Qantas chief executive Alan Joyce is in Canberra this week to meet with members of the new government. It’s not hard to guess what he’ll want to talk about. A lot of it was on the front page of The Australian Financial Review.
The airline is facing a potentially vicious new wave of competition in the domestic market with a $350 million foreign capital injection on the way for Virgin Australia, something that has put a predictable spring in the step of Virgin chief executive John Borghetti.
Qantas wants it stopped.
There’s been talk in the market for a couple of months now that Virgin was going to have to seek out some funding as its ongoing discounting wasn’t sustainable. The money is finally being tipped in, and Credit Suisse sees it as significant enough to describe it, ominously, as a potential “end game” in the Australian domestic aviation market.
One question that arises is: in a free market, why shouldn’t the guys with the deeper pockets be allowed to wade in and take it to the competition with a better, cheaper offering?
Part of the answer to this is that airlines aren’t just normal companies. They’re also strategic assets for a national economy. It’s not just about allowing people to go visit granny every few months, or giving companies a way to reach interstate customers. Qantas’s move to build a foothold in Asia with Jetstar Japan is an acknowledgement of the emerging reality that Asia, particularly China, is increasingly critical to Australian business.
With demand for flights to China on the rise, do you cede it to the Asian carriers or does Qantas make a play for the market and tailor a product that suits Australians and creates jobs, rather than Australians having to work around schedules and services dictated by the likes of China Southern?
Industry regulations that mean only 49% of the airline can be owed by foreign interest can hamper Qantas’s ability to compete. We’re seeing the effects of it now.
Qantas wants government intervention to stop what it quite fairly describes as a “distortion” in the market that would arise if Virgin has all that cash to play with.
The travelling public might be a winner in a continuing price war but regulators need to consider some broader consequences that are in play.
Qantas’s strategy has been to leverage its dominance in the domestic market, where it maintains a share of around 65%, as a platform to turn around Qantas International. Two years ago the international arm lost a staggering $484 million. But last year the losses were reduced to $246 million.
The turnaround is on.
But it won’t continue if the domestic arm is squeezed. An aggressive play by Virgin for the corporate and leisure market with heavy price discounting is a direct threat to the Qantas plan, to which there does not appear to be any alternative.
This is why it’s described as an “end game”, and why Qantas’ response has been so robust. Joyce knows they are cornered. This could cripple the national airline just as it’s starting to turn itself around.
So here’s the next difficult question. Apart from the employees and shareholders, who cares?
Running an airline sucks. There are doors — literally — that you can’t walk through without regulatory approval. An economic shock can derail years of planning, fuel costs can suddenly blow out, and shifts in exchange rates can unexpectedly transform demand on routes.
But the arrival of the ultra-wealthy Middle Eastern airlines has transformed the market. Passengers now expect old-world luxury at new-world prices.
The result is costly experience upgrades like in-flight iPads – introduced as a world-first on Qantas flights. Sure, the passengers are happy but the squeeze on the bottom line continues.
The resulting margins are incredibly thin. Qantas last year spent almost $16 billion to make a profit, after tax, of $6 million. Squeak.
The announcement by Qantas yesterday of its new Aquire service, allowing small and medium businesses to build points by spending with partners (for example, telcos and car suppliers) and convert those points directly into frequent flyer points, is all part of the same critical strategy to retain domestic market share. Qantas says Aquire has been in planning for a year, underlining how carefully the company maps out its plans to retain share in the Australian market.
The added spur to this is that the Virgin shareholders injecting the capital — chiefly Etihad and Singapore Airlines — are also direct competitors to Qantas International and its partner, Emirates.
Building Virgin’s market share in Australia would funnel passengers away from Qantas and Emirates. Everyone in the Virgin camp wins.
It’s a potentially devastating pincer.
All of this is the backdrop for Qantas’s call for the government to block what is essentially a major business investment in Australia.
Borghetti says the reaction is because Qantas has realised it no longer has a monopoly. Which it doesn’t.
Companies with a monopoly don’t behave like Qantas has in the past three years, from the still-stunning shutdown of the airline to bring an industrial dispute over maintenance costs to a head, to the Jetstar presence in Asia, fleet renewal, and a major strategic realignment in the Emirates deal.
Qantas is a unique brand in the Australian corporate landscape. There’s a saying that it has 23 million stakeholders. But national pride doesn’t make an airline competitive.
The government should provide clarity on whether the regulatory environment will enable Qantas to fend off foreign investment threats, and not just this time around. It will at least put an end to the airline pointing the finger at policy settings every time a competitor tries to improve its offering to Australian travellers.
And then at least Qantas would live or die on how it is run.
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