Jetstar Airways

Qantas restructures in a bid to wrest back the initiative in a turbulent world

Qantas today announced a substantial reorganisation of its management structure designed to create greater accountability and transparency among its different business units. This comes at a time when the international aviation scene is in a greater state of turbulence than ever before, with alliance and partnership relationships reaching a critical stage.

Splitting domestic and international operations into two separate business units and giving each its own separate P&L is not a unique strategy in any industry and arguably at a time like this gives the Group a better handle on formulating strategy for the future.

Coming in the wake of local competitor Virgin Australia dividing its domestic and international businesses into what are effectively separate companies (something that Qantas is unable to do, thanks to political restrictions set in the Qantas Sale Act), this does also set Qantas up for something similar in the future.

Qantas and Virgin Australia pursue different, but equally logical, strategies to grow domestically

The Australian market has recently started paying close attention to the growth strategies of the country's two largest airline groups, Qantas and Virgin Australia. It has concluded, erroneously, that their domestic growth strategies are perhaps incompatible, since Virgin Australia, buoyed by its move up-market, wants to take grow in its new position but any new capacity will be matched by the Qantas Group, which wants to maintain a profit-optimising 65% market share. 

But that view simplifies the complex equation – as well as its implications. To grow, the two must each pursue their present strategy, although that does not mean that for every new flight Virgin puts into the market Qantas will replicate in a tit-for-tat move. Instead the two are largely pursuing low-profile but high-yield markets, stimulating new traffic and also serving regions previously neglected.

Australian aviation market shows signs of slowdown just as airlines were enjoying yield premiums

There are now clear signs the Australian aviation market is entering a light slowdown, with carriers adding capacity ahead of demand while airfares decline marginally. This will affect the region's carriers differently and they should all fare better than counterparts elsewhere in the world; notably, the market in Australia is still growing, but not as fast. Most exposed are Qantas mainline and Tiger Airways Australia. The former has been slowly losing some corporate business to Virgin Australia and competes with a higher cost base.

Tiger is suffering from group-wide over-capacity and would not be able to redeploy capacity as readily. Unlike Tiger, Jetstar has a healthy and rapidly growing pan-Asian network that can absorb any surplus capacity and at a higher margin even than in Australia. Virgin Australia is seeing yield growth from its transition to a business carrier, growth that should overcome any weakness in the more leisure-exposed areas of its business.

AirAsia X and Scoot help make Sydney Australia's hub for low-cost long-haul carriers

The inaugural AirAsia X flight arriving into Sydney on 02-Apr-2012 is ushering in the era of low-cost, long-haul carriers at Australia's largest airport, which is poised to take the title of offering the most service from low-cost long-haul carriers between Australia and Asia. While Jetstar already links Sydney to long-haul destinations and previous carriers like Viva Macau tried, this new wave is of carriers going beyond point-to-point traffic to offer connections out of large Asian hubs.

AirAsia X will be followed by Scoot, and the presence of a Singapore low-cost long-haul carrier in Sydney makes it likely that Jetstar too will enter the Sydney-Singapore market, although parent company Qantas will have to accept that corporate routes previously in its exclusive domain must now be shared if it wants to remain relevant in a market with increasingly diversifying traffic.

The sudden influx of long-haul LCCs can be attributed to competitive responses but also the new government in New South Wales that is eager to better promote Sydney Airport.

Qantas-Air Pacific used as proxy fight between Australia and Fiji

Qantas and Air Pacific have been caught in a proxy fight between their home countries as Australia condemns the ongoing lack of democracy in Fiji since military leader Frank Bainimarama took control of the island nation last decade. Bainimarama in turn has had the civil aviation ministry pass a decree requiring, amongst other statutes, Fijian airlines to have local citizens comprise two-thirds of the board. Fiji has a 51% stake in Air Pacific while Qantas holds a 46% stake and accounts for four of the nine board seats.

While it is apparent Qantas will have to relinquish a board seat to comply with the new regulations, the carrier for some years has been seeking to sell its stake – and would surrender all board seats – but Fiji is unwilling to spend the AUD15 million that Qantas' stake is valued at. Fiji is also irritated that Qantas' LCC Jetstar serves Fiji, to Air Pacific's detriment, although Virgin Australia has significantly more capacity.

Singapore Changi’s decision to close budget terminal could backfire as need for third runway grows

Singapore Changi Airport has taken the unusual decision to demolish its relatively new low-cost carrier terminal and build a larger hybrid terminal in its place. The closure of Changi’s Budget Terminal in Sep-2012 will result in the airport’s total handling capability shrinking by 10% during what could prove to be a challenging four-year period before the new hybrid Terminal 4 opens. Singapore also faces a pressing need to decide on the opening of Changi’s third runway, which is now only available to military aircraft, if it wants to stay ahead of the growth curve. Growing LCC operations have seen aircraft movements grow higher than passenger numbers.

A third runway and even a fifth terminal will eventually be needed for Singapore to maintain its status as a leading hub. Singapore and Changi have always made the investments to ensure there is plenty of space for growth and first class facilities for passengers. But the highly profitable airport has come under scrutiny over the last year: first for its unusual decision to start charging a tax for transit passengers and now for its decision to close its Budget Terminal only six years after it opened.