Qantas loses altitude due to brinkmanship

Release date: 27/08/2011

A balmy gust of early spring weather wafted across the city midweek, providing welcome respite from the stormy conditions on global financial markets in the past month.

Ian Verrender, The Sydney Morning Herald

Warm as it was, it paled in comparison to the hot air being blown about our national airline, Qantas, which reached gale-force proportions by week's end.

In no particular order, we've had the company's chief executive, Alan Joyce, proclaiming imminent doom unless drastic action is taken, with claims of massive losses on Qantas's international routes.

On Thursday though, the airline turned in a half-decent profit of $249 million.

Double last year's poor effort, it would have been even better without the spate of natural disasters in Australia, Japan and New Zealand and a volcanic ash threat, all of which cost the airline almost $224 million in clear earnings.

Then out of the blue, came the wild and rather bizarre speculation about a takeover for the flying kangaroo. Of course, there were no details, just the talk of a mysterious ''private equity'' firm that was in the throes of mounting a $3 billion-plus bid, including claims the buyer would emasculate the unions.

Joyce deployed the ''Sergeant Schultz defence'', so named after the character in the television sitcom Hogan's Heroes who routinely regaled his superiors with the immortal line : ''I know nothing.''

Not that anyone really believed the takeover talk. Qantas's share price went backwards.

It was at this stage things really became strange. A series of full-page advertisements appeared in newspapers across the land. Did they proudly proclaim the company's achievements, that it has turned the corner with its earnings performance, that it was still one of the world's most profitable airlines? Uh-uh.

No, the advertisements graphically highlighted the poor performance of its international flagship - a $216 million loss - and denounced actions by the airline's unions which ''would put the whole of Qantas at risk, and the jobs of all our people''.

That would have to rank as the one of the most unusual defence strategies to a potential takeover threat. Unique even. ''Don't even think of buying us, we're going down the gurgler.''

So what really is the game here?

It is becoming increasingly obvious that this is a high-stakes - and high-risk - game of brinkmanship with the airline's heavily unionised workforce.

Alan Joyce is a diminutive character with a broad Irish brogue, a lilting accent combined with an easy charm. There's no doubt he is confronted with a monumental challenge, what with wildly fluctuating fuel prices, a competitive onslaught from heavily subsidised carriers from Asia and the Gulf, fickle demand and an uncertain global economy.

But the longer he continues with this strategy of trash-talking Qantas, the more he runs the risk of damaging his own credibility and that of the airline.

Take his angry outburst on Wednesday at the press conference to announce the results. Long-haul pilots had accused him of cost shifting within the company, that Qantas international was subsidising Jetstar operations, a claim repeated by Senator Nick Xenophon.

According to Joyce, that was ''in line with the moon-landing conspiracy theory that we didn't land on the moon''.

''It's in line with Elvis is alive and well and serving in a McDonald's somewhere in Manly. Qantas subsidising Jetstar is another one of those great conspiracy theories.''

A simple denial would have sufficed. Let's face it, everyone knows Elvis is working in a pizza joint on the Grand Parade in Sans Souci. Just as everyone knows that every company cross-subsidises costs from various divisions when it suits them.

When you board a Jetstar flight to Japan, for instance, it is not unusual to check-in through a Qantas desk or see Qantas ground crew milling about the aircraft. That would be how a normal company runs efficiently.

Qantas is a fully integrated airline. It has domestic, international and budget operations all run through a single frequent-flyer rewards system. It should have integrated back-office systems. If it hasn't, the question needs to be asked - why not?

International passengers flying into Australia are directed onto Qantas domestic or Jetstar flights. The notion that Qantas international somehow is a stand-alone operation is ludicrous because it would be impossible for the company to operate without it.

Earlier this month, Joyce unveiled his ''five-year plan'' for Qantas, a high-risk push into Asia with two new airlines - a domestic operator in Japan and an upmarket full-service carrier in south-east Asia.

Exactly where that will be has yet to be decided. Perhaps Kuala Lumpur. Maybe Singapore. The paucity of detail would suggest this merely is an idea, not a concrete plan. Again, this may simply be part of the broader threat against the unions with projections of 1000 job cuts.

Qantas's previous thrusts into Asia have been less than spectacular. Jetstar Asia, based in Singapore, only recently managed to edge into the black, six years after it was established. And its internal Vietnamese operation, Jetstar Pacific, has been a nightmare, financially and politically.

As for the takeover story, it had more holes than a Swiss cheese. You can never rule out anything. But it should be remembered that Qantas is covered by its very own act of Parliament, the Qantas Sale Act.

That stipulates Qantas must be majority Australian-owned, meaning any foreign bidder would need to team up with a local partner. That's been done before. Back in 2007, private equity outfit Texas Pacific Group joined forces with the now-collapsed Allco Finance Group to launch an $11 billion takeover.

That was then. Money was being splashed about by the banks and Qantas earned $1 billion profit. But times have changed and most private equity outfits are struggling. Buying an airline now, one facing serious challenges, would not be an easy ride to riches.

The contrast between Qantas and its main domestic rival, Virgin Australia, couldn't be more stark.

On Thursday, Virgin announced a $67.8 million loss as a result of natural disasters and the breakdown of its computerised booking system. But the chief executive, John Borghetti, was upbeat about the future, a message that appeared to be warmly received by analysts and investors who pushed the share price 15 per cent higher.

Borghetti, who was passed over for the top job at Qantas in favour of Joyce, has wasted little time forging an international network alliance with Air New Zealand, Etihad and Delta Air Lines and targeted Qantas's stranglehold on high-margin corporate travel.

But buried in the accounts was this clanger. Its long-haul international operation V Australia, launched in the dark days of the financial crisis and until now a financial millstone, was now in the black. Clearly, Borghetti is on a mission to prove the wrong man got the job.

Click here to read the story on SMH website

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