This paper will present a business assessment for the airline Qantas covering the next 24 months of the firm's operations. It will be shown below that the airline is being presented with a number of serious internal and external challenges. These challenges will force decisions that may well lead to major changes in the firm's current market position and organizational composition. The paper will be divided into four sections. The next section is the executive summary. The third section is the business description, which includes an analysis of the firm's current and future positions. The fourth and final section discusses the firm's market analysis.
Qantas is the leading carrier in Australia and the world's second oldest airline. The firm has a considerable market presence internationally in 40 different countries. The airline carries an average of 30 million passengers world-wide each year. However, Qantas has been experiencing considerable competitive and market stresses in recent years. The six month period ending in December 2013 saw the firm record a profit before tax (PBT) loss of $252 million. The challenges posed to the firm include market instability, a difficult and uncertain competitive environment, adverse world-wide economic conditions, high oil prices and unfavorable rates of foreign exchange. These factors will inhibit any near term financial recovery. However, not all of the firm's news is bad. Qantas still enjoys a high level of customer loyalty and considerable improvements in unit cost.
Nevertheless, restoring the firm's competitiveness and profitability remain core goals. Thus a multi-year Transformation Program was initiated in financial year 2013-14. This program will undertake a very ambitious a $2 billion plan to reduce firm costs by 2017. Key elements from the plan include reducing labour costs, withdrawing services from under-performing markets, and liquidating assets. Qantas is expected to experience considerable opposition to its Transformation initiatives from labour organisations, which could complicate program implementation. Finally, even with these changes, unfavorable market and competitive conditions could still pose significant challenges to the firm's goals over the ensuing 24 months.
Qantas, was established in 1920, and incidentally, the firm's name is an acronym meaning Queensland and Northern Territory Aerial Services. It is the world's second oldest airline and the leading air carrier in Australia ("Our Company"). The firm has a significant international presence in 40 countries, which includes over 80 different destinations. The firm and its various subsidiaries carry an average of 30 million passengers per year.
Qantas has experienced some significant economic difficulties in recent years. In fact, it began 2014 having its stock downgraded to high risk junk status by both of the world's leading credit rating agencies (Flynn). The reason for the reduction was the significant competitive challenge being posed in Qantas domestic market by Virgin Australia. Thus, the prognostication is that Qantas will experience considerable loss of market share to its more aggressive competitor in the coming years.
Qantas reported a profit before tax (PBT) loss of $252 million for the six month period culminating in December 31, 2013. There was a Loss Before Tax (LBT) amounting to $305 million and a Statutory Loss After Tax amounting to $235 million ("Qantas Group"). The firm's operating environment posed several challenges. First, growth in carrying capacity outstripped demand in the domestic market. This caused downward pressure on revenue. Second, Qantas was faced with competition from airlines that were either foreign government owned or sponsored in both its domestic and international markets. Then there is the significant increase in world petroleum prices since 2003. The firm's two positives were its high level of customer loyalty and improvements in unit cost.
The effect of the firm's credit rating downgrade will lead to an increase in the cost to obtain affordable credit. In addition, a change in the way banks credit Qantas accounts is expected to remove as much as $2.8 billion from the firm's cash balance. Until recently Qantas was able to bank any cash paid for tickets before the passengers took their flights (Flynn). However, going forward, the credit will only be allowed after the flights are taken. This procedural change will further compound the firm's already serious negative cash-flow problems.
Qantas first posted an after tax loss in the 2011-12 fiscal year of $US244 million. This was notable as the first loss since the firm went completely private during the mid-1990s. Qantas losses appear to be growing. The firm is facing a record $US868 million loss before tax for the 2013-14 fiscal year (Flynn). A number of factors will likely prevent any recovery for the company in the first half of 2014. These problems include high oil prices, unfavorable foreign exchange rates, weak passenger demand, and increased carrying capacity.
Oil prices have grown from a two decades average low of $US20 prior to 2002 to an average of over $US100 since. In addition, the excess seating capacity in international airline markets has significantly cut passenger cost (Dennis). Moreover, the cheap air fares market appears to be the only one that is growing. These factors make it extremely difficult for Qantas to earn enough income to pay for its expenses, much less generate a profit. According to its 2012 annual report, the firm recently had a record fuel bill of $4.3 billion.
The firm's weakening fiscal position is leading it to cut staff. In fact, Qantas announced plans to lay off 5000 workers and sell off assets such as its Melbourne Airport terminal (Whinnett). As many as 1500 staff cuts will be in upper management and a large number of these workers are expected to be let go by the end of March 2014 (Flynn). There are some reports these layoffs have already been processed.
The company is also trying to obtain changes to the Qantas Sale Act. The Act mandates limits to foreign ownership of the firm to only 49 percent. Unfortunately, this legislation inhibits the company's ability to raise capital and improve its competitive position. It should be noted, that the Green and Labour parties both oppose any changes to the Qantas Sale Act (Flynn). In their view, it will only cause more job loss and lead to the loss of certain regional air routes. A Green party leader argued that Qantas would have to guarantee jobs before receiving any government debt relief.
Qantas has initiated a $2 billion plan to reduce firm costs by 2017 known as the Qantas Transformation program. One of the major challenges facing the Qantas Group is the significant challenge posed by its competitors, chiefly Virgin Australia, in the domestic market. The growth in the carrying capacity of its competition has occurred simultaneous to a decreased demand for air travel within Australia ("Qantas Group"). These factors have put considerable pressure on both passenger loads and yields. The firm's domestic profit pool saw a decline to below $100 million in the first half of 2014 from over $700 million in FY2012.
Nevertheless, Qantas consistently produces a rewarding customer experience as evinced by its customer advocacy record. Qantas was more punctual than any other domestic carrier during each month of 2013 ("Qantas Group"). At the same time, the firm's fleet renewal plan yielded lower costs and an improvement in the customer experience. Domestic business travellers have made Qantas Domestic their consensus choice for travel. Moreover, the firm retains 80 percent of the business travel market by revenue in the first half of 2014.
Qantas enjoys a somewhat favorable liquidity position of $3 billion. by December 31, 2013, this position includes $2.4 billion in cash and another $630 million in recoverable debt. The firm doesn't have any significant unsecured maturing debt until Spring 2015. Nearly 30 percent of the firm's passenger fleet is operating without debt. Since FY2010, Qantas has brought an additional 31 unencumbered craft online, with seven to be brought online during the first half of FY2014 ("Qantas Group"). The same fiscal year also saw 20 mid-life aircraft see their associated debts retired. FY2014 capital expenditure includes $900 million invested in the first half of the fiscal year with an additional $300 million scheduled for investment in the latter six months.
After a December 2013 review, the firm's leadership decided that any further scheduled capital investment be commensurate with the firm's performance. Therefore a cutback of $1 billion in investment is planned for FY2015 and FY2016 ("Qantas Group"). Current projections indicate that capital investment will approximate $800 million in both fiscal years. These expenditures will include operating lease movements so that the firm can maintain its flexibility to undertake additional adjustments as broader conditions warrant.
Still, the firm's second half FY2014 operating environment continues to be both unstable and a challenge to effectively navigate. Domestic demand is projected to remain weak during the second half of the period ("Qantas Group"). Both international and national loads and yields will likely trend toward a decline.
Qantas operating expectations include three factors. First, the firm's capacity is expected to grow by about 3 to 3.5 percent in the second half of FY2014 over the previous half. Second, the firm's domestic carrying capacity is projected to grow by 3 to 4 percent over the same period. Fuel costs are projected to be about $4.6 billion in FY2014 ("Qantas Group"). With the announced Transformation program, the firm has decided against making any profit guidance at the time of this paper. As noted above, the challenging conditions include market instability, a difficult and uncertain competitive environment, adverse world-wide economic conditions, high oil prices and unfavorable rates of foreign exchange.
In light of these factors, Qantas has promoted its aforementioned Transformation Program. The program's goal is to achieve $2 billion in savings by FY2017 ("Qantas Group"). This will be accomplished by eliminating 5000 full-time workers, a major reorganization of the firm's fleet and network, and a $1 billion cutback in capital spending for FY2015 and FY2016.
The transformation program has targeted two key priorities both of which are expected to be pursued with considerable urgency. The first is to enhance the core of the firm's operations. The second is to better defend the foundation of the firm's future competitive benefits ("Qantas Group"). The program aims to achieve the following as part of this program. The first, is to maintain the highest quality customer experience for Frequent Flyers, in the air and on the ground. The second is to maintain the firm's two-brand domestic power through a combination of structural and operational means. Thus the firm has identified such priorities as rapidly reducing operating costs, bringing the fleet and network into a size more proportionate with market demand, further emphasize the strength of existing assets, move growth targets further into the future, ensure proper alignment between financial performance and capital investment, and rapid implementation of simplification.
Qantas is also implementing as many as 250 separate initiatives as part of its Transformation Program through FY2017. Some pertinent highlights from these initiatives include: eliminating service on underperforming routes and providing a better match between carrying demand and aircraft on other routes. Qantas International will exit from the disappointing Perth-Singapore route during FY2015 ("Qantas Group"). All aircraft on the Sydney-Singapore and Brisbane-Singapore routes will be switched to A330-300s also during FY2015.
Aircraft will be better utilised by cutting turnaround times, redesigning schedules, and reducing the firm's passenger fleet to 7 types from the current 11 by FY2016. This will be achieved by reducing the use of wide-body aircraft in Australia. The remaining equipment will focus on the East-West and peak period Sydney-Melbourne-Brisbane routes ("Qantas Group"). A330-200s will be deployed as replacement equipment for the firm's international operations. B767-300 aircraft will be retired by the second half of FY2015. Qantas will also reschedule services on the London-Melbourne route to cut back on A380-800 Heathrow Airport dwell time. This will help facilitate a revenue improvement for the first half of FY2015. As part of its growth deferment, Qantas will defer the scheduled delivery date of its A380-800 after an assessment of future needs. The firm will also defer the final three of its B787-8 aircraft, reorganize its A320-200 schedule, and defer existing plans for Jetstar expansion in Asia.
Labour disputes. Qantas has serious labour difficulties that may complicate its ability to restructure. In the fall of 2011, there was a dispute between Qantas and the Transport Workers Union (TWU). The dispute was over a proposed legal challenge to Fair Work Australia's decision to end all industrial action. This challenge emerged in the wake of the firm's decision on October 29, 2011 to ground all of its flights (Wright). Qantas argued that labour action should be terminated because it would provide the airline with certainty. The following month, Federal court proceedings were initiated by the Australian International Pilots Association (AIPA) to obtain an order challenging the Fair Work Australia decision to end any industrial action.
The TWU decided to use arbitration to resolve its dispute with Qantas. Tony Sheldon, the union's national secretary, supported an aviation award which would cover both Qantas, and among other airlines, Virgin Australia and Jetstar (Wright). The purpose of the aviation award is to obligate the airlines to provide fair rates of compensation to their employees. This stipulation would cover the entire Australian aviation sector. However, the unions are also concerned that Qantas is outsourcing more of its operations to its low-cost Jetstar subsidiary.
According to Qantas, the firm's fleet was grounded due to pressures from within the aviation industry. Thus company management has argued that setting pay rates beyond what their competitors are paying would significantly harm its competitive position (Wright). However, Fair Work Australia prohibits the undertaking of an industrial action during the arbitration period which could last up to four years. According to Qantas, bookings for the airline experienced a dramatic drop during the action and thus further hurt the business.
Qantas is suffering the deleterious effects of operating within a high-cost, relatively low demand industry sector. Most firms will need to cut labour costs in such a situation and the recommended course of action for Qantas should be no different. As Flynn suggested, the firm could offset its losses through the sale of additional assets such as Jetstar and the firm's Frequent Flyer plan. It's not known whether this will be enough.
Another recommendation could be for the Australian government to begin limiting air rights to foreign carriers under public sector ownership. These carriers are based mainly in Middle Eastern countries such as the United Arab Emirates (Flynn). They also bring in a fairly small number of foreign tourists relative to the number of Australian passengers they fly out (Dennis).
The firm could also abandon its goal of a two-thirds share of the domestic airline market. As it stands, current passenger capacity levels do not make this a cost-effective strategy (Dennis). A more drastic recommendation is to sell off the firm's international business operations to a company willing to accept operating in such a financially stressful environment (Flynn). In addition, a failure by Qantas International could lead to the formation of a new premium type airline modeled on Jetstar Gold. This type of transition could lead to cheaper wage rates and labour contracts (Dennis). Qantas could also attempt other cost-cutting measures such as using secondary airports and yield management. These types of strategies would certainly be unwelcome by other stakeholders such as labour. Qantas's problems are not unique. It's been reported that all of the world's international airlines are losing money. Consequently, Qantas has been competitive in domestic and regional markets, although the expansion of Virgin Australia may threaten that as well.
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Whinnett, Ellen. "Qantas Set to Axe 5000 Jobs and Sell its Melbourne Airport Terminal to Negotiate Federal Assistance." Theaustrialian.com.au, 25 February 2014. Web. Retrieved from http://www.theaustralian.com.au/news/federal-government-set-to-push-law-on-majority-foreign-ownership-of-qantas-as-airline-set-to-axe-5000-jobs-and-sell-its-melbourne-airport-terminal/story-e6frg6n6-1226836427210. February 2014.
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