Comment
No gains and a lot of pain for Qantas
March 1st 2014
There is no doubt Qantas Airways, after reporting an interim loss of A$252 million (US$211 million) in late February, is in financial difficulty. Other Asia-Pacific carriers – memorable examples include Malaysia Airlines, Air New Zealand, Japan Airlines and Philippine Airlines – have been in as much financial distress, if not more, than the ‘Flying Kangaroo’. Read More »
They have survived, with varying degrees of success, because their national governments either bought them out or heaved them over their financial humps with government back loans that allowed them to restructure.
The option of a government-funded guarantee for Qantas, which would attract favourable loan terms has been given the thumbs down by the country’s prime minister, Tony Abbott. After the Qantas results and its rescue plan were announced by the airline group’s CEO, Alan Joyce, Abbott asked “why should the government do for one what it is not prepared to do for all, or what is not necessarily available for all?”
A second option, a revision of the Qantas Sale Act, is unlikely in the short term, but possible if the objections of the national parliamentary opposition to a loosening of the legislation could be overcome. For now, many politicians, unionists and Australians believe the sale act has value because it prevents the airline from falling into foreign hands.
The act imposes a 49% cap on foreign ownership of Qantas, with no foreign investor allowed to hold more than 25% in the airline. Realists expect opposition to soften over time, especially when Qantas rival, Virgin Australia, is majority controlled by foreign carriers.
So, despite considerable lobbying on the part of Joyce for some form or government support, for now Qantas has to stand alone in its fight for survival. The decision to slash $2 billion from the bottom line via a 5,000 job cull (15% of the workforce), deferral and sale of some 50 aircraft, closure of maintenance and catering units, a wage freeze and network rationalization of its domestic and route network route is drastic, but there is no other way forward considering the circumstances of Australian aviation.
Qantas is the dominant player in the Australian market. But a wave of new capacity that saw international competitors add 40% more seats in and into Australia since 2010, has hit the carrier hard. At the same Qantas has put on only 8% more non-domestic seats and experienced shrinking demand for its global flights.
Domestically, Qantas and its rival Virgin Australia, are losing money over a capacity war that is criticized as pointless. Qantas insists it will maintain an expensive 65% line in the sand capacity rule for its domestic network. Virgin Australia can’t ignore this challenge so the losses mount as bookings do not strengthen commensurately.
Then there are the big challenges management will face in implementing the $2 billion three-year rescue plan. Unions representing Qantas employees are threatening a showdown over the job losses and the company-wide wage freeze (to apply until the airline is back in profit). This would worsen an already woeful situation.
Another complication is the future of Alan Joyce (47). There have been numerous calls for him to step down following the announcement of the A$252 million loss, with his opponents demanding a new management team to revitalize the carrier.
At press time, he confirmed he has the support of the Qantas board and that he is in for the long-haul as CEO. Whether it falls to Joyce or another CEO, the job of restoring Qantas to fiscal health is going to take several painful years. It is almost impossible to imagine the Flying Kangaroo disappearing altogether. But at the end of its restructuring journey it will have to be a vastly different airline if it is to be a sustainable business. It will probably be smaller. It is hoped it will be leaner and profitable.
