Qantas 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 in a changing world: quantifies refocused international strategy and limits capital exposure

Qantas' withdrawal from a series of international routes promises the single largest benefit to its loss-making international division, delivering AUD100-120 million (USD101-122 million) in annual benefits, with the majority to be realised in FY2013. But with the international division reporting a loss of AUD216 million (USD219 million) in FY2012, Qantas will continue to operate a number of unprofitable routes, primarily to Europe and Asia.

Qantas expects to reduce those losses through the reconfiguration of its Boeing 747-400 and A380 fleets, which when complete towards the second half of FY2014 will deliver AUD70-90 million (USD71-91 million) of benefits annually. Qantas previously put those retrofit changes at a cost of AUD400 million (USD406 million). They include reconfiguring nine 747-400s to have no first class while 12 A380s have a reduced number of business class seats but more economy and premium economy seats.

Qantas maintains the regional rage against Virgin Australia, contracting Alliance Airlines

Qantas will enhance its domestic competition with Virgin Australia by making new pushes into regional Australia via a short-term partnership with Alliance Airlines, primarily a fly-in, fly-out operator serving the mining and resource sector. Alliance will operate an initial 19 services a week between Brisbane and Emerald with Fokker F100 aircraft, which with 100 seats are of higher capacity than the 74-seat Q400s Qantas normally uses – as well as the 68-seat ATR72 aircraft recently introduced by Virgin Australia, which broke Qantas' near monopoly on the route.

Qantas' regional network is primarily operated by subsidiary QantasLink, which CEO Alan Joyce has termed the “quiet achiever”. But since Virgin Australia's push into the highly profitable regional Australia market in Oct-2011, Qantas has experienced a greater challenge to its dominance. It has already re-deployed 115-seat 717s from the west coast to the east coast and announced new frequent flyer lounges in regional centres. The high yielding regional market is the end-game for Virgin Australia to challenge Qantas more effectively. It does not score the major points in terms of market share, but it does deliver considerably higher average yields.

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.

Olympic Games, despite conventional wisdom, present no large benefit to airlines

Some members of the public were incredulous last year after Qantas announced it would cut its London capacity by over a third in Mar-2012, months before the summer 2012 Olympic Games being held in London. They saw the Games presenting a large traffic opportunity and thought Qantas should wait for the Olympics to pass before reducing London capacity. But in fact the Olympic Games or any sporting event when held in a large city present little uplift. While leisure demand increases, corporate traffic tends to whittle.

British Airways and Virgin Atlantic, some of the most exposed to London, expect no notable uplift from the Olympics. During the 2008 Olympic Games in Beijing, airlines recorded traffic – and financial – losses as security measures stunted growth. 

Virgin Australia claims an international network larger than Qantas, but still some way to go

Virgin Australia and CEO John Borghetti deserve all due credit for creating an airline with wide and deep partnerships that has become a formidable competitor to Qantas. But Virgin Australia's claim that it has the largest network out of Australia is perhaps stretching the point.

Importantly, Virgin has put in its own qualification that this claim is based on seats, some of which are operated by its partner carriers. It is measuring itself and its partners against oneworld seats in and out of Australia.