directors and said: ‘Do you support the decision or not?’ There was unanimous support, which gave me a lot more confidence about the decision and what we had to go through in the next few days. I knew fully that the Board was completely behind what had occurred.”

Another major strategic shift was Qantas’ alliance with Emirates Airline. The partnership saw Qantas shift its Australia-Europe operations from a Singapore midway hub to Dubai. It was extremely controversial, but it has paid huge dividends.

“The year before the Emirates alliance, on all of our code-share partners into Europe with a Qantas code – Cathay Pacific, Finnair, British Airways and others – we carried 400,000 people. This year, we will carry more than 1.7 million passengers on the Qantas code with Emirates. It has more than quadrupled the number of people we are putting over to Europe,” he said.

Joyce said the Emirates partnership has been fantastic for three reasons. It allowed Qantas to take capital out of Europe by dropping Paris and Frankfurt. “Particularly Frankfurt. That was losing us a fortune,” he said.

It also brought change to Asia, which until then had essentially been a transit point to Europe.

The third leg of the profitability rise was produced by its Loyalty and Domestic businesses. “Instead of competing with a bad network to Europe, we’ve have the best network to Europe and we have seen massive growth in our loyalty program.

“We have the ability to fly people to 39 destinations in Europe. They can burn their frequent flyer points on the Emirates network and earn frequent flyer points on Emirates. It has really strengthened our core Domestic and frequent flyer business,” he said.

Joyce plans for more to run in the partnership. Emirates president, Sir Tim Clark, and Joyce, along with their teams, met in Australia recently to mull over ideas. “There’s a lot more we can do to co-ordinate and improve on the partnership,” he said.

One development that clearly excites him is the arrival, from next year, of the B787-9s. “It’s an aircraft that in some ways is perfect for Qantas. It’s an aircraft that gives you maintenance and fuel saving efficiencies and it has allowed us to change some of our union agreements in order to take the aircraft.

“Our pilots were great. They came to the table. There are big benefits with that aircraft entering our fleet, which will allow us to increase productivity by nearly 30%.” He said the pilots understood that Qantas needed to make the business case work for the new aircraft. “If it made the business case work for acquiring the 787s, it would mean a lot more promotions, a lot more recruitment and a lot more growth for them. If you’re a first or second officer that’s what you want more than anything else.”

Along with technological efficiencies of the B787 and the deal with the pilots comes the aircraft’s capability and range. “Given the distance Australia is from a lot of the destinations we’d like to go to, it helps us. There are routes like Melbourne-Dallas, which would be the longest passenger route in the world. It would build on the success of Sydney-Dallas, operated with A380s, which has been phenomenal for us,” he said.

“We also are very keen on a Perth-London service, which would be the first time in history that there would be a direct, regular passenger service between Australia and Europe. In fact, they are probably the only two continents, if you discount Antarctica, which do not have a regular direct passenger service.”

Qantas sees Perth as a hub for one-stop flights to Europe, giving travelers from Australia’s east coast an alternative to one-stop flights through Asia and the Middle East. It has upgraded seating on its domestic A330s to better fit with the onboard seating of long-haul B787 flights.

“If Perth-London works, we have the traffic rights to do Perth-Paris and Perth-Frankfurt. Opening up key European destinations becomes a possibility through that Western hub. It’s a natural hub for us. We have all the domestic cities linked to Perth automatically and adding the operations into Europe would be phenomenal. We think it could work.”

One aircraft type that won’t be expanding its presence in the Qantas fleet is the A380. Qantas operates 12 and has eight more on order, but Joyce keeps deferring deliveries. “They are good aircraft. Customers love them, but 12 aircraft is the right size for us,” he said.

“We have them on the right routes, to Los Angeles, Dallas and London. They work. But going past 12 aircraft we don’t see a business case. We’d rather see more of the B787s. They allow us to fly directly into more places and on longer routes the A380 can’t serve.”

Joyce also wants to focus on recruiting the best people to the company. “We continuously talk about making sure that we are perceived as an attractive organization. You want to be at the forefront of innovation - that has to come from generation Y and the future generation Z – so we want the best of these people to work for us,” he said. “Statistics forecast that soon 50% of the workforce will be generation Y and Z. We are starting to appear in the top two or three companies that people want to work for.”

Earlier this year, Qantas advertised for 170 pilots. In ten days it received more than 1,000 applications from around the world. An advertisement for a single auditor attracted 170 applicants worldwide. “We are finding it to be the same for IT and technology jobs. People want to work in an exciting business and for an iconic brand like Qantas,” he said.

Joyce, whose background was in IT, is putting Qantas in the forefront of innovation by using technology advances and Big Data to drive efficiencies at the group as quickly as they become viable.

“There are a number of projects in the transformation pipeline that will use information and intelligence systems better than we do today,” he said. “For example, Compass is designed to handle disruption, a common issue for airlines.

“At the moment, that process involves a lot of people trying to solve the issues. But with the new technology, information is available from Big Data in minutes rather than hours. It improves and speeds up management decisions.”

Qantas also is introducing high speed Wifi across its fleet. A couple of planes have been fitted with the technology and testing will begin early next year. The benefits extend beyond the passenger experience to operational efficiencies that provide instant information to pilots about weather and flight planning. “We think that technology will bring the next wave of efficiencies at airlines,” he said.

How has Joyce survived, especially when his critics were baying for his blood? “One, you have to have good people around you. We have an amazing management team. I’m a big believer in diversity and inclusion. So you listen to people a lot. Sometimes you hear things and think ‘that’s a key item. It’s exactly where we should go’. Leveraging that is very important,” he said.

“The best leaders I’ve seen are always humble. A humble nature means you are curious. If you are curious and willing to admit when you are wrong and willing to adapt your strategy as a consequence of that, you will change.

“It’s the people who are so convinced they are always right that will end up getting into trouble.”

He also finds it useful to compartmentalize tasks. “So when you are here doing an (media) interview that is your entire focus. There might be a lot of things going on out there, but your focus is directly on the thing you’re doing,” he said.

“At the same time, when I leave work, to go home, jogging, watching TV, reading, I don’t think of work, don’t talk about work and don’t want to have anything to do with work.”

For Qantas, Joyce is producing the goods big time. “We want to reward our shareholders for their commitment and investment in Qantas. I have always said if you continue to reward your stakeholders, your customers, your employees and your shareholders you get a virtuous circle going on in your organization. I think Qantas has got that virtuous circle going. I certainly want to maintain that going forward,” he said.