Saturday 24 February 2018

Interview: 'We saw the writing on the wall with the low-cost carriers, so we created our own one' - Qantas CEO

Qantas CEO Alan Joyce has just declared a three-year turnaround plan at the airline complete. After almost a century of operations, it is now making record profits and expanding once again.

As well as engineering a stunning financial turnaround at Qantas, Alan Joyce is taking a leading role in supporting the campaign for a Yes vote in Australia’s forthcoming referendum on same-sex marriage. Photographer: Giulia Marchi/Bloomberg
As well as engineering a stunning financial turnaround at Qantas, Alan Joyce is taking a leading role in supporting the campaign for a Yes vote in Australia’s forthcoming referendum on same-sex marriage. Photographer: Giulia Marchi/Bloomberg
John Mulligan

John Mulligan

Alan Joyce is rarely out of the headlines in his adopted home of Australia. As chief executive of Qantas, over the past three years he has piloted the carrier through what was arguably the most tumultuous time in its almost 100-year history.

As the airline stalled in 2014, it notched up huge losses (A$2.8bn, or €1.87bn, that financial year) and faced collapse.

Joyce slashed 5,000 jobs, targeted A$2bn (€1.3bn) a year in savings, cut A$1bn from the airline's debt pile (it's now at A$5.2bn) and reduced the number of fleet types that Qantas operated.

But in the initial depths of that turnaround, Joyce (51) faced death threats (he even had bodyguards at one stage), vitriol and calls for his resignation.

The influential 'Sydney Morning Herald' newspaper carried a feature on Qantas in 2014. "The decline of the national carrier has all the makings of a modern corporate tragedy," it lamented.

"It did help in some ways in having the urgency around the bad financial position and the fact that the government wasn't going to help," says Joyce. "That really sent messages internally that we had to fix our own shop and get it right. No one was going to be riding in on a white horse. Our fate was in our own hands."

Joyce, who grew up in Dublin's Tallaght, eventually emerged from the assault course, having proved the naysayers wrong.

A gruelling turnaround has just seen Qantas deliver its second-ever highest annual profit, of A$852m (€569m), with the previous financial year having been a record performance for the airline group. In the process, Joyce's reputation has also been transformed.

The Qantas revival has elevated him in the eyes of many Australians, while his championing of gay rights and his support for gay marriage Down Under have catapulted him into the national limelight as a voice of reason for a swathe of the population. Joyce himself is gay and lives in Sydney with his New Zealander partner of almost 20 years.

During the summer, Joyce (who became an Australian citizen in 2003) received Australia's highest honour, the Companion of the Order of Australia, for his services to aviation, tourism, gender equity and indigenous education.

He also had a lemon meringue pie shoved in his face in May at a business breakfast gathering in Perth. A former farmer was irate that Qantas and Joyce are supporting what is effectively a same-sex-marriage referendum in Australia.

In London last week, Joyce agreed that the post-results investor roadshows for Qantas are a breeze now compared to in 2014.

"They certainly are. The share price has gone from $1 to $5.90 and we were the best-performing ASX- 100 stock in the last three years and in the last year," he says, ticking off the stats. "We're the best performing airline stock for the past year. So shareholders who bought in a couple of years ago as part of the turnaround have done exceptionally well."

As cash started to flow again, it started to be doled out to shareholders. Qantas has returned A$2bn in the last two years, while a new share buyback programme, coupled with the latest dividend, will see another A$500m wing its way to investors.

Joyce has reaped the benefits too: his remuneration package hit A$25m (€16.7m) in the last financial year - almost double the previous year's, making him one of Australia's highest-paid CEOs.

And somewhere out there, you can bet that there's more than one MBA student already working on a thesis examining how Joyce pulled off the airline's reversal of fortunes.

Among those involved in the initial stages of that turnaround was Dublin-based firm PlaneConsult, the consultancy firm owned by Conor McCarthy, the former Ryanair executive who is also the founder and executive chairman of Dublin Aerospace.

"The secret of our turnaround was that it wasn't just happening as a top-down programme," explains Joyce. "We identified what we needed to do in terms of the $2bn target (in cost savings) and where we needed to get the balance sheet to."

But the rest, he insists, was down to people power.

"We gave our people the power to make the turnaround," adds Joyce. "It was the 30,000 people at Qantas who came up with 250 different projects and figured how we implement them. A lot of people make the mistake of coming up with great ideas, but the implementation falls apart."

Joyce adds that the "real secret" was that employee engagement.

"Get them engaged and get them to see the light at the end of the tunnel," he says. "We did make 5,000 people redundant at the start of the programme. There were a lot changes that were just structurally problematic, like call centres; heavy-maintenance bases because we had too many of them. But in the past year there have been huge benefits to the employee base; we've actually recruited nearly 1,000 people because we've grown."

Qantas also owns Jetstar, the low-cost operator that flies across Australia and the wider Asia-Pacific region. Between them, the carriers control the bulk of the Australian domestic market.

Growing demand in Asia in the 12 months to the end of June saw Jetstar post earnings before interest and tax of A$417m (€278.6m). Qantas' own domestic operations made A$645m and its international arm made A$327m. The group's loyalty programme turned a A$369m profit.

Not bad for a company that had hit the skids just three years ago.

The return on invested capital at Qantas (a key measure of profitability) was 20.1pc in its last financial year. That compares to 13.6pc at Aer Lingus and British Airways owner IAG and to 23.1pc at Aer Lingus itself.

Joyce, who once worked at Aer Lingus after graduating from Trinity College, Dublin, was appointed chief executive of Qantas in 2008, having headed Jetstar from 2003.

Growth in Asia, particularly propelled by China, has got airlines and aircraft lessors in a tizzy. Qantas has more than 50pc of its international capacity now directed into Asia, while Jetstar is increasingly up against a plethora of upstarts that are hoping to capitalise on the boon.

It's a goldrush that will, as always, leave a trail of winners and losers.

But the projected scale of the potential is phenomenal. The International Air Transport Association (IATA) reckons that China will displace the United States as the world's largest aviation market in terms of passenger traffic around 2024. India, meanwhile, will displace the UK for third place in 2025, IATA predicts.

Aircraft lessors - most of which have their headquarters or major offices in Dublin - have regularly dismissed notions that there are simply too many aircraft on order to fill demand. Cheap finance has spurred lessors, but they insist that between organic growth and fleet renewal in coming years, the new jets will all find homes.

"In China, there is a huge amount of capacity being operated, particularly by the main three there and secondary carriers," Joyce points out.

"For us, that's not been a problem, because we only fly to cities that are very important for the corporate Australia market - Hong Kong, Shanghai and Beijing. We have a partnership with China Eastern that has essentially benefit-sharing model on their operation. We get a huge benefit of particularly Chinese tourists coming in to Australia. Typically, the Chinese visitor makes two or three domestic trips (in Australia) and that benefits our domestic business quite significantly."

Last month, Qantas renewed an agreement with Gulf carrier Emirates that sees the pair co-ordinate pricing and schedules in a codeshare partnership.

Qantas also announced that it was dropping Dubai (Emirates' hub) as the stop-over point for its Europe-bound services. Instead, they will fly through Singapore, helping the airline to capitalise on that increasing demand in Asia.

Joyce is also far from concerned that the IATA growth projections could be ambitious and eventually leave carriers flailing. "We're very excited about Asia growth," he insists.

"In fact, we think one of the big reasons why shareholders invest in us is because the Asia-Pacific market is going to be bigger in 2035, according to IATA forecasts, than North America and Europe put together.

"If you can capitalise on that growth and be where we are in the region, it's a huge opportunity."

And opportunity is also being presented to Qantas and other carriers by new technology.

With composite aircraft, such as Boeing's 787 Dreamliner (they're lighter and use less fuel than peer jets), having already opened up point-to-point routes across the world that were not previously possible, and its 737 Max now being used by operators such as Norwegian and Air Canada on the transatlantic market, the structural dynamic of the airline market is undergoing another radical change.

As Qantas released its full-year results last month, Joyce challenged Boeing and Airbus to develop an aircraft that would enable the carrier to fly non-stop - with a full payload - from Sydney to London by 2022 (a non-stop Perth-London route starts next year).

Nicknamed Project Sunrise, it is an ambitious goal. Even if it is operationally achievable and with economics that stack up, will customers want to spend the guts of 20 hours non-stop on a plane? At the right price, you can be pretty sure there'll be plenty who will.

Those technological advances are also helping to make other airlines become more profitable and lure investors.

"The great example for me is when Warren Buffett said a few years ago he'd never invest in an airline again after he got burned," says Joyce.

"He said that if there was a far-sighted capitalist at Kitty Hawk, he should have shot the Wright brothers. Now he is investing in the four majors in the US. He has seen a structural change."

Joyce points out that disruption is happening daily across all business sectors around the world.

"There are a lot of industries being disrupted by technology," he says. "The good companies will disrupt themselves before somebody else does it."

He adds: "What we did when we saw the writing on the wall with low-cost carriers, we created our own one. We knew that if we didn't we would get massively disrupted, like the airlines in Europe and North America were.

"Now we see this technology coming in and we are at the forefront of figuring out how we can disrupt what were the hub carriers in the past, and use it to improve the stability of our business."

Meanwhile, having previously considered a flotation of its loyalty business, Joyce insists that both it and Jetstar will not be hived off into separately listed businesses.

"For both of them, we'd say absolutely no," he says.

"We looked at it, but the loyalty scheme is so important to the loyalty of airline customers. For example, we don't have expiry on points."

He maintains that if a loyalty programme is operated by a third party, for example, the tool can become significantly less effective and could annoy customers to the point of losing them.

"Similarly with Jetstar, there are times when I've made a call and said, 'Jetstar, you're pulling off this route even though it's profitable, because Qantas can make more money on it.

"What I'm focusing on is group profitability, not maximising Jetstar's," he adds. "If you start having minority shareholders in one of the entities, you have to maximise for that every day.

"That destroys value and it means you can't do the co-ordination, which is the secret of how we've made this work."

While consolidation has been a feature of the European and US market in the past number of years, in Asia, the market is skewed by government-backed airlines and tight controls over cross-ownership. As a group, for instance, Qantas owns 33pc of Jetstar Japan, and 30pc of Vietnam's Jetstar Pacific Airlines.

"We've always been big fans of consolidation, but a couple of preconditions need to happen before what happened in Europe and the US can occur," says Joyce. "You need a single market definition and to get governments out of airlines, because that's been a distortion in the region.

"There are very significant restrictions on ownership in various markets. Those restrictions limit your ability to do consolidation."

Meanwhile, Joyce is also focusing his energy on a postal 'survey' in Australia on same-sex marriage. The ballots - already being distributed across the country - have to be returned by November 7.

He has donated about A$1m of his own money to the 'Yes' campaign and thrown the weight of Qantas behind it too.

The manner in which the vote is being undertaken annoys Joyce - it's not compulsory to vote in it, unlike elections there, and he argues that parliament should have made the decision.

The vote is also proving to be a divisive issue.

"The turnout's going to be critical. While the opinion polls are positive for a yes vote… we can't be complacent."

Much like in the airline industry then.

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