Business

Saturday 10 December 2016

Flying high Down Under

But the Dublin-born chief executive of Qantas faces battle to keep the airline profitable as recession keeps business travellers away

Published 04/12/2010 | 05:00

This week's decision by Qantas to seek compensation from engine-manufacturer Rolls Royce marked an unwelcome end to Dubliner Alan Joyce's second year in charge of the Australian flag carrier.

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Qantas hit the headlines for all the wrong reasons on November 4 when one of its new superjumbo Airbus 380s was forced to make an emergency landing at Singapore after an engine exploded.

For Qantas, an airline which is justifiably proud of its excellent safety record, the sight, broadcast worldwide on TV and the internet, of chunks of the damaged engine being recovered from neighbouring Indonesia, must have been a galling one. Qantas immediately grounded its fleet of five Rolls Royce-engined A380s while the causes of the incident were investigated.

This week Qantas struck back when it announced that it was seeking damages from Rolls Royce, the manufacturer of the Trent 900 engine which exploded on November 4.

At the time of the emergency landing, Qantas played down the seriousness of what had happened. However, following an investigation conducted by the Australian Transport Safety Bureau, which published this week, it is now clear that Qantas was only a hair's breadth away from disaster on November 4.

"The aircraft would not have arrived safely in Singapore without the focused and effective action of the flight crew," the report concluded.

Investigation

The investigation blamed the explosion on an oil leak which had been caused by a manufacturing defect. The defect caused an oil pipe to crack, resulting in the explosion which knocked out both the aircraft's autopilot and its satellite communications system.

Following the report, severe restrictions have been imposed on the operation of the Trent 900. These restrictions mean that Qantas can only fly 80 rather than the previous 450 passengers on Rolls Royce-engined A380s on its key London-Sydney route.

This, of course, renders these aircraft totally uneconomic, forcing Qantas to revert to using its mothballed Boeing 747s on the Sydney-Los Angeles route and changing the engines of the A380s flying on the London-Sydney route.

Not surprisingly Qantas is seeking compensation from Rolls Royce, reputed to be A$100m (€74m). It has filed a statement of claim with the Australian Federal Court, which will allow it to sue if negotiations with Rolls Royce fail to produce a satisfactory outcome.

The November 4 engine explosion is merely the latest problem to dog the A380, the new two-storey superjumbo that Airbus hopes will allow it to overtake Boeing to become the world's leading passenger aircraft manufacturer.

Meanwhile, Boeing, which has staked its future on a much smaller long-range airliner, the 787, has also been experiencing serious difficulties with its new baby.

Operating from a geographically remote home market, Qantas operates a far higher proportion of long-haul flights than most other leading international airlines.

Sydney is more than 10,500 miles from London and almost 7,500 miles from Los Angeles. These extremely long distances have meant that Qantas has been one of the early customers for both the A380 and the Boeing 787.

Orders

It has ordered 20 A380s and has options over another four while it has ordered 25 787s with options to purchase a further 25.

The two aircraft embody two very different design philosophies. The A380 is a flying Leviathan capable of carrying more than 800 passengers in an all-economy configuration.

However, it is so enormous that it can only fly to a couple of dozen large airports. This means that the routes it can fly will be restricted to these airports.

The 787 is much smaller. This will allow it to fly to a far larger number of airports. Boeing argues that, in future, more passengers will want to fly directly to their destinations rather than having to change flights at the relative handful of large airports capable of accommodating the A380.

The problems with the A380 and Boeing 787 are bad news for Qantas. Founded in 1921, it is an Australian icon on a par with the kangaroo, Sydney Opera House and win-at-all-costs sportspeople.

This hasn't spared it from feeling the effects of the economic downturn, with the airline recording pre-tax profits of just A$178m on a turnover of A$10.9bn for the year to end of June. This compares with the pre-tax profit of A$970m recorded for the year to the end of June 2008.

In fact, the underlying situation is even worse than the headline figures indicate. The core Qantas brand is barely breaking even, with most of its profits coming from its low-cost offshoot Jetstar, of which Joyce was chief executive for five years before taking over as boss of the parent company in November 2008.

Jetstar is a complicated corporate beast, operating both within Australia and throughout south-east Asia. While its internal Australian operations are 100pc-owned by Qantas, its international arm, which is based in Singapore, is only 49pc-owned by Qantas.

Qantas is not the first airline to attempt to operate separate full-service and discount brands side by side. Airline-watchers will need no reminding that BA attempted something similar when it set up Go, a separate low-cost subsidiary, to compete with Ryanair and easyJet.

The move was not a success with BA eventually selling Go to easyJet in 2002.

Can Qantas succeed where BA failed? It argues that the two brands appeal to different groups of consumers and that its two-brand strategy gives it "unique flexibility".

The key strategic challenge facing 44-year-old Joyce is to get Qantas's profits up to levels that will justify its investment in new aircraft. In 2007, Qantas announced plans to purchase up to 188 new aircraft with a list price A$35bn from Airbus and Boeing.

While these orders have since been scaled back and no major airline pays anything like list price for a large order of new aircraft, it is clear that the anaemic profits recorded by Qantas in its 2009 and 2010 financial years don't even come close to justifying the planned investment.

Like BA's Willie Walsh, Tallaght-born Joyce is an Aer Lingus alumnus. After graduating from DIT with an honours degree in physics and mathematics he joined Aer Lingus. He also holds a masters degree in management science from Trinity College, Dublin.

He left Aer Lingus in 1996 to join the now-defunct internal Australian airline Ansett, where he was head of network and schedule planning, and of network strategy.

After four years with Ansett he was head-hunted to perform a similar function with the much-larger Qantas. When Qantas established Jetstar in 2003, Joyce was appointed boss of the budget airline before being named to succeed Geoff Dixon as Qantas chief executive in 2008.

Can Joyce repeat his Jetstar success at Qantas? Working against him has been the airline's traditional dependence on high-margin business travellers.

Unfortunately, as the recession bites, even business travellers are eschewing the front of the plane and discovering the delights, and cost savings, of flying economy.

If he is to get Qantas profits back up to their 2008 levels then Joyce must find a way of stemming the haemorrhage of business travellers.

Ironically, the success of Jetstar, by introducing lower fares into the Australian market, makes this task far more difficult.

Will Joyce's earlier achievement in building Jetstar up from scratch ultimately prove to be his undoing at Qantas?

Irish Independent

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