Qantas has arrived at a place it never foresaw when it asked the Abbott Government for a $3 billion unsecured loan early last year, nor when fuel benchmarks in USD were twice what they have been in recent times.
Its employees are in a place they never saw either when they accepted a pay freeze deal that has at basic rates been more than compensated for over one year by a five percent bonus.
And the shareholders in some cases have arrived at a price more than three times what they might have paid more than a year ago.
But it must also be said, Qantas would not have arrived at such good fortune in the fighting fit shape that it now is without group CEO Alan Joyce and his management having pushed through productivity changes that were essential to its survival.
Qantas is not just in a position of strength from which it can begin to grow and genuinely prosper, but is experiencing a festival of new ideas and smart and intuitive initiatives that can make it (subject to all the usual external perils) a strong global brand delivering industrial strength rewards to its owners and surviving employees.
The language of woe that has been recited by every management since the advent of the 747, long before privatization, about being at the end of the road in world air routes, no longer makes sense.
Being at end of the road is, all of a sudden, looking pretty good. It’s as if the darkest moments in the Mad Max 2 movie has segued into The Sound of Music, at the stage where everyone escapes from the Nazis.
If the Australian dollar remains competitively valued, and the country’s inbound and outbound business, tourism, leisure and family travel sectors benefit from the improved activity, it could become worthwhile being one of its flag carriers, provided the vital domestic operations and lucrative loyalty programs hold up.
Australia’s two airline groups — readers may recall that there is another called Virgin Australia – could have a longer term future.
There are nevertheless points of interest for Qantas and Virgin watchers to track.
Qantas low cost franchise Jetstar began flying more than 11 years ago. Well run low cost carriers that are independent from legacy carriers are among the most profitable flying businesses in the world. Those that have to work in concert with the full service carriers that own them don’t necessarily fit in well with brands that they are naturally set up to kill.
Sooner rather than later the patience Qantas has shown in supporting Jetstar Japan, and the so far grounded Jetstar Hong Kong venture, and the lackluster performances of Jetstar Asia and Jetstar Pacific has to either run out, or see them turn into gold mines.
It is a fiction that Jetstar in Australia compliments Qantas more than it is a competitor for its parent (as well as full service Virgin Australia) . The two low fare brands of Jetstar and Virgin Australia owned Tigerair Australia are wherever their networks cross, competitors for both full service brands, and able to wound both.
Qantas is clearly more exposed to the upside and downside risks of low cost brand competition, since it has serious capital as well as market share at stake in Jetstar, but Virgin Australia has by quarantining Tigerair more tightly than is the case of Qantas with Jetstar, also exposed itself to the risks of less participation in low cost profits.
It’s a tough balancing act for both full service brands, and don’t they know it.
There is vanishingly small reason to doubt that Qantas will exercise some options for Boeing 787-9s from 2017 onwards. Going on past hints or guidance from Alan Joyce these will be used to re-expand its international division and support the larger capacity 747s and A380s and refurbished A330s used for overseas flights.
Virgin Australia will never acquire 787s for anything like the deals struck by Qantas under Geoff Dixon at the end of 2005, and it is far from clear what its intentions for a presumably modest or token extension of its own-fleet international network might be. But it could get more A330s for a bargain price, and compared to most current 787 operations, that older design Airbus wide body is more comfortable or attractive for the bulk of adult sized passengers anyhow and available sooner than a new Dreamliner.
Qantas has been very quiet about a potential ace in the hand over the now legally possible recapitalization of Qantas International through a sale of up to 49 percent of that part of its operations to a foreign airline as permitted through the recently amended Qantas Sale Act.
That silence doesn’t mean it will do it. It has already decided selling off all or part of its loyalty program would be a bad idea given its future earning potential and the same logic may be held valid for Qantas International.
The market behavior of the Qantas/Jetstar and Virgin/Tigerair groups within Australia had been in a state of truce when it comes to fare and capacity wars for more than half a year.
But on current guidance as to the profit outlooks for each group, Qantas could probably crush Virgin through competitive pricing if it wanted to.
Ignoring limited availability bargains from Qantas or Virgin, the latter’s emphasis has not been on undercutting the Qantas fares, but ensuring that it delivers the same if not better quality of service, moving to network wide complimentary refreshments, matched baggage allowances, and outstanding lounges.
Will Qantas leave Virgin alone if it continues to be a price follower rather than price setter? It’s not something to risk betting on, but so far, this appears to be the case. Virgin’s marketing behavior seems to be aimed at being a higher yielding niche player for the discerning middle-of-the-market consumer that might even be happy to pay a token higher fare to fly on its services and use its lounges.
Virgin’s long game, both in the latter years of Virgin Blue under co founder Brett Godfrey, and rebranded as Virgin Australia under former Qantas senior executive John Borghetti has been not to interrupt Qantas while it allowed Jetstar to account for an ever increasing part of Qantas group domestic uplift.
It’s a long game that could readily see Virgin Australia (domestic) carry more passengers than Qantas domestic because of the growth Qantas encouraged in Jetstar domestic, where passengers can continue to earn Qantas points.
However when it comes to international flag carrier services in their own jets, Qantas seems set to at best, maybe hold the line on what had been diminishing market share courtesy of 787 acquisitions. By say 2020. The prospects of Virgin Australia taking on Qantas long haul to Japan or China or even cities in the US beyond Los Angeles seem at this stage to be vanishingly minuscule.
At the outset, the market, and its powerful foreign carrier owners in Air New Zealand, Etihad and Singapore Airlines, might surely insist on the Virgin Australia group becoming as comparatively profitable as the Qantas group before ponying up with substantial extra capital.
The difficulty for Virgin Australia and its offshore airline stakeholders, is that a revitalised Qantas holds all the cards needed to confine Virgin’s growth to whatever it feels comfortable with.
The question is, will Qantas play those cards overtly, or while holding them close to its chest?
The ACCC can, at times, restrain unfair competition, but not ‘unfair’ success.