Earlier this year, Australia’s largest airline, Qantas, revealed that it had maintained profitability in the final six months of 2009, while competitors sank into the red under the effects of the global recession.
The carrier’s underlying pre-tax profit – the main measure used by the group’s management to assess performance, equivalent to operating profit – totalled A$267 million (US$227 million) in the six months ended 31 December. Statutory net profit before tax was A$90 million, in line with the company’s forecast from December that the figure would be in the range of A$50-150 million.
“While the operating environment has been unprecedented and challenging, the result reflects the strength and diversity of our operations,” said Chief Executive Officer Alan Joyce. Pointing out that the International Air Transport Association (IATA) expects the global airline industry to lose US$5.6 billion this year, Joyce attributes Qantas’s 2009 performance to its two-brand strategy, which makes the business resilient and contains costs.
“Our two-brand strategy, focused on growing the full-service, premium Qantas and low fares Jetstar, is not only delivering benefits to our customers, but also to our shareholders,” Joyce said. “Qantas, in particular, has benefited from the capacity reductions and restructuring activities implemented since April 2009, with substantial cost savings achieved during the current half-year.”
Joyce said that the global economic crisis had forced the company to make tough decisions in 2009, especially in managing capacity and cutting costs. The result was further helped by the company’s three-year Q Future cost-reduction programme, announced in August 2009.
Q Future was unveiled as the airline revealed that its annual profit for the business year ended 30 June 2009 had dropped 88 percent to A$117 million, down from A$969 million a year earlier. The airline said the programme would allow the carrier to cut its costs by A$1.5 billion over three years, starting with a target of A$500 million in the current financial year.
The plan addresses cost-cutting from multiple angles, including measures such as using technology to improve productivity, for example by the introduction of mobile phone text check-in for Jetstar passengers, as well as adjusting cabin seating configurations to the demands of individual markets.
Since the airline had already slashed its workforce in the 2008/2009 business year, eliminating hundreds of management positions and 1,250 operational jobs, Qantas said it did not anticipate any further staff cuts.
“We have taken out nearly 600 management positions, making ourselves leaner, flatter and faster,” Joyce said. “This is an important basis for a stronger culture of innovation and a platform for us to form wider, deeper and more enduring relationships with our customers.”
Joyce added that during 2009, the airline had consolidated its operations, pulling numerous business segments into a single Airline Operations unit to deliver a more integrated, seamless service to customers, through direct control over all core elements of the business.
The carrier also relaunched its frequent flyer programme in 2009 “to a huge response”, Joyce said.
“Our 6 million member Frequent Flyer base provides us with an unrivalled - even unique – ability to understand customer preferences,” the Qantas chief said. “We have also been undertaking detailed research to understand niche market segments and explore opportunities to service them effectively.”
“We have been repositioning ourselves for the future,” Joyce said. “We are entering a new era of aviation.”
A new era
“The Qantas Group is in the rare situation of having two outstanding brands in both the premium and low fares categories: Qantas and Jetstar. We believe each has a major role to play in the next era of aviation,” he said.
The airline chief said he believes there is “no future” for a middle-of-the-road, hybrid business strategy. “We certainly don’t take the view that one size can ever fit all,” he said, adding that the carrier has significant plans for both its existing brands.
“I’ve noticed way too many advance obituaries for premium travel,” Joyce said. “Well, I can assure you that the reports of the ‘death of premium travel’ have been greatly exaggerated. Yes, demand for premium flying has been affected during the global downturn, and pretty seriously. But our research confirms that there is now, and will continue to be, an appetite for premium travel among both domestic and international travellers.”
He does not, however, anticipate any return to the 1960s-style model of premium dominance. “Modern premium flying is going through an important evolution. Or rather, we believe it should go through an evolution to maximise its position in a more sophisticated and segmented marketplace,” he said.
Joyce said Qantas aims to become the world’s first ‘next-generation’ premium carrier, by re-engineering how its products and services are delivered, “even in radical ways”.
“While I expect this to be a game-shift in the airline sector and for Qantas, it is not an untested concept,” he said, pointing out that similar strategies have been adopted in other sectors.
Joyce takes the examples of the Tiffany jewellery brand and Mercedes cars. Both have shown “that it is possible to create value based on their core brand strengths, by going beyond mere incremental improvements in the way they deliver their products and services to customers”.
Reaching new customers
Mercedes has moved from two core car ranges to multiple platforms that serve customers the company had never sought to serve before. Simultaneously, the company has slashed the cost of delivery and improved consistency.
For its part, Tiffany’s, which has long been a prestige brand associated with consistent quality and excellence, has diversified its product ranges to cover a variety of price points, expanding the company’s customer base without compromising its core values.
“The [Mercedes] three-point star and [Tiffany’s] duck-egg blue box remain powerful symbols of aspiration,” Joyce said.
Joyce also cites Apple as an example of a company that has reached out to niche market segments with high-quality, elegantly simple products, while still nurturing the strong values that define its brand.
“Apple fans are happy to pay a premium for the product – I’m one of them,” Joyce said. “To ensure Qantas retains its iconic status, global reputation and commercial strength, we must continue in the great tradition of our company… and keep on innovating.”
The first initiative the airline is undertaking to achieve this goal is called ‘Airports of the Future’.
“Our research with our domestic customers has told us that airport check-in today is nothing less than ‘a point of pain’,” the Qantas chief said. “Check-in takes too long. It causes too much stress. Our customers know what they want: speed and ease. “
The airline is approaching this problem by developing a ‘next-generation check-in’ system.
All Qantas Frequent Flyers – from Silver through to Chairman’s Lounge membership categories – and all Qantas Club members receive their own personal boarding pass, with an associated permanent baggage tag embedded with an intelligent chip.
“You'll be able to speed through check-in, simply swiping your card on the reader, and head to a radically simplified baggage drop or straight through a smoother security process to your lounge,” Joyce said.
Instead of dealing with stickers and weigh-ins at check-in desks, passengers will just scan their personal boarding pass and drop their bag with its permanent bag tag on a conveyor belt. While the process will be vastly simplified for the passenger, the technology ensures the full range of security checks remain solidly in place.
Bronze Frequent Flyers and non-frequent flyers will also see significant upgrades to check-in arrangements, with hosted kiosks and rapid bag drops.
The programme also addresses security bottlenecks.
“We all know security is vital and none of us will tolerate any compromise here,” Joyce said. “So as part of the project we are developing new technologies and associated processes to speed up the security process without compromising our rigorous security protocols.”
The personal boarding pass will be a guarantor of recognition, ease and speed throughout the airport processes. The airline is also planning to extend that ease into the aircraft cabin. It has begun to offer domestic advance seat selection along with pre-selected special meals or extra luggage-allowance purchases.
The next “point of pain” being addressed is baggage pick-up at the passengers’ destination.
“We are working on a separate project to improve that process too, cutting the time-lag from disembarkation to baggage pick up and speeding you on your way faster than ever,” Joyce said.
The project “is genuinely a big challenge, and especially the permanent bag tag component, because it is an absolute world first,” Joyce said. “We are pushing the boundaries here and we will obviously be working in close concert with various regulatory and other authorities and partners in the aviation industry. But we are not afraid to step into the future and I've asked our people to work to an ambitious timetable.”
Trials of the concept were scheduled to begin in mid-year in Perth, with Sydney to be added by the end of 2010 and Melbourne in early 2011. The programme will then be extended to other Qantas CityFlyer destination airports through next year.
“Our plan is to halve check-in time. Or better,” Joyce said.
The airline CEO insists that Qantas will never be “Jetstar-ised” as has been suggested by some industry analysts.
“Qantas is our iconic, premium airline brand,” he said. “It has enduring value. Far from downgrading out commitment to the premium status of Qantas, we are reinforcing it.”
While the airline has cut capacity during the downturn, the core network commitment remains and stands ready for expansion as demand requires.
“But we equally know that the next generation premium airline cannot win if it operates in the same way as many of the lumbering legacy businesses of the past (and some in the present),” said Joyce. “We must be nimble and creative.”
“We see opportunities in everything from our information technology processes to aircraft configuration to fuel conservation; from fleet simplification to supply chain management,” he continues. “The evolution of Qantas as a premium brand will involve more initiatives like this - where we re-design processes and operations to meet the evolving preferences of our customers.”