Joyce's justified Asian advance

While an army of critics derides Alan Joyce's Asian strategy for Qantas, recently announced plans by China Southern Airlines illustrate why he is so committed to the plan.

While today’s Qantas strategy day didn’t produce much that was new, a familiar factoid in its presentation, when coupled with the plans announced last week by China Southern Airlines, tends to illustrate why Alan Joyce is so committed to pushing ahead with an Asian strategy that many of his army of critics deride.

Qantas International’s market share has fallen from 39 per cent to 14 per cent over the past decade, against a backdrop of intensifying competition from the emerging Middle Eastern carriers and other government-sponsored competitors with network and cost advantages.

That’s not a new statistic but it becomes even more disconcerting when the plans of China Southern are factored into the competitive mix Qantas is already grappling with. China Southern’s president, Tan Wan’geng, told a Gold Coast audience he plans to dramatically increase flights between Australia and China over the next four years and connect the Australian market to major hubs in Asia, Europe and the US.

China Southern is already operating 35 flights a week between China and Australia, up from 10 a week two years ago. It now plans to boost that to more than 110 a week by 2015. It isn’t, of course, alone. Asian and Middle Eastern carriers are now continuously entering the market and ramping up capacity on routes into and out of Australia.

Joyce made it clear that the ‘’do nothing’’ option isn’t an option for Qantas. Qantas International is a core element of Qantas’ integrated business model and of the mutually-reinforcing linkages between its airline's brands, its dominance of high-yielding domestic corporate travel and its highly profitable frequent flyer program.

Despite the unstable external economic backdrop, and its own internal issues, that explains why Qantas is so determined to press ahead with its plan for a new Asia-based premium airline

The Asian hub strategy is aimed at establishing a multi-brand presence and a base in Asia ahead of the liberalisation of aviation markets in the region and before other carriers have obtained dominant positions.

It is about creating a new low-cost hub operation into which to feed its existing Qantas and Jetstar traffic to overcome the major competitive disadvantage it now has as an end-of-the-line carrier in an already liberalised market.

While China Southern’s ambitions might appear threatening, and could be, they also underscore the potential for Qantas within the broader Asian region if it can execute its strategy effectively. China Southern wouldn’t envisage such a dramatic scaling up of its flights between Australia and China if it weren’t convinced of a commensurate and explosive growth in demand.

If Qantas could create a new premium carrier with a competitive cost structure and product offering and broad enough route network, its loss-making international operations might have a future.

Joyce has given himself a five-year timetable to establish his new Asian brand and remains in discussion with the authorities in Singapore and Malaysia about establishing its base in one of those jurisdictions, although Malaysia is thought to be the location Qantas most favours.This is perhaps because there might be less resistance from incumbents and, if it can co-operate with Malaysia Airlines and its major shareholder, Tony Fernandes’ Air Asia, there would probably be less capital required.

While there is a sense of urgency within Qantas in embarking on the Asian hub strategy – the growth in the Asia Pacific market is attracting new entrants and a lot of new capacity both for intra-Asian routes and for routes linking Asia to the Australian market – the global economic backdrop and the financial cost of its industrial disputes has made Qantas more cautious than it might otherwise have been.

Ultimately, however, the high costs and poor product within its existing international business (the two issues are related) means that it has to act decisively and creatively and execute its chosen strategy effectively if that business is to have a future.

Tapping into the world’s most significant growth market before the land grab now occurring (and which, until now, Qantas has left largely to its Jetstar brand) is over may involve some risks, but appears the only obvious escape route for the embattled international business.

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