Qantas' future: Just what are the answers for the mystery pudding?

Release date: 23/06/2011

The commentary Qantas CEO Alan Joyce gave yesterday concerning the restructuring of its international services means August 24, when all is revealed, will be a flag-lowering day, a bloody day, with the loss of experienced pilot jobs and a retreat from poorly performing routes after what he promised would be a review made with “ruthless but honest” eyes.

Ben Sandilands, Crikey 

 If “honesty” is at play in these decisions, much more detail is required.

 Just how much has the claimed poor performance of an airlineexpected by Australians to service their links to the world  been a consequence of gifting jets and other benefits from the full-service brands to the Jetstar brands?

 How much of it has been poor fleet and route decisions, which have seen Australians choosing faster and easier trips on other carriers, even if, as sometimes happens, they pay Emirates, Singapore Airlines or other competitors slightly more for their services?

 Surely it has costs hundreds of millions of dollars more than the $200 million Joyce predicts Qantas international will lose in the year to June 30, a situation so bad, he says, it threatens the very existence of Qantas as a group.

 It is rare for Qantas to reveal the performance of its passenger-carrying brands in isolation from each other.

Investors are told how much the so called “loyalty” program makes from selling frequent-flyer points to people selling petrol, groceries and or running card programs, but as a matter of policy, the actual figures for Qantas domestic, Qantaslink, Qantas international, and the Jetstar franchises, are mix mastered into a blend as commercial-in-confidence.

But not yesterday. At a National Press Club luncheon at which reporters asked the most obsequious and feeble questions  Joyce has probably faced in his career, he said the overseas full-service operation would lose $200 million on a $5 billion investment.

While the cross subsidisation of Jetstar by Qantas is a zero sum game for investors, it is also the dark matter that distorts the visible Qantas universe.

When investors, government and employees are told that Jetstar is the highly profitable growth engine of Qantas group operations, they are kept in ignorance as to how well Jetstar and the full-service brands would perform if billions of dollars worth of Airbuses, much of their fuel, and some of the maintenance, training and other costs of Jetstar were reported on a divisional basis, rather than blended into a mystery pudding.

These figures are also important because without them, the slaughter that is coming to Qantas long haul cannot be truly assessed by the investment community as a brilliant strategy, or as a potential disaster for the Qantas brand and its future.

Whatever the fiscal truth about Jetstar, and there is no denying its success in winning low-fare customers  (but discouraging higher-yielding passengers) it is not a $10 million seed capital venture such as Virgin Blue, which took and kept more than 30% of the domestic market.

Instead, Jetstar has been a massively costly exercise for Qantas. A very successful exercise, but one lacking in transparency in terms of the relative performances of all the Qantas divisions if their costs and assets are fully accounted for.

How real is the $200 million loss for Qantas international? Not only is that under a cloud, but so are management decisions that would easily account for that $200 million in botched fleet decisions, uncompetitive product and appalling network and schedule strategies.

It is almost as if Qantas international has been robbed of assets and set up to fail.

Qantas is considering several international options. Its impending embrace of more joint business ventures with other carriers is widely admired in other markets where it has been used to deliver benefits to investors and consumers alike. It is precisely what Virgin Australia is doing with its ventures with Singapore Airlines, Etihad, Delta Airlines and Air New Zealand.

However, going on recent decisions, those deals only get regulatory approval in Australia and abroad if there is a guarantee by the parties to maintain existing capacity, rather than reduce their combined operations.

The other card Qantas has showed is the off-shoring of activities in which a controlled or financed subsidiary based in Singapore, or Kuala Lumpur, or perhaps Shanghai, takes over some of the flying Qantas does to and from Australia at lower wages and conditions, as well as participating in traffic originating in the region hosting the enterprise

This comes with risks on a scale comparable to those Qantas is seeking to retire by quitting some of its loss-making, Australian-based long-haul flying.

Two things may happen to Australian forays into strongly defended Asian markets. They may get eaten alive by the established national competitors, whether breweries or factories or distributors or airlines, or eaten alive by them as supposedly equal partners in a common venture.

Qantas has already revealed its hand in relation to flying costs at Jetstar, proposing a labour-sharing arrangement in which pilots from its Asia-based and New Zealand franchises could also be shifted into Australia for duty tours, for the terms and conditions under which they are employed in their home countries.

The emphasis Qantas is placing on solving its international underperformance is good. But are the answers rigged.

Click here to read the story on the Crikey website

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