Qantas shakes the status quo

The aviation sector has consistently shown the status quo will not work, justifying Qantas' move to restructure its international operations even if the most optimistic forecasts are realised.

Politicians and union leaders searching for a context in which to place the damaging confrontation with Qantas could do a lot worse than looking at the latest International Air Transport Association forecasts for the airline industry and some of the comments of its chief executive, Tony Tyler, in particular.

At the moment IATA, which tends to be consistently over-optimistic, is keeping to its forecast of a $US6.9 billion profit for the industry in 2011 and has only modestly revised down its 2012 forecast, from $US4.9 billion of profit to $US3.5 billion. At that level the industry would be generating a profit margin of only 0.6 per cent.

Should the eurozone crisis deepen, a banking crisis develop and Europe fall into recession, however, IATA would expect all regions to fall into losses and the industry overall to lose about $US8.3 billion. As it stands, that looks the more likely scenario than the more benign outcome in the eurozone that underpins the central forecast.

The Qantas group, of course, is profitable. Even after absorbing around $100 million of losses as a result of the disputes with three of its unions that led to the grounding of its fleet, it still expects to generate underlying earnings before tax of between $140 million and $190 million in the December half.

That profit, however, is based on the strength of its domestic franchise, its frequent flyer business, its Jetstar brand and its other non-aviation operations. Its international operations, it has said, are losing $200 million a year.

If IATA’s view of what 2012 might look like in the event that the eurozone authorities can’t finesse a positive and stabilising outcome imminently, the outlook for Qantas’ international business – in which it has $5 billion of capital tied up – would look even less palatable.

Even on IATA’s more sanguine outlook for 2012, the industry would have lost more than $US26 billion over the past decade despite generating revenue of $US5.5 trillion. It is a terrible industry, not helped by the interventions of government or the lack of comprehension of its inherent vulnerability by unions.

‘’You might say that the normal state of aviation is crisis and once in a while we have a few consecutive months of benign conditions – the danger of which is that everyone from suppliers to unions to governments think that airlines are fat cash cows ready for milking in one way or another,’’ Tyler said.

It is the denial of the reality of the international aviation industry and its impact on Qantas’ business that underpins union attempts to freeze those operations in a 1960s status quo and the government’s inability to comprehend why Alan Joyce took that very difficult and financially painful decision to ground the fleet.

If IATA’s fears about the eurozone were borne out, the Asia-Pacific region, generally the most profitable in the globe, would, with the rest of the world, lose money – more than $US1 billion – rather than the $US2.1 billion profit IATA’s central forecast anticipates.

For Qantas, flying point-to-point long haul routes against Asian and Middle Eastern hub carriers with far more modern and efficient products, even the less threatening outcome isn’t going to materially reduce the tide of red ink flowing through its international business. A European meltdown would be very unpleasant.

International aviation isn’t, and never has been, a good business. Over the past 40 years, according to Tyler, the industry has actually made money – but generated an abysmal profit margin of only 0.3 per cent.

In the past decade the emergence of new carriers out of the Middle East and Asia has meant that despite relatively strong growth in passenger numbers, yields have been squashed by the torrent of new capacity pouring into the industry.

Qantas’ international operations need to be radically restructured, their cost base lowered and its configuration re-shaped. Joyce’s strategy of launching a new premium carrier within Asia alongside the rapidly-growing Jetstar business – one of the reasons for the union hostility – might be risky but the status quo isn’t an option.

Even if Qantas could wear the losses, while there is no prospect of generating a return from those operations it isn’t possible for the Qantas board to justify the massive investment required to completely overhaul and upgrade the international product to make it more competitive. That’s why the timetable for the fleet renewal program has been continually pushed out into the future.

Whether or not IATA’s more pessimistic outlook for 2012 is confirmed, the actions taken by Joyce and his board this year to try to do something about the uneconomic structure of their international business are validated by the continuing sub-economic state of the international industry.