Turbulent times as Qantas fights for survival
Late last month, Qantas released its financial accounts. The figures were staggering – a $2.8 billion loss, contrasting soberly with the previous year’s meagre $1 million profit, and three or four times greater than most analysts’ forecasts. CEO Alan Joyce’s popular status as a maladroit villain was secured – commentators expressed disbelief at his longevity, while many customers still remember him for the shutdown of the carrier in 2011 after a bitter dispute with unions.
It has not been easy for Joyce, who has watched Qantas shares halve in value since his appointment in 2008. But Joyce inherited a company impaired – invisibly at times – by a history of poor choices and complacency. The pain Qantas is experiencing is acute, and Joyce has contributed to some of it, but the story starts well before he arrived.
Trading on reputation
In the film Rain Man, Dustin Hoffman plays autistic savant Raymond Babbitt, who in a famous scene whips himself into a delirious refusal to board his aircraft after persuading himself of the danger of the airline. As his beleaguered brother nominates alternative carriers, Babbitt rapidly cites details of crashes for each of them. Exasperated, his brother tells him: “All airlines have crashed at one time or another. That doesn’t mean that they are not safe.”
“Qantas never crashed.”
For his virtuosic kitsch, Hoffman won for himself an Oscar, and for Qantas an even greater international reputation for safety. Rain Man was released in 1988 – a bloody year for aviation. There were almost 250 accidents, and in every month between March and December there was a major incident – commercial aircraft were variously cruelled by birds, power lines and trees wreathed in fog. In July, the US Navy shot down Iran Air flight 655 over the Persian Gulf, apparently mistaking it for an Iranian fighter jet, and killing all 290 passengers. The following month, Pakistan’s president, Mohammad Zia-ul-Haq, was killed when his Hercules C-130 ploughed into the earth. In December Pan Am flight 103 was blown up by terrorists en route to New York, and rained catastrophically upon the small Scottish town of Lockerbie. At the time, Qantas’s safety record seemed like a minor miracle.
In 1988, Qantas was 68 years old – it’s one of the world’s oldest airlines – and was entirely owned by the government. It transported nearly half of the international passengers entering and departing Australia. But the carrier was being reconsidered amid the great project of removing parochial regimes of protectionism and state ownership. It had taken too long to sell the carrier – Labor traditionalists had opposed it for some time, and come the sale in 1992, the high prices of the ’80s were missed. The trend in the industry was for larger, consolidated airlines and it was unsure if Qantas could compete in the changing environment.
In 1992, the prime minister, Paul Keating, announced the successful passage of the Qantas Sale Act and the airline was floated on the Australian Stock Exchange three years later. Almost immediately, British Airways bought a 25 per cent stake. But the act placed restrictions on foreign ownership – a cap of 49 per cent foreign investment, and no single entity could own more than
25 per cent. There were other stipulations also, such as a prohibition on changing the name of the airline or taking its administration and training offshore.
These restrictions were in part so the government could better negotiate “flight rights” with other countries, and to protect the carrier’s world-best safety record. But it was also because of a persistent belief that Qantas holds some vague but recondite significance for our national psyche. Rain Man had merely confirmed for Australians their pride in the Flying Kangaroo. Yet today a national carrier makes little economic sense; most large countries no longer have one.
James Strong was appointed the first CEO of Qantas in 1993 – he had previously led Australian Airlines, with which Qantas merged as a result of the Sale Act. Qantas was now facing greater competition internationally from an increasingly safe and consolidated industry. For some observers, this is when the rot set in – well before Alan Joyce’s appointment. Arguably, Qantas had grown complacent by its legacy and a history of scant competition.
“Fast forward to the early 1990s and Singapore Airlines led the way with seatback videos for economy passengers,” aviation expert Geoffrey Thomas wrote last year. “Emirates and Virgin Atlantic were also early adopters of entertainment for all. Inextricably [sic], Qantas was stoic in its resistance.”
Increasing competition and improved technology through the ’90s enhanced conditions and lowered costs for consumers – but it was also diminishing industry profits. Qantas’s slice of the pie was getting smaller. In 2001, Geoff Dixon replaced Strong as CEO. On September 4, 2001, Qantas executives began drafting a report for shareholders. “In last year’s annual report, we noted that Qantas had performed well in a challenging environment and as part of an industry characterised by low overall profitability.”
A week later, that characterisation would seem rosy.
Two Qantas employees were aboard American Airlines flight 11 on September 11, 2001, flying from Boston to Los Angeles. Laura Lee Morabito, 34, was an American sales manager for the airline. Alberto Dominguez, 66, was a baggage handler at Sydney airport, and four weeks from retirement. An Australian citizen, he had emigrated from Uruguay years earlier. At 8.45am, their plane vanished into the north tower of the World Trade Centre.
It was a disconcerting time for Dixon to assume the reins. The International Air Transport Association reported that 2001 was just the second year of international traffic declining in the history of civil aviation. Just days after the twin towers collapsed, so too did Ansett.
While global fear depressed international flight, the liquidation of Ansett conferred Qantas an enormous advantage. Virgin Blue had entered the domestic market the year before, and while Qantas avidly absorbed Ansett’s routes, passengers and some of its planes, Virgin was left out in the cold. Between 1998 and 2001, the number of passengers choosing Qantas grew an average of 800,000 annually – up to 22 million in 2001. The following year, Qantas accommodated more than 27 million passengers, the equivalent of six years’ growth in one. For the year ending June 30, 2012, Qantas enjoyed a profit – before tax – of $630 million. It was the second-highest profit in five years, and had more than offset the global aviation depression.
But it couldn’t hold. Virgin dug deeper into the market, and Tiger Airways entered the domestic fray in 2007. As South Asian airlines had asserted themselves in the ’90s, the Noughties saw the swift rise of very wealthy services based in the Middle East. Airlines such as Emirates were capitalised by oil revenue, and boasted the best planes, entertainment and flight networks. Qantas was being pinched again, and it was saddled with an enormous cost base.
Compared with Singapore Airlines or Emirates, Qantas pays an average wage twice that of the others. Its costs were also ridiculously increased by its obstinate decision to hold 65 per cent of the domestic market – even though to do this meant maintaining a fleet much too large for the actual demand. Qantas has been routinely flying half-empty jets all over the country. The so-called “capacity wars” ended this year, after Virgin Australia and Qantas exhausted themselves in the unedifying wrestle, and domestic fares should increase later this year as equilibrium between supply and demand is achieved.
Qantas has long argued that the Sale Act has stymied it, too. The issue was addressed in 2009, when then transport minister Anthony Albanese released a lengthy aviation policy paper. It read, “Currently there are secondary foreign ownership limits that apply to Qantas, but not to other Australian international airlines. The government will amend the Qantas Sale Act 1992 to remove these limits so that the same investment regime will apply to all airlines. This will increase Qantas’s ability to compete for capital and to have more flexible equity arrangements ... However, the government will ensure that Qantas continues to be majority-owned by Australians.”
The Gillard government never did pass the amendments, and Joyce continued to grumble about expensive workplace conditions and the act’s restrictions while he watched stock prices – and profits – plummet. Last year, the company announced a severe plan it called the Qantas Transformation program. It involved the writing down of assets, the closing of certain unprofitable routes, separating the international operations from domestic, and cutting 5000 jobs. When the jobs announcement was made early this year, Joyce approached Canberra for a debt guarantee after its credit was graded as junk by Standard & Poor. Abbott turned him down, but he did, in July this year, help pass amendments to the Sale Act very much like the ones proposed by Albanese in 2009. While Qantas would love its abolishment, it was a start.
Despite the stark decline for the Flying Kangaroo, there are signs that the company might improve. Of its $2.8 billion loss in the recent financial year, nearly half a billion of that was owing to redundancy and restructuring costs. These are one-off payments, and are almost all acquitted. It’s hoped the corporate splitting, coupled with the Sale Act changes, can attract fresh investment. And a new era of austerity, it’s wished, will return the Roo to the black.
“These numbers are confronting,” Joyce said. “But they represent the year that is past… We are through the worst now.” But it will never be the same again. The world has changed since Raymond Babbitt uttered his famous words.
This article was first published in the print edition of The Saturday Paper on Sep 20, 2014 as "Flying blind". Subscribe here.