Joyce must keep circling for the right partner

The Qantas-Malaysia Airlines deal had been pointing towards failure for some time. However, Alan Joyce must stick to his guns and find a more suitable partner to align with.

The failure of Alan Joyce’s preferred strategy for creating a new Asian hub to bolster Qantas’ loss-making and shrinking international business is a significant setback for the group even though it has been obvious for some time that the prospect of an imminent deal had receded.

Joyce announced today that discussions with Malaysia Airlines, Qantas’ preferred partner in establishing a new premium carrier in the region, had ended after the parties were unable to reach mutually agreeable commercial terms.

Malaysia Airlines is a basket case, which would inevitably have complicated the tri-partite negotiations between Qantas, Malaysia and Malaysia’s major shareholder, Tony Fernandes’ Air Asia. It is haemorrhaging red ink and is in desperate need of a major transfusion of capital.

Qantas was never going to supply that capital, given that it is deferring new plane deliveries, slashing jobs, rationalising its maintenance footprint and quitting unprofitable international routes to improve profitability, preserve capital and protect its prized investment-grade credit rating.

In fact the Malaysia solution was its preferred option, even if in terms of a hub location it wasn’t ideal, precisely because it proffered a capital-light solution, with planned deliveries of new Malaysia Air planes to be re-directed to the proposed new premium carrier.

Qantas had also explored the possibility of basing the proposed new carrier in Singapore, but that is problematic, given Singapore Airlines’ own regional plans, and the likelihood that it would involve substantial outlays of capital.

While its pilots will be delighted that the prospect of Qantas creating a new low-cost carrier operating from an offshore hub has been dealt a significant blow, the longer term strategic challenges for the group haven’t disappeared.

Its international business is losing hundreds of millions of dollars a year and has a network based on ailing developed world economies facing long-term structural issues that will depress any growth they can generate.

Chopping routes and cutting costs will help reduce the extent of the losses but, with existing and new foreign competitors pouring capacity onto the routes into and out of Australia, and Virgin Australia forging alliances and code sharing agreements with some of its major competitors including Singapore Airlines, Etihad and Air New Zealand, the long-term trend towards an erosion of its market share will continue. Qantas once held a 39 per cent market share on those routes; today it is closer to 14 per cent.

The Asian hub strategy, and the international expansion of its Jetstar brand, were Joyce’s relief valves from that inexorable pressure on the international business and the structural cost disadvantages it faced against newer competitors with more modern and efficient fleets and without the legacy cost structures Qantas carries.

There is something of a land grab occurring in Asia's skies, with an explosion of low-cost carrier activity but also tentative steps towards the creation of premium services to capture the growth in wealth and travel occurring throughout the continent.

Joyce said today that Asia would remain a priority for Qantas and that it would continue to explore opportunities, including joint ventures and alliances. Qantas’ own financial condition and the global environment, however, meant the group would allocate only ‘’minimal’’ capital to any ventures.

He also said the plan to return the international business to profitability in the short-term remained on track and that in the medium-term the combined domestic and international flying businesses would return more than their cost of capital.

Joyce might, perhaps, shrink the international business to viability through the wholesale restructuring now occurring and by continuing to shift marginal business to the Jetstar brand.

In the longer term, however, if the international Qantas brand is to survive, let alone prosper, it does need something like the radical shift in strategy and focus the Asian strategy would involve to enable it to overcome its vulnerability as a pure end-of-the-line carrier competing against an increasing number of far lower cost hub carriers.


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