How Qantas could live the American aviation dream

Three years ago, the US aviation industry was on its knees, but today its airlines have made a stunning return to profitability. There's much Alan Joyce could learn from his US counterparts.

Qantas chief executive Alan Joyce once told me years ago that aviation was “a mug’s game”.

He pointed out that there weren’t too many industries that were as vulnerable as aviation to such a litany of outside variables like the price of oil, outbreaks of bird flu, terrorism or inclement conditions.

“The good times don’t last for too long,” he said. “But once you have jet fuel in your bloodstream there is no turning back.”

As Qantas prepares to pick itself up off the mat after announcing 5000 job cuts, the wide-scale retirement of its ageing fleet and the abandonment of unprofitable routes, Joyce would do well to look across the Pacific to his US counterparts. After all, it was only a few years ago that many were also considered out for the count.

If we take a look back to just before the September 11, 2001 terrorist attacks on the US, America had 10 major carriers. Today, it has just four.

It is a little complicated, but here’s basically what happened. Northwest merged with Delta, AirTran became part of Southwest, United took Continental on board and America West was swallowed up by US Airways, which itself has just been combined with American Airlines, a carrier that started the whole merger spree with its 2001 buyout of TWA.

An overcrowded market, the World Trade Centre attacks, rising oil prices, financial exposures, cost of labour and, often, simply bad management has left only American, Delta, United and Southwest on the runway.

While the newly-merged American Airlines leapfrogs Delta to become the largest of the US airlines, it was only just over two years ago that it filed for bankruptcy.

Tom Horton, chief executive of American Airlines’ now former parent company AMR, said upon declaring the bankruptcy in November 2011 that the decision was unforeseen and that “the world changed around us”.

The recession, a huge drop in the number of Americans travelling and high oil prices combined to knock the airline out cold.

American Airlines’ move followed United’s bankruptcy in 2002 and Delta’s in 2005. By 2011, all US airlines were bleeding. However, while Qantas profits have nosedived, the US airlines have returned to profitability.

Despite only recently pulling themselves out of the grave, American Airlines and US Airways managed to earn a combined $US1.95 billion in 2013, according to earnings released in January.

That compares with 2012 when the two companies earned a combined $US407 million.

So how did the US airlines pull themselves back from the brink?

They have done this largely by passing rising costs on to passengers.

In 2007, when budget US carrier Spirit Airlines started charging people for checked baggage, many expected a passenger revolt.

Now, US airlines are raking in $US6bn annually from new fees on checked bags and flight changes.

United, for instance, says its revenue from such charges amounts to more than $US20 per passenger.

Jonathan Kletzel, US transportation and logistics leader at PricewaterhouseCoopers, says that the days of getting a free toothbrush and a sleep mask on a domestic flight are over -- unless you want to pay for them.

“There’s no question the (American) airline industry is undergoing a renaissance marked by increased revenue and stable profitability,” he said.

“When taking into account all fees and ancillary revenues, airlines are seeing as much as a 9 per cent increase in average base airfares. Going forward, you can expect airlines to roll out additional sources of revenue, by strategically charging fees and bundling services that are aimed at enhancing the travel experience.”

The big four US airlines said this week that the extreme winter weather in the US had forced them to cancel 74,500 flights in the first two months of the year.

Delta alone said it would hit revenue by about $US90m.

But none of the airlines sounded too worried.

"All in, we still think it's going to be a very solid first quarter," Delta president Edward Bastian said.

That is because they have found a number of additional revenue streams that they didn’t have before.

Those changes, as well as low oil prices, will help global airline profits hit a record $US19.7bn in 2014,  the International Air Transport Association said. That is an increase of more than 50 per cent on the $US12.9bn estimate made for 2013.

For Qantas to get a slice of that action, it will need to restructure the way it does business. What that means is that the Qantas that we have grown up with is set to change.

As he restructures Australia’s national carrier, Alan Joyce will be looking where he can for inspiration. The US is a good start.

Mathew Murphy is a Walkley Award winning reporter based in New York.

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