Qantas rolls with the punches

As Australia’s Qantas celebrates 90 years of operations, including 80 serving flights to the UK, Ian Goold examines the carrier's continuing response to recent economic, natural, and technical challenges, and its growth plans over the next seven years. By August, Qantas Airways should have received 11 of the 12 Rolls-Royce Trent 900-engined Airbus A380-800s it ordered in 2000. Six years later, the Australian flag-carrier, which is celebrating 90 years of operation, booked a further eight of the very-large airliners (VLAs), the last of which is scheduled for delivery by 2015.

6th Jun 2011


 

 Qantas rolls with the punches

As Australia’s Qantas celebrates 90 years of operations, including 80 serving flights to the UK, Ian Goold examines the carrier's continuing response to recent economic, natural, and technical challenges, and its growth plans over the next seven years.

By August, Qantas Airways should have received 11 of the 12 Rolls-Royce Trent 900-engined Airbus A380-800s it ordered in 2000. Six years later, the Australian flag-carrier, which is celebrating 90 years of operation, booked a further eight of the very-large airliners (VLAs), the last of which is scheduled for delivery by 2015.

The carrier’s A380 fleet drew the world's attention late last year when flight QF32 suffered an uncontained engine failure as it was climbing out of Singapore. Very substantial damage was incurred to the engine, wing, and various control systems and, after dumping fuel, the aircraft returned to Singapore – where it will remain for several more months, undergoing repair by Airbus under the airline's supervision.

The second-biggest A380 customer, Qantas operates a network of services, which – including alliance and code-share partners' flights – links more than 180 points in over 40 countries in Africa, Australia, the Americas, Asia-Pacific, Europe, and the Middle East.

The QF32 incident was merely the latest in a series of major challenges – economic, environmental, and technical – faced by Qantas in the last few years. Now, the carrier has unveiled strategies aimed at ‘re-positioning’ the business, as it deals with surging fuel prices and the impact of natural disasters in Asia-Pacific region. Apart from the much-reported engine failure and subsequent grounding of the Qantas A380 fleet, the airline’s operations have also been hit by cyclones Yasi and Carlos, floods in Queensland, an earthquake in Christchurch, New Zealand, and the March earthquake and tsunami that hit Japan.

 ‘Significant cost’

Unveiling the re-positioning plan, Qantas Chief Executive Officer Alan Joyce said that the world had never "faced so many natural disasters", all at "a significant cost" to the airline. “We need to act decisively to ensure the sustainability of [the Qantas group's] business,” he said, announcing aircraft retirements, increased passenger fuel surcharges, management lay-offs and reduced capacity on domestic and international services.

"Significant and sustained" increases in the cost of fuel are the airline's most serious challenge since "the Global Financial Crisis”, according to Joyce. Near-50 percent increases during October 2010-March 2011 are expected to push fuel costs for January-July 2011 – the second half of the airline’s financial year – up to A$2 billion (US$2.1 billion), about 20 percent more than the first-half cost. Accompanying August's scheduled A380 delivery will be Qantas’s 2010-11 annual results, in which Joyce may provide the airline group's best guess about the likely impact of recent events on the 2011-12 results.

A review of operations in March led Qantas to cut back this year's intended 14 percent increase in domestic capacity to 8 percent, while reducing international capacity growth to 7 percent from the planned 10 percent. Since April, Qantas low-cost carrier (LCC) subsidiary Jetstar has dropped up to four round trips a week to Japan. Airbus A330 twinjets have replaced larger Boeing 747-400s on Qantas services between Sydney and Tokyo’s Narita airport, while Perth-Tokyo operations have been suspended since early May.

Also since April, three domestic Jetstar New Zealand daily services to Christchurch and one daily Melbourne-Christchurch operation have been dropped. Furthermore, Qantas has decided to bring forward – to unspecified dates – the retirement of two Boeing 767-300ERs and to reduce employee numbers (initially affecting management only) and the cost of employees' leave. After increases in fuel prices, the airline had previously put up domestic fares and international fuel surcharges twice in early 2011 and Joyce has warned that Qantas does not expect to be able to fully offset the impact of those or other expected fuel-cost increases.

Business transformation

The need to cut costs this year has come in the midst of the company’s QFuture project, a three-year business-transformation programme intended to enable sustainable growth in an increasingly competitive operating environment. Qantas hopes to generate some A$1.5 billion in increased revenue and reduced costs during the three business years from 2009-10 to 2011-12.

Launched in July 2009, QFuture aims to transform business elements like airline alliances, airport-terminal development, fleet utilisation and scheduling, information technology, office consolidation, and purchasing. Over 30 major, and many minor, initiatives were expected to improve "value" for customers, boost margins and revenue, sharpen up operational efficiency and “engage" the Qantas workforce.

The company reports that continuing benefits from the exercise are weighted toward the second-half of its 2010-11 financial year (January to June 2011), having yielded benefits worth some A$173 million in the first half. Qantas hopes to have achieved a cumulative benefit of A$1 billion for the two years July 2009-June 2011.

In early 2011, the group reported a A$417 million underlying profit before tax (UPBT) – its preferred business-performance measure – for the 2010-11 first half. Joyce says this built on the company's 2009-10 performance (when it posted A$377 million UPBT) and demonstrates that Qantas survived the global financial crisis in reasonable condition. "The Qantas group has delivered a strong result and is, again, one of the few airlines [alongside Emirates in the Middle East and Singapore Airlines in Asia] to remain consistently profitable and continue to hold an investment-grade credit rating."

Joyce says all parts of the group performed well in the period, with half-year UPBT having grown by more than 56 percent year-on-year. He cites Qantas and Jetstar as being "the two most-profitable domestic airlines in Australia" and says the company began 2011 in a good position to capitalise on opportunities in an improving worldwide aviation environment.

In the last six months of 2010, there was a continued recovery in domestic business travel, although the Australian domestic leisure market was still "highly competitive". On international routes, where Joyce says Qantas is committed to improving its performance, there was improving demand on key routes but generally the market environment remained "challenging".

 

Dual focus

The future of Australia is, of course, seen very much as being tied to that of the whole Asia-Pacific region. In this context, the group is seeking two things: regional growth through aggressive low-cost activity by Jetstar and opportunities for Qantas to capitalise on increasing demand for premium business travel. QantasLink, the group's domestic regional-airline business, made a "strong" contribution to first-half 2010-11 results, says Joyce.

Considering the current, fiscal second-half period to 30 June, Joyce sees a continuing improvement in the general operating environment: forward bookings suggested yields will be up on those in the second half of 2009-10, while the airline chief warns that the first half is typically the "stronger revenue period due to seasonal factors".

In efforts to counter the potential impact of fuel-price rises, the group hedges its fuel purchases, supported by increased fares and surcharges. In addition to the effect on current trading conditions of significant environmental events in the Asia-Pacific, Qantas has to accommodate the impact on operations of the A380 engine failure. This is estimated at A$25 million in second half 2010-11 (in addition to the A$55 million cost in the first six months.

Overall, the company expects UPBT for the whole year to be "materially stronger" than during 2009-10, but warns that "fuel prices, foreign-exchange rates, general trading conditions, and the impact of significant weather events" could quickly take their toll on earnings. The group also has made "significant capital investment" in renewing its airliner fleet in support of growth plans.

Central to the company's strategy is its plan to operate Qantas as "the best premium brand" and Jetstar as "the best low-fare brand". The two businesses account for a claimed 65 percent share of the Australian domestic market. Qantas and Jetstar international services total nearly 1,000 flights per week, with Qantas offering almost twice as many as Jetstar. Within Australia, Jetstar, Qantas, and QantasLink provide about 5,600 weekly services – with Jetstar offering about 1,200, Qantas almost 2,400 and QantasLink nearly 2,000 – to around 60 destinations. In addition, there are 160 domestic Jetstar flights each week within New Zealand.

Business review

In February, Qantas revealed that a senior executive was to review international Qantas business as part of a scheme to make the company a "great global airline", rather than just a carrier flying travellers to and from Australia. “We have set up a task force to explore options [to] invigorate the business, generate new and profitable markets, and protect our jobs and assets," the airline said.

The move has been stimulated by Qantas's falling share of the international market, down from 35 percent to 20 percent, according to Joyce, who says that non-Australian carriers have put on an additional 39 percent more seats, even though passenger growth has been "just 10 percent".

A major plank in the Qantas business over the past 90 years has been its operation on one of the principal traffic lanes of the old British Empire – the ‘Kangaroo’ route between the UK and Australia, which the airline has served (in one way or another) for all but ten of those years. Today, with joint-services and Oneworld global-alliance partner British Airways, Qantas provides 42 round-trips per week to Britain, 28 of which are its own flights. The airline flies 44 services a week to the USA from Australia, with three non-stop flights per week to Argentina, as well as a daily operation to South Africa.

The QantasLink operation, which forms Australia’s largest regional airline through a partnership with Airlink, Eastern Australia Airlines, and Sunstate Airlines, flies to 54 points in Australia and, since July 2010, has also served Port Moresby in Papua New Guinea. QantasLink's fleet of 11 Boeing 717-200s and 43 Bombardier Dash 8s carries 4.3 million passengers annually. Following the purchase of Network Aviation, for which Qantas is acquiring additional Fokker 100 regional-jets, QantasLink is overseeing the group's move into Western Australia's "fly-in/fly-out" air-charter market, serving the natural resources industry.

Having always made money since its 2004 launch, Qantas’s low-cost carrier (LCC) affiliate Jetstar has produced record profits and is the country's second most-profitable domestic airline after Qantas. Singapore-based affiliate Jetstar Asia represents the brand in several markets and is the city-state's largest low-cost operator.

Dreamliner introduction

Qantas and Jetstar provide the bulk of group growth, and future plans include the introduction of Boeing 787 Dreamliners into their fleets. Two years ago, in June 2009, Qantas revised its 787 requirements when it cancelled aircraft set for delivery in 2014-15. After having previously increased orders from 45 to 65 – against an original plan to acquire as many as 115 examples – Qantas cut orders to 50. The aircraft remaining on order are the group's initial15 787-9s for international Jetstar services, 15 787-8s for Qantas domestic services (replacing Boeing 767-300s) and 20 more 787-9s earmarked for international Jetstar and Qantas flights. The airline holds purchase rights covering another 50 aircraft.

As of 1 April 2011, the Qantas group operated a 270-strong fleet (see table). It has now taken an additional three wet-leased Boeing 747-400s and a 767-200 freighter. In the first half of the 2010-11 financial year, Qantas bought six aircraft and leased another seven, while returning a leased 747-400.

During January-June 2011, the group expects to have taken delivery of three A380-800s, six 737-800s, a Dash 8-Q400 and three Fokker 100s, while Jetstar is to receive an A330-200. One 747-400 and three 737-400s are expected to be withdrawn from service.

 Charter expansion

As Qantas chief executive Alan Joyce unveiled first-half 2010-11 results in February, he announced Qantas would boost its domestic, international, and resources charter fleets: "With the domestic market continuing its strong [post-financial crisis] recovery and growth, the group will need additional capacity to participate in this growth and maintain its profit-maximising 65 percent domestic-market share."

Accordingly, a combination of new aircraft orders, leases, and lease extensions was planned to permit Qantas, Jetstar, and newly acquired Network Aviation, to profit from new market opportunities. Key points of the plan, which covers short-term fleet development in the period up to 30 June 2013, involve: the lease of another five 737-800s and extension of two existing 737-800 leases for Qantas;
the lease of an A330-200 and ten more A320s, and the extension of 11 current A320 leases, for Jetstar; the lease of two more 717-200s for QantasLink; and the purchase of ten Fokker 100s for Network Aviation.

During the longer-term period from January this year to June 2018, Qantas is scheduled to receive 173 aircraft currently on firm order. Excluding machines covered by purchase rights, the new equipment comprises 13 Airbus A380-800s, four A330-200s, and 54 A320-series jetliners; 50 Boeing 787s, 33 737-800s, and two 717-200s; ten Fokker 100s; and seven Dash 8-Q400s.

 

QANTAS GROUP FLEET*
Qantas
Airbus A380-800 10
Boeing 747-400 20
Boeing 747-400ER 6
Airbus A330-200 8
Airbus A330-300 10
Boeing 767-300ER 26
Boeing 737-400 21
Boeing 737-800 44
Sub-total 145

QantasLink
Boeing 717-200 11
Bombardier Dash 8-Q200/Q300 21
Bombardier Dash 8-Q400 22
Sub-total 54

Jetstar
Airbus A320-200 44
Airbus A321-200 6
Airbus A330-200 9

Jetstar Asia
Airbus A320-200 12
Sub-total 71
Qantas Group total 270

*as of 1 April 2011

(Source: Qantas)

 

Asian Aviation at a glance