Qantas to Resume Flights; But For How Long

Arjun Dave
30 Oct, 2011
New York City

Fair Work Australia ordered Qantas strike suspended early Monday morning and flights are expected to resume in the afternoon. However, structural problems at Qantas are not going to go away as the airline reposition in Asia and battles for a profitable market share in long haul travel to Europe.

[R]7:30 AM Sydney – Fair Work Australia suspended Qantas strike early Monday morning and flights are expected to resume in the afternoon. However, structural problems at Qantas are not going to go away as the airline reposition in Asia and battles for a profitable market share in long haul travel to Europe.[/R]

What lies at the heart of the Qantas’ problem is a growing competition in its international long haul business and the public’s embrace of discount airlines.

The long distance travel between Europe and Australia has seen a sharp escalation in competition from new airlines, Emirates and Etihad and a possible rise of more airlines from India. The crowding of more airlines in Singapore hub also dragged fares lower.

Emirates’ profitable and sustained rise in the last ten years has changed the landscape in the long distance travel market. Emirates has been picking up passengers in the UK, Germany and France and using its vibrant Dubai hub to transport passengers onwards to Asia and Australia.

Etihad Airways, controlled by the Abu Dhabi government is also copying the strategy and targeting long haul traffic between Europe and Asia through its hub in Abu Dhabi.

India focused airlines are also getting ready to jostle in the market for long haul travel between Europe and Asia and then to Australia. But that is another 3 years away.

Lower Fares Mean Lower Costs

Australian domestic travel has also shifted to the low cost business model with four airlines, Tiger Airways, Air Asia, Virgin Australia and Qantas owned Jetstar competing with sharply lower air fares.

Lower fares also mean lower costs and also lower profits.

Qantas knows this and has suffered financially in the long haul business in the last six years as Emirates encroached in the crowded market and now Etihad is muscling its way. And domestic profit margins have suffered.

Its focus on the European market has long been obsolete and is slow to reposition in the fast growing markets in Asia.

Future in Asia

Qantas needs a hub in Asia and operate more as an Asian airline with an extended route network in Australia. The business of air transportation needs a sustained large scale and competitive cost operation and stability in the customer and employee base.

Yes, this blunt assessment does not make politicians and unions happy but Qantas’ management, workers and customers understand it.

Management at Qantas has been keenly aware of the rising traffic within Asia and growing tourism business from China, Japan and Korea to Australia.

Belatedly, the company crystallized its strategy in August and announced the start of a new premium airline competing head on with Cathay Pacific and Singapore Air.

Though the hub selection has not been finalized but the company has not rejected market speculation that Singapore and Kuala Lumpur are the front runners.

The company is also looking to operate a joint venture in Japan and looking to expand its presence in Vietnam.

Qantas operates a vast air travel network that serves 208 cities in 46 countries and flies 44.5 million passengers a year. Qantas also owns discount carrier Jetstar that flies to most large cities in Asia.

Jetstar flies 20 million passengers and battles for domestic market with Virgin Australia and Asian competitors Tiger Airways and Air Asia. Virgin Australia now serves 20 million passengers a year.

Changing Business

On October 29, Alan Joyce, chief executive announced the grounding of all aircrafts and sharply escalated the row with the workers, engineers and pilots unions that has been brewing for three months.

Politicians complained, lives are disrupted and workers were taken aback by the management step that was once unthinkable.

Australians openly wondered why the national carrier is suddenly brought to a halt when only a few days ago Prime Minister Julia Gillard had urged the company and the unions to settle their differences quickly.

What most people do not realize is that the forces of change have been in motion for nearly a decade and though travelers have grown to embrace cheap fares it also has consequences.

Pilots have been infuriated with the company’s plan to set up a premium airline in Asia, engineers and transportations workers are worried that they may lose more than announced 1,000 jobs in the next five years as the new airline takes off.

Well, it could have been worst. Pilots have to face the reality that they have been paid extremely well in the past and cannot go on forever. The average pilot is paid more than $400,000 including allowances and the pay scale is one of the highest in the world.

That was probably fine before the arrival of Emirates and Etihad and other Asian carriers.

The dispute has long been simmering for the last five years and both sides need to review the situation with calm and cold business logic. Otherwise, the national carrier will suffer more losses, jobs will be lost and business will shift elsewhere.

Fair Work Australia, the labor tribunal has ordered the flights to resume as early as Monday but the structural problems are not going to go away.

Qantas employs 35,000 and plans to eliminate 1,000 in the next five years. Yes, jobs will be lost but the new airline will also create new jobs, probably at lower wages. Qantas will add new pilots in Asia at cheaper wages but that will also give the airline a key advantage in retaining its profitability that will support existing staff.

Workers and pilots should not forget that the rising incomes in Asia is giving lots of new business to Qantas but that will not be the case for ever.

Pilots, Wake Up

For now, Qantas has the financial wherewithal and management expertise to get off the ground a new airline that will able to compete with Cathay Pacific and Singapore Airlines but it must have competitive costs to be able to stand the market forces.

And no start ups are guaranteed a success.

Management should also not forget that it needs experienced and trained people to run the airline and constant bickering with the workers will only dilute its brand and ability to serve its customers well.

Chief Executive Alan Joyce does not help his cause when the company endorses $5 million pay package only 24 hours ago in the annual general meeting and then blaming union for asking wage increases. The cost cuts have to be fair and even across all segments of the operations.

Generally, operating an airline is a financially losing proposition in most markets in the world. Qantas has been fortunate to be one of the few select airlines to have a financial strength and to be able to employ 35,000.

Qantas, though the market leader for now in Australia, can be decimated in less than six months if the corrosive dysfunction between labor and management continues. Only a decade ago Ansett Australia suffered its fate when world air travel suddenly seized in the aftermath of the Sept 11 attack.

Workers have to grasp the new reality of the changing nature of the air travel business. New competitions from the Arabian land and from India and ever improving aircraft flying distance range has changed the market structure.

Domestic low cost business model means low cost for everyone in the business not just low fares.

Management has to communicate that to employees and devise ways to work with fewer and productive workers and deal with the reality head on, rather than taking a combative stance.

Pilots have grown accustomed to automatic raises and now the pay scales are reaching over $500,000. Not sustainable at any airline. If pilots are smart, they should be taking pay cut of more than 10% and not demanding an increase.

Only fifteen years ago, United Airlines pilots got greedy and we all know what happened there.

Australians are reasonable people and when all facts are laid on the table they are smart enough to see where the future of the air travel business is and where the future of Qantas is and where the future of the employees is.

If pilots and workers do not like what they see, they can leave and take employment where they choose to but bleeding the airline with persistent actions and threats will not serve anyone.