Virgin Australia

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 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.

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.

Virgin Australia stake in Skywest supports long-term growth of regional and resource markets

Virgin Australia's planned AUD8 million (USD8.3 million) investment for a 10% stake in regional carrier Skywest will allow it to further capitalise on the country's strongly performing regional and resource markets. Virgin and Skywest had previously announced a partnership and then alliance, which received draft approval in Mar-2012.

The stake follows a number of similar arrangements undertaken by airlines in deep partnerships with each other: Etihad in airberlin and then Air Seychelles as well as Air New Zealand in Virgin Australia (a move largely seen to preempt Etihad from taking a stake in Virgin). Such partnerships allow the investing airline to further gain financially from the airline it is benefitting with increased network access. Virgin ended 1H2012 with AUD851 million (USD879 million) cash balance, AUD506 million (USD523 million) unrestricted, making the Skywest stake a relatively small expenditure.

Australian resource flying to further expand to east coast, possibly internationally in medium-term

As Australia's domestic market shows signs of slowdown, increasingly presenting itself as an opportunity for mainline Australian carriers is flying for the booming resource sector. The resource industry flying has been heavily concentrated in Perth, where charter carrier with small aircraft sub-737/A320 size can effectively reach most of the state of Western Australia, where the majority of resource work occurs, although increasing amounts are in Queensland too.

But as Perth becomes saturated – from peak aircraft movements, housing availability and skilled labour – resource companies will be increasingly pulling from the country's more populous east coast. These distances place restrictions on existing charter carriers, creating the opportunity for Qantas and Virgin Australia to fill demand just as their traditional regular public transport markets are weakening. In a second phase of growth, resource flying could even be extended to Southeast Asia to tap that region's skilled labour pool, if Australian immigration policies allow.