Qantas’ wake turbulence

The news that Qantas is looking at an alliance with a large Asian carrier may be too little too late. Will Qantas have much of a brand to bring to the table? Its heavy focus on the domestic market has not done its brand any favours, indeed it has done damage.  In order to have a pincer play on Virgin, Qantas launched low cost Jetstar hoping to force Virgin into the unproductive middle. The strategic logic no doubt was that in many industries in the world, there is a vanishing middle. Low cost, commodity players compete on price, high price players compete to maintain pricing power that is underpinned by their brand, anyone in the middle becomes part of the food chain.

Trouble is, Qantas, in order to maintain its local cartel, has tried to use a low cost approach at both ends of the market. It has outsourced Qantas maintenance offshore to reduce costs. So whenever Qantas has a near miss or aviation problem – and they do seem to be becoming more frequent – it creates the impression that cost cutting may be affecting safety. A brand is all about impressions. “Is Qantas the great Australian airline?” is the question that is increasingly being raised with local customers.

According to Stephen Bartholomeusz, the international business is struggling, and the future growth may be in Jetstar. Qantas may cannibalise itself with its own brand:

“Alan Joyce has sounded an alarm about the position of Qantas’ international business and by implication foreshadowed major changes to his group’s network and strategies. In an address to the Melbourne Press Club the Qantas chief executive made the point that while Qantas’ twin-brand domestic business was very strong and profitable and there was a tremendous opportunity for the Jetstar brand in particular in Asia – Jetstar is the biggest low-cost carrier by revenue in the region already and is growing rapidly – Qantas International was, financially, falling ‘significantly short’’ of where it should be.

While he didn’t say it, it is probable that the international business is losing money despite the rebound in international aviation last year.

Joyce said capacity had flooded into Australia from China, the Middle East and elsewhere with the total growth in direct aviation capacity to Australia rising 39 per cent between 2003 and 2009 despite an increase in total inbound passenger growth of only 10 per cent.

“So that tells us these carriers are not growing the market but simply taking existing demand,” he said. As a consequence, Qantas International’s market share had fallen from 35 per cent to 20 per cent.

“As an end-of-the-line carrier serving a market of 22 million people, in a market flooded with so much capacity that our competitors aren’t even using their full quota, we face severe limits to growth,” he said.

Once again we see Australian management struggle to move beyond the domestic cartels. They lack the skills, strategic intelligence and organisational culture to deal with globalisation. Granted, global aviation is not really a normal market or a business; it is more a territorial contest, governments competing with each other to distort pricing in order to validate their national sovereignty. But given that is the nature of the market, Qantas’ offshoring operations in Asia was questionable. Not employing Australians was always likely to have implications for an Australian brand (it is a flying kangaroo, not a flapping Asian bird).

Throw in the weakening of the Qantas brand by Jetstar, and the fragility of focusing on cost reduction becomes apparent. As the cliché goes, cost reduction is not a strategy, it is just a discipline.

For a dominant player, defending against competitors should not just be done on price, it should be done on quality, brand, everything. But managers of Australian oligopolies tend to be accountants or listen too much to accountants, which means a focus on expenses rather than revenue growth. Qantas is paying the price for it. A lot needs to be done to make the brand resonate effectively with customers. Not treating as enemies their own staff and the unions who represent them might be a good start.an revenue growth. Qantas is paying the price for it. A lot needs to be done to make the brand resonate effectively with customers. Not treating as enemies their own staff and the unions who represent them might be a good start.

Comments

  1. threedogsandakid

    Good article.

    Unfortunately for Alan Joyce, he is not one of the Masters of the Universe. Bankers would still have rewarded themselves handsomely for being at the helm of a sinking ship.

    http://www.businessspectator.com.au/bs.nsf/Article/Alan-Joyces-pay-packet-shrinks-pd20100904-8XMK4?opendocument&src=rss

    Agree with your observation that Australian oligopoly management are mostly accounting types, or listen slavishly to accounting types. There is a serious lack of initiative and vision out there.

    ps Geoff Dixon, not a Master of the Universe (although paid like one) rather a Master of Good Timing.