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Qantas flies into the perfect storm

June 6, 2012

Alan JoyceAlan Joyce Photo: Reuters

Joyce’s only strategy left is to turn the international division around – but the odds are stacked.

QANTAS boss Alan Joyce is a man under extreme pressure. Not only is he presiding over a company that has plunged to its first loss since joining the sharemarket 17 years ago – and whose share price dived almost 19 per cent yesterday – his options to rescue the company are as harsh and difficult as they are limited.

And to make matters worse, the plan he outlined last year to revive the troubled international operations of the Qantas business will need to show some signs of gaining traction next year or the market will be calling for his blood.

The dilemma for Joyce is that in the commercial world there is always an expectation of a quick fix. And when it comes to restoring the fortunes of Qantas’ loss-making international operations, there is no immediate remedy.

He outlined a four-pillar strategy last year that would take several years to execute. To date – or at least on the numbers he delivered yesterday – the trouble child among the Qantas brands has become even more troublesome.

This is not Joyce’s fault. The fuel price and the European economic meltdown are issues well outside his control.

The pressures on the better-behaving Qantas domestic and Jetstar operations are more within his control and he will be more accountable for the way these perform in the near and medium term.

Joyce has tied his right to lead to the way the international business performs over the next few years. And there will be an expectation that the building blocks for recovery that he has announced will deliver some gains next year.

Ultimately, he will need to bring this aviation troublemaker to break-even point.

Whether he needs to have it return cost of capital is another matter entirely. He says this is the objective, but it may never be achievable on a sustainable basis.

Qantas international’s profit performance has a history of gyrating wildly, depending on external conditions.

At the earnings-before-interest-and-tax line, Qantas international will lose $450 million this year.

This poses the question of why Qantas needs to run this operation at all. Its current market share runs at about 17 per cent and has often been a thorn in the group’s side in terms of brand perception.

The rationale, as explained by Joyce, is that despite its stand-alone losses, it is a fundamental part of the wider network as it provides feeder traffic into the domestic operations.

But with 17 per cent of the market, why bother to keep this loss-making feeder alive? Surely it costs more than the financial benefit it gives to Qantas’ domestic operations.

According to Joyce, the calculation is not that clean.

While Qantas international has a relatively small market share overall, its share of the premium market is significantly larger. The business, or premium, market is the nirvana for all operators as it is the high-yielding end.

Not only do premium domestic customers want to be able to use their frequent-flyer points on international flights, they also want to use their international points for domestic flights.

Thus the highly profitable frequent-flyer division and the domestic premium Qantas brand both need the sustenance of Qantas international.

On top of this, there is a bigger wrinkle. Joyce may consider this the counter-factual dilemma.

If the company was of a mind to get rid of the Qantas international business, it has three options – sell it, sell part of it or close it down.

There is nothing stopping Qantas from forming some kind of joint venture with its international division and another airline via third-party equity. The recent internal splitting of Qantas domestic and international has put the first block in place. This has clearly been investigated and potential partners have been mooted. Most recently a tie-up with Emirates has been bandied about.

But selling it outright is a near impossibility because the Qantas Sale Act would not allow a foreign owner.

Closing down the division has more dire consequences. It’s a $5 billion business with liabilities including debt and 10,000 employees who would have to be paid out.

”We have looked at every strategy under the sun,” Joyce said. And the only conclusion is to turn the business around.

Still, it is a tall order.

International carriers continue to eat Qantas international’s lunch – the latest of which is China Southern, which has entered what is now called the Canton route to Europe via China.

The increasing invasion by foreign and often government-owned airlines of the Australian market means that the goalposts continue to shift for Joyce and Qantas.

There are many who blame the Qantas board and management (past and present) and their service and fleet strategies for the pickle in which the company finds itself.

There is no doubt that mistakes have been made.

But the present reality is that Qantas is pursuing a turnaround strategy for its international business with one hand tied behind its back.

Read more: http://www.theage.com.au/business/qantas-flies-into-the-perfect-storm-20120605-1zu8w.html#ixzz1x0lt69cb

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