Qantas Lays Out Its Conflicting Plans to Fix Itself

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So I thought that Qantas was going to roll out its big plans to transform itself on August 24. There’s apparently still something in the works that day, but CEO Alan Joyce jumped the gun with a wide-ranging speech this week that gave us a look at the high level architecture of how Qantas will try to right the ship. I found it confusing to say the least, and really contradictory. I like half the plan, but I fear the other half will doom the airline.

Qantas Forgets It's Australian

Qantas has said that its biggest problems are on long haul international flying. Domestic is doing well (even if it is under attack from Virgin Australia) and Jetstar is theoretically doing well too. The problem according to Qantas is competition – there’s a lot of it. And Qantas is having trouble competing with the Middle Eastern and Asian airlines that are picking up traffic at an alarming rate. It also doesn’t help that the airline’s costs are quite high (20 percent higher than the competition, according to Qantas), and labor is a big part of that.

So, here’s what Qantas is going to do to fix things:

  • Focusing on a “gateway” strategy which means Qantas will bring passengers to a gateway and then send people on partner airlines beyond that gateway.
    • Flight to DFW took the place of San Francisco because it’s an American Airlines gateway. (Forget that Qantas can’t always make that flight nonstop)
    • Looking at Kuala Lumpur as a good spot to transfer to soon-to-be oneworld airline Malaysia
    • Switch Buenos Aires flight to Santiago and feed oneworld partner LAN
    • End Bangkok and Hong Kong to London flights and let British Airways carry those passengers. Focus London flying via Singapore only
    • Continue to use Jo’burg as a gateway to Africa and connect with South African
  • Turn focus to building up Asia
    • Start Jetstar Japan working with Japan Air Lines and Mitsubishi for domestic Japan first and then international
    • Will “invest” in new premium airline to be based somewhere in Asia (location tbd)
  • Improve the onboard experience
    • Refit nine 747s with the A380 seats
    • Bigger, better lounges in Singapore, LA, and Hong Kong
    • Improved premium cabins and check-in for Trans Tasman flights
    • Order 110 new Airbus narrowbodies, including Airbus A320neos
    • Defer six A380s until the 747 fleet is retired (instead of growth, will become replacements)
  • Cut 1,000 jobs

That’s a fairly comprehensive plan, but there’s one problem. Two of these things are complete opposites. I mean, Qantas says it wants to have this gateway strategy, so then why the heck is it opening hubs in Asia? Shouldn’t that be done by the gateway partners?

The upshot here is that Qantas thinks it can rest on its laurels for domestic flying. Forget about the fact that Virgin Australia is gunning for Qantas passengers and that airline is being run by a former Qantas exec who knows all the airline’s secrets. You would think this would be the best time to keep your eye on the part of your business that works since that’s really the lifeblood, right?

Of course, that doesn’t mean the international operation should be ignored. I like the gateway strategy. Stick to your strengths and then have your partners connect people into your system from elsewhere. It makes a lot of sense, and it’s why close alliance ties can pay real dividends. So why mess around with all this Asian stuff, Qantas?

At the end of his speech, Alan talked about how Qantas is “an Australian company, owned by Australians, with the vast majority of our operations based in Australia . . . we’ll always call Australia home.” So then why aren’t you focusing on Australia?

In Japan, it might simply be that JAL doesn’t have the resources to do something like this. Ok, fine. So lend your expertise to “JALstar” if you want, but this is much deeper with Qantas really running the show and providing the aircraft. I’m just struggling to understand how the Qantas expertise in Australia lends itself to a very different culture in Japan. And for that matter, how does a premium Asian airline fit into the mix as well?

This seems like an airline that’s trying to spread itself too thin. I would focus on the strengths, and those lie in Australia. I say that in particular because its position there is under attack by Virgin Australia. It’s not like it has a monopoly and can just forget about what’s happening.

Cut the unprofitable flying, align with your partners, but stop pretending like Asia is somehow your territory just because it’s the closest thing to Australia. I fear that this focus could push Qantas to lose ground in its home market. And then what? Not good.

[Original photo via Flickr user planegeezer/CC 2.0]

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24 comments on “Qantas Lays Out Its Conflicting Plans to Fix Itself

  1. This may not end up being that big on a world scale but aviation in Aus is going through a fascinating phase which will be in management books for years to come.
    In one corner is an airline, Qantas, that is making good profits and sees the way ahead as going low cost and completely disregarding staff, product and equipment – bar some A320s for a high risk venture.
    In the other is Virgin Aus. Expanding its routes, renewing equipment (first ATR72 arrived tonight), and working with staff (agreement with pilots almost done). Now Virgin will make a loss due to restructuring this year but the next will be interesting.
    An aviation nut I know which I want to succeed. The next two years will show who was right and who was wrong.
    On the global scene this could verify the existing march to the bottom in avoation or be a watershed and led to some changes in management methodologies.

  2. Isn’t the purchase of 110 (!?!!!) Airbus narrowbodies a somewhat focus on the domestic market for Quantas? Isn’t that where those things fly? I question the size of the order given that AUS is a country of less people than the state of Texas. I know Perth is a long haul from Sydney, but how much inter-Australia flying is there?

    1. As Dan said, many of these are destined for Asia. There will be 24 A320s in Japan, and more will go to the new premium airline somewhere in Asia. No number has been given for that yet. So yes, some of these airplanes will be replacements for the current domestic fleet, but many are A320neos so it will be years before they arrive anyway. And we don’t know that there will be anything special about these airplanes compared to what’s out there today except for lower operating costs.

  3. The intra-Asian bit worries me – what can Qantas do, that other airlines like Singapore or any of the mainland Chinese airlines can’t do ? I’m assuming they’re not going to set up in competition with Air Malaysia, JAL or Cathay Pacific

    1. Actually, Kuala Lumpur is thought to be one of the finalists, so it could theoretically compete with Malaysia. That market is getting very interesting. Malaysia Airlines is going to be oneworld buddies with Qantas, but meanwhile it’s just signed an equity deal with Air Asia, a massive competitor to Jetstar Asia. If Qantas goes into Malaysia with another low cost carrier, it’s enough to make your head spin.

      But I like the first question – what can Qantas do that others can’t? Not much. In fact, I’d say its expertise in Australia won’t necessarily translate very well.

  4. When your home base it at the an end point (read bottom of the world) you are more of a O/D location. Opening up Asia hub(s) means more thru traffic you can carry and better compete. Even in their own country most of the population is along the cost so flying coast-to-coast is still a lot of point to point with no where to ‘hub’ in the middle of the country.

    Starting a whole new airline even with JAL help is risky and you would think they would have learned from the American carriers who tried it, it doesn’t work. But maybe doing it in a different country may make a difference.

    They are smart to refocus some of their flying to a alliance partners home turf to better connect, that only makes sense.

    1. O&D is precisely the issue.

      Qantas is getting killed internationally by the likes of Emirates, Singapore, etc. These airlines specialize in transiting large volumes of passengers through hub cities (DXB, SIN) which are not themselves large O&D destinations, but are geographically well located for providing connections between Europe, Africa, Asia, and Australia. As a primarily O&D airline serving a relatively small and isolated region, Qantas can’t compete effectively on its own in terms of volume, frequency, or routings. Air Canada faces some of the same problems, which is why they’ve resisted allowing greater access to Canada for Emirates.

      I think what Qantas is doing is trying to set up their own Asian-based carrier that operates on the ‘transit’ rather than O&D model. This ‘Qantas Asia’ would funnel passengers from Europe or Africa through a hub in, say, Kuala Lumpur and onto long-haul flights to Australia and Asia (or vice-versa). It’s somewhat like the Tokyo hub operation that United and Delta currently run, where passengers arrive from across North America, get redistributed in NRT, and are then sent on to their final Asian destinations. If you can’t beat Singapore or Emirates, might as well join them, right?

      Yes, this plan will ship Australian jobs overseas, but it makes sense operationally. As it stands, Qantas is an airline without a major international gateway. Instead, there are one-off flights from Perth, Adelaide, Melbourne, Sydney, Brisbane, Cairns, etc. to individual long-haul destinations, primarily in Asia. Sydney is the closest thing to a hub they’ve got, but geographically it’s only good if you’re coming from the Americas, and even then Brisbane is arguably better. There’s nothing in Australia that would be suitable as a gateway to Asia or Europe since all the major centres are located on the southern coast, hence the need to go offshore.

      Having spent 6 months living in Australia last year, I think we in North America often fail to appreciate how much closer Australia is to Europe and Asia than it is to us, both culturally and economically. The future for them is not to the east but to the north and west, and it sounds like Qantas is pointing itself in that direction.

      1. I don’t think that’s what’s being proposed. The Japan operation is a short haul low cost carrier. The other “premium” airline is also going to be an A320 operator – starting with 11, according to Joyce’s speech. As for Europe, it’s cutting service there. London will now only be served from Singapore and not from Hong Kong or Bangkok. So this is really a play for Asia and not for connectivity between Europe and Australia.

      2. Thanks to Robin Johnson posting that link at the bottom of the comments section, we have more info on the premium airline.

        And we believe the product that we’ll have on this aircraft will be better than anything else seen in the Asian market. It will have a lie-flat business bed in the business cabin, better than on the A380s, and it will have an economy class better than on the A380s with a very exclusive private jet feel to it and we think it’s exactly what our corporate market and business market is after.

        So apparently it is going to be a longer haul operation with A320s, but it won’t be an all-biz configuration. I really want to see the route map for this – then I might re-evaluate my stance depending upon what they do.

  5. Two questions:

    1) If they transition to DFW as their US destination hub, what airplane do they have to fly that route if Brett says they can’t now. Are they waiting on the 787s? And when do those arrive?

    2) Except for BA’s Open Skies, there are plenty of bodies piled up after the great business class airline fight of the past decade. MaxJet, SilverJet, Eos and L’Avion (which is no Open Skies) Granted these all focused on Europe, but do people think this model will work better across the Pacific?

    1. 1) Well, the 787 is really the only option when it arrives. The 747-400ER they’re using now is often forced to stop along the way so it’s not ideal, but the 787 won’t have much capacity. If it’s not enough, then Qantas has no other option to make it work. I can’t imagine the A380 working.

      2) I don’t think that’s what Qantas is talking about in terms of an all premium airline. I think it means more of a full service-style operation as opposed to low cost. It’s also a short haul focus within Asia.

      1. Thanks Brett. I guess they’re using the term “premium” to differentiate from Jet Star’s offering. And they use “invest” meaning $$? Planes? I wonder if there are other airlines that plan to invest also?

  6. I don’t get Qantas’s obsession with Asia… Its as if US and Mexican airlines said “Lets serve intra-Canadian routes!” Sure its close but why doesn’t Qantas just focus on somewhere really profitable. I dunno, perhaps setup shop somewhere in the Middle East?

    1. Nicholas – places like the UAE, Bahrain and Qatar as destination are already over served with flights – the only way to make money there is by setting up a major mid/long haul connection hub which is pretty risky if you don’t have a country willing to back you in case it all goes wrong.

      Further to mu earlier comments, I’m wondering whether, assuming they can get the relevant traffic rights, there might be room for Qantas to set up a local airline based in either Indonesia or the Philippines where the competition is not so strong.

    2. Qantas needs to target the Asian market because the oil-rich Arab airlines (Emirates, Etihad, Qatar) and the Asian airlines are now beginning to attack the Australian aviation market en-mass thanks to Virgin Australia’s new codesharing and the fact most travelers fly on price.

      The reason they have made this move is because the Australia – World flying (mostly going to Asia/Europe) is coming under attack from all the airlines which are flying. Hence, they are cutting some of those routes and expansion for them and looking to gain some profit in Asia.

      To try and rid the market of Virgin would be futile, so they just have to adapt to the market. Either that or beg the regulator to make some routes monopolies or duopolies.

  7. QF’s fleet (in)decision making has been appalling (although what you would you expect from an airline that bought 747SPs to fly into Wellington, New Zealand simply because they could cope with its very short runway). Its lack of 777s limits its ability to serve secondary ports in Europe so Antipodean customers are taking their business to Singapore or Emirates and flying directly to where they want to go without having to transit via LHR or FRA.

    Not a fan of the gateway strategy. Forcing your passengers to change airlines halfway through their journey, particularly when it’s to someone like BA (which doesn’t have a great reputation here in Oz) isn’t going to generate a spike in QF bookings anytime soon. And the decision to drop SFO for DFW when you don’t have the right planes and don’t provide a daily service was sheer madness.

  8. The other thing is just how much of the supposed unprofitability of QANTAS’s international operations can be traced back to undisclosed subsidies to Jetstar?

  9. Ansett’s problem wasnt the expansion…it was the constraints put on that expansion by its Air New Zealand owner, the lack of focussed management for years and the crazy fleet mix.

  10. Good analysis Brett. I have blogged about Qantas big announcement:

    The focus on Asia makes sense. Travel between Asia and Aust and across Asia continues to grow rapidly. Look at the success of Air Asia. Whether Qantas has the expertise to compete in that space will be interesting. Setting up a new full service airline that will allow Qantas to expand in the region without the high labour and maintenance costs that it is saddled with in Australia seems logical. The surprise for me was that the new Qantas Asia will not be called Qantas. Setting up with a new name, new brand. route system, planes etc etc seems riskier than extending the existing Qantas name out.

    Your cartoon is right Brett. It does feel like the retreat of the flying kangaroo and that is making a lot of us regular Qantas fliers nervous.

  11. Some quotes from an interesting speech by an Australian Senator:
    “Jetstar’s costs are magically becoming Qantas’ costs.”
    “Jetstar never pays Qantas for the cost of rebooked passengers, but Jetstar gets to keep the revenue of the original bookings.”
    Senator Xenophon speculated that Qantas was using “a strategy of private equity selloff by stealth” to avoid breaching the Qantas Sale Act.

    “That doesn’t stop you moving assets out of Qantas and into an airline you own, but isn’t controlled by the Act.”

    He said Qantas group would end up with a whole lot of subsidiaries it could base overseas, using poorly paid foreign crews and engineering and safety standards that do not match Australian standards.

    “In time, if the Qantas group wants to make a buck it can flog these subsidiaries off for a tidy profit,” he said.

    ‘The Australian’ newspaper, 23 Aug 2011

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