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The Joyce Stick

Wednesday, February 1, 2012 - 12:36

The boss of Qantas copped flak when he took on the unions, but his mission was clear: win the bigger battle. By Tom Skotnicki.

Last October Alan Joyce alienated himself from large sections of his staff, customers and the community by deciding to ground the network. It was a radical decision that damaged one of Australia's most valued brands. But will he be proved right and emerge as the airline's saviour?

The lockout turned the Qantas chief executive into a virtual pariah. In an example of poor timing, Qantas ran a competition on Twitter the following month to promote the airline's first-class service. The competition was described as the "Hindenburg of social media". ABC radio's PM presenter Mark Colvin (@Colvinius) summed up the attitude of many of those participating, when he said "first-class luxury" was "getting from A to B without the plane being grounded or an engine catching fire".

The union strategy, if it was to embarrass the airline, had succeeded. The once great Qantas brand was seriously damaged as disgruntled passengers, their families, friends and colleagues dealt with the closure of Australia's dominant airline.

Joyce was savaged by the media, politicians and his own staff, who blamed his hard-line tactics for the lack of progress in industrial negotiations. The closure coincided with an attempt by Virgin's CEO, John Borghetti, to challenge Qantas's domination of the lucrative business market. Virgin has established new routes, introduced a business class, business lounges, new food and beverage offers and upgraded its frequent flyer scheme.

Qantas shareholders would have been forgiven for wondering what Joyce, backed by his chairman - former Rio Tinto CEO and industrial strongman Leigh Clifford - was doing. Within the corridors of other airlines there were suggestions Joyce was acting as the public face of Clifford. However, this is almost certainly a simplification. The reality is the closure was endorsed by Joyce and his management team.

It would be naïve to ignore the provocation by Qantas unions. The strategy of rolling stoppages and protests was to disrupt the airline's commercial base to force Qantas to accept staff demands. One unionist described it as a "slow-bake".

The union action was costing Qantas more than $20 million a week in additional network costs and lost and cancelled sales. Joyce said if it had continued it would have destroyed the airline. It was the aviation equivalent of mutually assured destruction, or the MAD doctrine.

It is no secret the industrial relations morass stemmed from Qantas's plans to expand its international business. The Qantas unions and associations refused to allow jobs to be sent overseas or hard-won pay and conditions to be cut.

Historic battle

Joyce is fighting a battle over the future of the airline. Ultimately, it is about a fundamental philosophical divide between staff and management. The role of management is to act primarily in the interests of shareholders while staff (including, in the case of Qantas, highly paid pilots and engineers) want job security, higher incomes and better working conditions.

Employees would prefer Qantas remain overwhelmingly a domestic airline with a modest international operation flying out of Australia. Joyce has much more ambitious plans. He wants to establish Qantas as a major player in the Asia-Pacific, the world's fastest growing aviation market. But, as he and Qantas employees know, that will require a further cut in the cost base of the airline that eventually will spill over to the Australian operations.

Joyce may be a rocket scientist (a science graduate specialising in mathematics and physics) but the future is not that hard to predict. Pan Am was the world's largest carrier for 44 years until its collapse in 1991. Ansett Australia was a key Australian domestic airline for 66 years until it disappeared in 2001.

In 2010, United Airlines and Continental merged in the United States. This followed the merger of Delta and Northwest in 2008. In 2011, British Airways responded to growing global competition by merging with Spanish carrier Iberia to form IAG. Air France and KLM have merged, so too Chile's LAN and Brazil's TAM airlines.

On the flip side, a decade ago who had heard of airlines such as Emirates, Etihad, Singapore Airline's cut-price airline Scoot, AirAsia X and China Southern Airlines, Asia's largest airline which is starting to make inroads into Australia. As one senior airline executive told Mt, Qantas is having its "lunch cut" on the international routes. The international Qantas business, once a profit driver, is now losing money. The reasons are complex and include its inability to compete on a cost-effective basis with Asian and Middle-East carriers, the high Australian dollar (making Australia a less popular destination) and the capacity of international airlines to offer cut-price airfares in Australia because they are able to link up through significant international hubs. The problem for Qantas is Australia (and New Zealand) is a spoke, not a hub. It is literally the end of the line.

The real strength of Qantas has been its domestic market where, for the past decade, it has been able to generate large profits supported by the success of its frequent flyer program. It has also benefited from the success of cut-price Jetstar, founded by Joyce in 2003 and which is highly successful here and overseas.

Aviation consultant Stephen Pearse, former head of United Airlines in Australia and later vice president of Emirates in this country, is convinced Qantas will survive even if it does not expand into Asia.

"It has a strong position in Australia and a powerful domestic franchise," he says.

Pearse said Qantas was still well-placed to serve the direct non-stop traffic out of Australia although it had lost about half its share of international traffic in a very competitive market.

Unions over-reacted

Pearse believes the unions have over-reacted to the threat of the airline moving offshore. "You are talking about future growth. Don't really think that Qantas wants to offshore itself to Asia but what it is seeking to do is buttress the business by developing an Asian base and expanding its scope of operations," he said. Very few jobs would be outsourced, he said, and what it was about was the growth of a mature business.

"The domestic cost base will be largely based on what you can and can't do in Australia and if you can support that with higher fares then that's fine. The new Asian business has to be competitive with wage rates and costs in the Asian region," Pearse said.

"It's a nonsense that airlines have to have the same pay and conditions in different markets just because the airline operates with the same brand or similar brand."

He also pointed out there were limits on job cuts with most work having to be done in the country of operation, from crews to desk staff and baggage handlers. "Most of the employment has to be located where the bulk of the operation takes place," Pearse said.

Asked why Qantas had run into its industrial relations problems, Pearse said: "Perhaps in aviation you are more sensitive to small changes in the industrial front than many other businesses."

Pearse is an admirer of Joyce. "He is obviously decisive. If you take the 380 engine crisis, he understood what was important to his brand and grounded the fleet, took the financial hit for the sake of the brand and fixed the problem before putting the fleet back in the air."

Pearse said being head of Qantas must be one of the most difficult jobs in Australia because of the level of scrutiny. "I don't know anywhere else that the history of the national carrier is part of the school curriculum."

Despite the temporary damage, Pearse has no doubt the brand will recover. "There's a swathe of reasons why people fly: frequency, loyalty schemes, lounges, and when you consider all these things in relation to Qantas the brand will naturally recover. The marketing muscle will come to the fore — it is already virtually back to normal."

Joyce wants to create new growth opportunity for Qantas in Asia. However, he will need to eventually rein in domestic costs to ensure the viability of the home market and significantly cut international costs to compete against the emerging Asian airlines and Middle-East carriers. Qantas may have decided to delay the establishment of a premium airline in Asia but this is more likely to reflect the current investment climate than any fundamental change in strategy.

The rise & rise of Alan Joyce

Alan Joyce could easily have been a policy wonk. The Dublin-born and educated Qantas chief executive excelled at physics and mathematics. It appears the leadership qualities and management skills that led him to his current position emerged during his career.

Joyce graduated with a science degree and a masters in science management. Still in his early 20s, he joined Irish national carrier Aer Lingus. During his eight years at Aer Lingus he held a wide range of positions in sales and marketing. But it was in network planning and strategy that he excelled.

Network planning and strategy has emerged as the pointy end of profitability for airlines. In most instances it is possible to build traffic by reducing prices and increasing passenger load, but unless the fleet network and planning is compatible the airline will not make money. Airlines rely on maximising use and limiting costs. Like most logistical planning it requires a solid understanding of the mathematical principles involved.

However, Joyce was more than a talented mathematician. He quickly demonstrated an understanding of the immense array of interrelated factors that determine the success or otherwise of an airline. Airlines, and particularly large scheduled airlines, are a round-the-clock business, prone to unpredictable factors (including accidents and volcanoes) and dependent on a large staff of often highly paid and skilled workers in diverse areas, a large number of critical suppliers and billions of dollars of investment in aircraft.

It is little surprise many of the world's leading airlines over the past decade have struggled for profits. One parallel would probably be the large movie studios which have to invest billions of dollars a year with often less than predictable outcomes. In the case of the major carriers, not only are they expected to provide a return to shareholders but also have community and civic obligations.

Joyce made the transition from Ireland to Australia in 1997 when he joined Ansett in a networking role. He was only 31 but already seen as an up and coming airline executive, highly regarded by former Ansett chief executive Sir Rod Eddington. He left Ansett in 2000 to join Qantas and at 37 was appointed CEO of Qantas subsidiary Jetstar, putting him in direct line for the top job at Qantas.

Joyce has had several opportunities to return to Ireland but chose to remain. He has been headhunted by one of Europe's most successful low-cost carriers, Irish-based RyanAir, and in 2005 was named the likely new head of Aer Lingus before deciding to stay with Jetstar.

The Irishman is regarded as affable and generally easy-going. He is apparently a good listener but, having made up his mind, is known for his decisiveness. It was a trait frequently referred to when he shut down the airline last October.

To date, his greatest success has been Jetstar. He virtually built the airline from scratch and turned it into a key profit centre for Qantas while not cannibalising the existing network. He was involved in, at times, extremely tense negotiations with staff represented by about 14 unions and associations. In the process he ensured Jetstar had far lower operating costs than Qantas, which enabled the cost-effective expansion of the airline that was largely responsible for stifling the growth of other low-cost carriers such as Virgin and Tiger.

He also established Jetstar as a major player in the Asian cut-price market where it is now the largest no-frills airline operating out of Singapore. Importantly, Jetstar is widely regarded as the only truly successful cut-price operation established by a premium airline.

It was this success that made Joyce one of the most talked about executives in the global airline industry and made it virtually inevitable he would succeed Geoff Dixon as head of Qantas in 2008.

What the analysts say

Aviation commentators Tom Ballantyne and Geoffrey Thomas are admirers of Alan Joyce. Ballantyne, chief correspondent of Orient Aviation Magazine, said Joyce had to take on the unions. He said the airline could not afford to lose tens of millions of dollars a week. He said the unions would have to make a deal with the airline.

"The plan to establish a premium airline in Asia has been put on the backburner but with Jetstar's success in Singapore, and now Vietnam and Japan, it is only a matter of time before Qantas establishes a hub in the region," Ballantyne said.

He said the delay reflected increased nervousness among potential European investors. He said Qantas would eventually pin down the right partner.

The long-term issue is how Qantas can cut costs. It has already succeeded with Jetstar, which operates on a different cost base to Qantas. But if Qantas, as a premium airline, is to succeed it must reduce the average 20 per cent difference between it and other premium carriers.

"You can't blame Qantas staff for wanting more. They were certainly restrained during the global financial crisis but they are still the highest paid in the region," Ballantyne said.

Geoffrey Thomas, chief editor of Air Transport World, said Qantas had to tackle the industrial action head-on. Failure would have threatened the airline with collapse. "Corporate bookings were down 40 per cent, which is a totally intolerable situation. They were being slow-baked." He said the industrial action by engineers and baggage handlers and threats by pilots meant the airline had to go with the "nuclear" option of a lockout. "The airline was facing losses of $85 million and it was only a matter of time before it was torn apart." He said the union strategy was to make the dispute so expensive the airline would buckle.

Thomas said relative costs made it difficult to compete. While a captain of a US airliner with 21 years' experience was paid on average $155,000, Qantas was paying its top long-haul pilots closer to $380,000 with co-pilots on $280,000 and first-officers $180,000. Wages for US airline captains had fallen by an average 40 per cent over the past 10 years, largely because so many airlines went into Chapter 11 bankruptcy and renegotiated their pay deals. Thomas said Qantas pilots were also better paid than Jetstar pilots: 40 per cent more for 26 per cent less flying.

Thomas said with so many international airlines flying to Australia, Qantas was struggling to compete with a cost base of 20 per cent higher. One of the latest airlines flying to Australia, China Southern, was offering a return business-class Sydney to Paris ticket for $4500 (Qantas charges twice that).

"The dynamics of air travel and marketing have changed dramatically over the past 20 years but the unions have not caught up. There was a time when Qantas could demand a premium based on its safety record but all airlines are relatively safe and it has fallen away as a concern among passengers who are now far more price conscious. Engineers and pilots have to stop living in the 1960s and 1970s," he said.

Thomas said Joyce was not a typical airline executive. "He is quirky and different but he is a brilliant numbers man which reflects where the industry is at."

There are no doubts about Jetstar's success. Thomas said the decision of Japan Airlines and Mitsubishi to establish Jetstar in Japan was a tribute to the Joyce approach. He said Joyce was worth his pay packet. There had been a lot made of the $5 million voted on at the last annual general meeting but Joyce "deserves it".

Joyce gems

The Qantas boss cuts to the chase:

  • "Employee engagement is not where we want it to be at Qantas."
  • "You can never over-communicate with employees."
  • "Don't be afraid of having frank discussions, but at the end of the day, be decisive and make sure you have a clear direction and everybody's behind it. Once a decision has been made, make sure nobody's undermining it. That's one thing I really don't like and that's something at Qantas we won't tolerate."
  • "Flexibility and adaptability is really key."
  • "I am not sure I could ever run a bank or a widget-producing company because I would probably find it boring."
  • "You have to lead by example. It's important everyone takes the tone from the CEO."
  • "People who are not performing are not tolerated in the organisation and the people performing well will get rewarded for that."
  • "If you use non-constructive behaviour, are a bully and turn people off, then it's not a great place to work."

The Asian equation

In 2001 Tony Fernandes, former Time Warner executive, bought a struggling Malaysian airline for 26 cents and $11 million in debt.

A decade later, AirAsia is one of the most dynamic airlines in Asia with flights to more than 400 destinations and a network of subsidiaries. It is an integral part of the revolution in low-cost, no-frills aviation driving passenger traffic in the world's most populous region.

The airline has won many awards and has the lowest cost per passenger kilometre of any airline. It is making rapid inroads into Australia through subsidiary AirAsia X.

Azran Osman-Rani, 40, CEO of AirAsia, is a dynamic aviation executive and a former McKinsey consultant and pay-TV manager with engineering and economics degrees from Stanford University.

He has no doubt about the airline's potential for further growth in Australia. The airline is already flying to three Australian destinations and plans to increase flights into Melbourne and Perth. Osman-Rani is also targeting Adelaide and Sydney and plans to add several new aircraft to Australian routes next year. He said the airline was achieving high loads, particularly on its premium seats which are priced significantly below business-class seats on airlines such as Qantas.

"The lower cost base of our airline, up to 50 per cent less than other carriers, gives us a significant advantage when combined with our customer focus," he said.

Other new low-cost airlines are also expanding operations in Australia including China Southern Airlines and Singapore Airlines subsidiary Scoot. Not to mention competitors such as Virgin Australia and Tiger. There is also a growing presence from airlines such as China Eastern and Air China as well as other premium airlines out of the Middle-East such as Emirates and Etihad.

The region already accounts for a quarter of the world's traffic and is expected to grow rapidly. Asia Pacific airlines in 2011 generated about $144 billion. Over the next 20 years Boeing expects the region to spend $1.5 trillion on 11,450 new aircraft. Little wonder Qantas, which accounts for about 10 per cent of the region's revenue, wants a share of the boom.