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CEO Interview: Qantas - it’s important to keep the brands separate

Alan Joyce - CEO QantasAlan Joyce, CEO and Managing Director of the Qantas Group, says operating a major airline and a low-cost carrier makes life difficult for the competition.

The Qantas share price dropped during the first six months of 2012. How has this affected the airline’s financial position?

The fall was an overreaction. If you look at the breakdown of figures from the Qantas Group, you would see that most of our markets are making money. The domestic market—Qantas and Jetstar combined—made more than $605 million (AUD600 million), for example.

It is the international services that are suffering because of the high oil price, the state of the world economy and the appreciation of the Australian dollar. International services are expected to lose more than $452.8 million (AUD450 million) in 2011/12. We are spending about $4.54 billion (AUD4.5 billion) a year on fuel overall and the Australian dollar has appreciated 40% against the US dollar in the past few years.

Our financial position is still strong, however. We have a cash balance of $3.02 billion (AUD3 billion) and continue to bring down capital expenditure.

We have deferred some new aircraft, which has released $1.11 billion (AUD1.10 billion)—far more than we could have raised through equity. So market speculation that we need to raise more cash is simply wrong.

It’s also important to realize that Qantas is one of the few airlines to have an investment-grade credit rating. Moody’s has said that it is comfortable with our rating and Standard & Poor’s actually rates us slightly higher than Moody’s, which is why we have been placed on its watch list. 

Is the buoyant Australian economy helping Qantas?

The Australian economy is strong but it’s a patchwork economy and certain sectors are doing a lot better than others. Currently, the mining sector is doing very well and this is driving the economy forward. We have seven flights a day to a small mining town and we’re making good money on the route.

But the Australian consumer isn’t as confident as you would expect. A survey found that Australians are more worried about the future than Spaniards. I suppose this reflects the fact that we all live in a global environment. And, of course, a strong economy is attracting more domestic competitors, which means our domestic yields are under pressure.

In addition, as I mentioned previously, the appreciation of the Australian dollar has badly affected our bottom line.

Can the airline industry ever return profit margins that at least cover the cost of capital?

In this respect, we are a long way way from being a sustainable industry. Aviation is a cyclical industry and we tend to make money in the good times and we lose money in the bad times. The problem is we don’t make enough in the good times. We don’t get close to making the cost of capital, which is in the 7% to 10% range.

In part, Qantas’s transformation program is an attempt to deliver value throughout the cycle and return a profit during good times and bad. And in the good times, we do get close to returning the cost of capital.

On an industry level, I don’t think we will see such positive results because there are still too many carriers out there that do not have a commercial focus. As long as they exist, the industry will struggle to post a healthy profit margin. 

What’s the secret in managing both a full-service and low-cost airline? Many have tried and most have failed.

There’s no doubt that operating a low-cost carrier (LCC) when you’re a major airline is like walking a tightrope. The possibility of failure is all around you.

Some that have tried this have failed because they tried to integrate two very different types of airlines. Many years ago, Delta, for example, coordinated the IT systems and used the same pilots. Others failed because they were too independent. Look at British Airways (BA) and Go. The LCC basically cannibalized BA routes to Spain. Rod Eddington, who was BA’s CEO at the time, only found out which routes Go were planning to launch when he heard it on the radio.

At Jetstar, we knew we would have to have a separate brand. So from the beginning, we decided to have our own IT systems and processes. But we also created a “Flying Committee”, which coordinated the two airlines. The committee helped Qantas and Jetstar plan routes and new aircraft purchases together.

The committee still exists, although it doesn’t have such a major role to play any more as both airlines have become very experienced in the strategy and coordination has become very slick.

To help maintain the ties, we also swap staff on a regular basis. The current Jetstar CEO, Jayne Hrdlicka, has a Qantas background and, of course, I was Jetstar CEO before taking over at Qantas. We will keep rotating staff because it helps them maintain an overall perspective and drives an holistic approach to their work.

It’s a successful recipe. In the Qantas Group, the short-haul Qantas premium product is our most profitable segment of the business and the Jetstar leisure product is the second most profitable.

How do you manage the brands?

Qantas and Jetstar are two different brands that are perceived differently by the market. They appeal to different segments and it’s important to keep the brands separate.

When Jetstar was launched seven years ago, it didn’t compete with Qantas at all and served completely different routes. But now there are 30 routes in common. Jetstar serves Melbourne-Sydney 11 times a day and Qantas has 32 daily flights between the cities.

Maintaining the difference between the brands is essential now as it avoids the risk of cannibalization. It also helps the Qantas Group to battle its competitors.

The competition gets squeezed in the middle because Qantas competes in the full-service, high-end segment while Jetstar dominates the leisure sector. Both carriers go to Honolulu and we’ve seen competitors walk away because there’s no space in the market for them.

How do you rate infrastructure provision in Australia? Airspace is being modernized but there is no decision on Sydney airport expansion.

Overall, aviation infrastructure in Australia is of a good standard. But with rapidly growing capacity and passenger numbers, it’s vital that investment and government policy settings support efficient operations. 

One of the first speeches I gave as Qantas CEO called for a collective effort to improve not just ground infrastructure but also the infrastructure of the sky—our air traffic management (ATM)system. Good progress has been made on this since then and we need to keep the momentum going, not least with a carbon price increasing the pressure on airlines to reduce fuel burn.

Qantas has invested heavily in new technology such as Required Navigation Performance and we want an ATM system that allows us to maximize it.

On Sydney’s aviation capacity, Qantas has clearly expressed its view that we need a second airport and should start planning now, while also pursuing improvements at Kingsford Smith Airport. We have been debating this issue for too long—we need to act because airport infrastructure goes to the heart of Sydney’s economic productivity and international competitiveness.

It’s good to see progress being made following the release of a very comprehensive report on the options available and, again, we hope that momentum continues.    

What perspective will you bring to the table as Chairman of the IATA Board of Governors?

It is the job of the Board to support the work of the Director General and CEO and I will make sure that we continue to do that. As a Board, and as an industry, I think we are very engaged in the major issues.

Look at the work being done on climate change. No other industry has such a sound strategy in place even though the airline

targets have been there for a few years now. On issues like this, I think we should shout more and I will try to do that too.

Most of all, given my background at Jetstar, I am interested in seeing what more can be done to encourage LCCs to join IATA. They don’t have much representation at the Association even though they are a large part of the aviation market—over 30% in some regions in fact. I want to convince them that IATA is an effective organization with policies that are applicable to the entire industry and not just the large legacy carriers. 

What would you say to an LCC to persuade them to join IATA?

It is more a matter of communication than anything else. To be honest, I wasn’t too aware of IATA until I became Qantas CEO about four years ago. These days, many LCCs offer a sophisticated product and occupy the same space as the major carriers. IATA membership should be acknowledging that.

The value of IATA can clearly be seen in a program such as the IATA Operational Safety Audit (IOSA). There are far more airlines on the IOSA registry than there are IATA members because all airlines appreciate what IOSA is doing in terms of safety, cost and efficiency. Jetstar isn’t an IATA member, for example, but it interlines with a number of other airlines and IOSA has made the interlining procedure a lot easier.

And look at the work being done on Fatigue Risk Management Systems (FRMS). IATA plays a vital coordinating role for all airlines. It ties all the available experience together and presents a consistent industry view to the regulator. That is really important in terms of getting the regulators to listen to us and it’s work that benefits all carriers. 

Will we see a positive end to the European Union (EU) Emissions Trading Scheme (ETS) saga?

Airlines have never said they don’t want an ETS. At Qantas, we deal with an Australian scheme and there is no problem with that. We get treated fairly by the Australian government and we recognize that the Australian government has the right to impose a domestic ETS.

But it is just that: domestic. The Australian scheme would be a problem if they tried to apply it internationally. And that is what the EU is trying to do.

Airlines have always promoted a global, sectoral approach and we have always said that the International Civil Aviation Organization (ICAO) would be the correct channel for an agreement. We have been very consistent and that makes me hopeful that a solution can be found. I don’t buy the European argument that ICAO is too slow. Actually, if you look at their work in a broader context, ICAO is quite fast.

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