The Qantas answer

I’m awarding two of yesterday’s comments full publication and acknowledgement on the Qantas question. The first is by Tubemaster, a former aviation insider who nicely captured the competitive pressures at work inside airlines. The second is by regular commenter, Ronin, who makes clear that safety and commercial pressures are a troubling mix. So, the implied answer to the question posed yesterday – how can the Qantas impasse best be resolved? – is another question. Should the flying roo be nationalised?

Tubemaster

As entertaining as the current situation is, Qantas is just another airline in a long list of international / domestic carriers that have gone through the same pain. Some have scraped through and morphed into a ‘more-of-the-same-type’ commercially sustainable operation. Others collapsed and created an opportunity for another service provider. This scenario is the commercial airline business. Unless of course, you are an airline with a) an owner with extremely deep pockets, b) enjoy the benefits of full government / state support, and b) have little or no labour regulation. We know who they are!

Joyce is a capable CEO. Why anyone would want to run an airline is beyond me, but he has chosen to run this business and you can’t run airlines in isolation of the rest of the world. It’s an international playing field and an exceptionally cut throat one at that. If a competitor can run its operation at a significantly lower cost, then you have to make changes to stay in business. Airline labour is but one cost. Consider the myriad of other (potentially) very expensive operational costs, not to mention the hourly exposure to unforeseeable events such as environmental, geopolitical, macroeconomic and infrastructure setbacks.

While we’re on the theme though of who gets paid what, it’s a hollow story without reference to the some of the competitive pressures that exist at this juncture of the industry’s evolution. For example, [fact] none of the employees that work for carriers in The Gulf (Emirates, Etihad and Qatar Airways) have any recourse in their employment contracts whatsoever. These particular airlines also own their own airports, airport services, duty free business’, engineering facilities and so on. Not to mention a free hand from the government / rulers / owners.

Qantas’ legacy as an Australian flag carrier is redundant and has been for a while now. It’s just another international airline (among many) trying to keep its head above water. Anyone who chooses to work in the industry has to recognise the risk that goes with their chosen vocation. If you want to keep your job, you have to be prepared to be as competitive as your peer working in Hong Kong, Singapore, Malaysia, Qatar, Germany, Canada, Brazil.

As a punter, do I really care anyway? As long as I can fly from A to B and back again safely, reliably, comfortably and cheaply, I don’t care whether it’s Captain Sanchez, Captain Pierre or Captain Hong-Li driving up front.

Ground the airline. Hopefully the poor buggers stuck in airline limbo will get a better standard of local industry for their pain, Qantas or no Qantas. There are certainly plenty of other carriers happy to pick up the business.

P.S. I had a conversation with an (Australian) Emirates pilot last year about how upset he was that he only got a 10% bonus in his salary that year compared to the 30% he got the year before. Sensing there was a deeper resentment behind his comments, I asked what upset him the most about it? He said, “They’re just so greedy. I understand they need to make a profit, but why do they have to make so much bloody profit?”.

[The author has just returned from 5 years in The Middle East, working in senior management roles for Etihad and Qatar Airways. Other aviation adventures include Ansett Australia, Compass I & II and Alitalia(amongst others). Suffice to say, it’s a mugs game and I’m looking for a new gig. Any and all offers will be considered. Please reply by way of the good people at macrobusiness.com.au]

Ronin

The Qantas crew who managed to bring down the A380 without any casualty were honored for their effort at the Guild of Air Pilots and Air Navigators this week.

http://www.pprune.org/rumours-news/467710-qantas-a380-crew-honoured.html

‘Dodos’ (terms pilot use to describe non-flyers) like us will not appreciate the skill that is involved. In summary, the number 2 engine exploded, engine 1 and engine 4 becomes unresponsive, lost half the hydraulic system on the plane, lost most of the flight control, fuel was leaking, air brake is lost, and most electronic functions are malfunctioning. Despite all these, they still managed to land the plane thanks to skill and experience. To the passengers on the Airbus 380, the pilots are definitely not overpaid.

Plane automation have improved significantly. Instead of flying a plane, the new generation of pilots flies a computer system, and most of the decisions are made by the computer. Unfortunately, that also means the new generations of pilots don’t have the skill to fly a plane without auto-pilot and protection in extreme circumstance. To a “bean counter”, the extra 0.001% chance of a plane going down is not worth the extra pay, especially since the airline is insured. Other airlines in the world have made the decision to skim on training and focus profit even if it means some people will die unnecessarily (look up Air France 447).

So the question becomes : should Qantas become one of the ‘other airlines’? If Qantas is to retain the excellence of in safety, how can they compete in the current environment?

Comments

  1. “What price safety”? is the other question that comes to mind. We accept cost/safety tradeoffs in other areas – car manufacture, road design. Why not in airlines, which in any case are by far the safest mode of transport?

    I think the market has answered the question, by the fact that Qantas’s international business is a losing proposition. People want cheap air travel, even if it is at the cost of reduced safety.

    • >People want cheap air travel, even if it is at the cost of reduced safety.

      Most commercial passengers don’t realize that they are making a choice. They assume that air travel is 100% safe, and if all air carriers are equally safe then then only remaining variable is price.

      If you were to explicitly give them a choice … fly 100% safe at a increased price, or 50% safe at a reduced cost … then I’m sure you’d see a different result.

      Although I’m sure the A380 experience mentioned above was tense, I’m also quite sure the passengers didn’t realize exactly how close they came to a fatal conclusion. The *only* thing that prevented a tragedy were the pilots. If this point were explained to the passengers, do you think they would safety over cost?

      Regards,
      Kane.

      • The choice is neither as stark, nor as simple as your toy example.

        I don’t believe that passengers think air travel is 100% safe. If anything, they are likely to think air travel is far more dangerous than it actually is. This is because commercial airline plane crashes, although rare, get very large publicity and involve hundreds of people.

        Even airlines with the worst safety records are still far safer than driving a car.

      • Actually it is. Its about risk management and is measurable. Regions and airlines can be compared, measured and evaluated.

        “This is because commercial airline plane crashes, although rare,” Rubbish.

        Recents:
        http://www.airsafe.com/events/last_15.htm

        Airline stats in our region (note the clean 2)
        http://www.airsafe.com/events/regions/asia.htm

        USA/Canada
        http://www.airsafe.com/airline.htm

        Europe
        http://www.airsafe.com/events/regions/europe.htm

        http://www.airsafe.com/airline.htm

      • Pretty rare compared to fatal road accidents. And compared to the number of passenger miles traveled.

        You’re making my point for me, that people think air travel is far more dangerous than it really is.

      • My higher degree is oriented towards Air Safety management, whats your point?

        Road travel is more dangerous.

        BUT, if it wasn’t for the training of THAT crew on QFA32 it would be a hole in the ground.

        The SE Asian crews of similar capabilities, qualifications and training IMO would be Cathay Pacific or Air NZ. In any of the other local airlines you’d ‘probably’ be dead.

        You make a choice when you buy your ticket and you get different products for your money, not just meals and legroom.

      • “My higher degree is oriented towards Air Safety management, whats your point?”

        Credentialism is not an argument.

        “Road travel is more dangerous.”

        So you agree.

        “BUT, if it wasn’t for the training of THAT crew on QFA32 it would be a hole in the ground.”

        Irrelevant to the overall safety level of air travel – you can’t argue from the particular to the general.

        “You make a choice when you buy your ticket and you get different products for your money, not just meals and legroom.”

        I agree. Seems to me though, that people vote with their booking dollars, and Qantas isn’t winning.

        If pilot training is a particular beef of yours, you should be arguing for international training standards.

      • Those stats make it clear that small craft, old planes and jungle cleared air strips are clearly over represented. But I am pretty sure Quantas knows that risk assesment already which is why they avoid that part of the market.

        When Joyce proposes mandatory stop offs in New Guinea or trading in those A380’s on some classic Antanovs to save cash, I will be the first to book elsewhere.

    • How does the safety question relate to this dispute?

      If QANTAS can’t save money on aircrew pay, they’re more likely to try to cut costs elsewhere – e.g. fewer training hours, lower maintenance standards.

      Furthermore, I doubt if any QANTAS pilots would resign and get jobs in other industries if their pay went down a bit. Nor would the type of person attracted to a flying career change.

      • The Qantas pilots have offered about a 20% productivity increase for little or even no pay rise.
        Pay has been used by QF to divert attention from the main issue.
        Qantas pilots want to guarantee when you buy a Qantas ticket you really get a Qantas pilot, not a Jetconnect/Jetstar/AirChina/Aeroflot pilot etc.
        That’s it. QF management won’t even discuss what pay and condition cuts they need to achieve this. That’s the problem here.

      • Great post. Thats it in a nutshell. And you know whats funny? NO QF pilots have engaged in industrial action other than red ties and pa announcements. All strike action has been baggage handlers and engineers. Do the rhetoric spewing village idiots know or acknowledge that? No.

      • “the rhetoric spewing village idiot” is just showing that he folowed the crash links and actualy read them. QF had a zero, good point. But the airfleet, terrain, maintenance, local weather AND pilot training all seem to have some representation in the 42 incidents listed. Those items were highlighted in the incident report summaries, so someone other than me thinks it’s relevant to causation even if you don’t.

        Why offer that data if you don’t want it to be commented on? Some of the crashs are from aircraft in the QF fleet, but a significant proportion arn’t. Including those just make it appear that you are arguing rather than enlightening.

        Benz, Bosh and others have had to outsource many items to China to remain viable. An FMEA on a bolt, suspension link, brake or stability contol module will have many items rated as Severity 9 or 10 (Loss of control with/without warning). Outsourcing is a difficult process, especially when culture conflict, graft and corruption are considered. But there is a precedent from the Auto industry that it can be done successfully and the sky doesn’t have to fall.

        Some compenents and materials in the A380 are actualy made in China. It’s an odd logic to trust the “3rd World” to supply items new, but then to consider them incompetent to maintain them.

      • We (air safety types) have no chance in Australia.

        SteveB writes above:

        “Those stats make it clear that small craft, old planes and jungle cleared air strips are clearly over represented.”

        Boeings, Airbusses, Embraers are small types apparently (5 Boeing crashes in 2010, 3 Airbusses, Ejets etc). Canada, Dubai, Sth Korea are jungles strips.

  2. Joyce is a capable CEO.

    Don’t you mean Joyce is a culpable CEO?

    Again I ask, what shareholder value has Joyce delivered since taking over?

    I think far more likely he was offered the big bucks by the board to bust the unions. If that’s the case, it would have been far wiser to not be seen taking a big, fat pay cheque up front. The bonus could have been delivered in a few years once the airline was on a more sustainable footing.

    Again, its a measure of how far out-of-touch big corporations have become that they don’t grasp this.

    • Perhaps, Lorax, it’s all part of the game? When Alan J toddles off to another adventure, to use a Tubemasterism, the Qantas Board can use the ‘ we’ve moved that greedy Irish bugger on. Now, Aussies! Let’s get back to work..” So I’m sure there was due deliberation given to the whys and wherefors of any remuneration change for Mr. Joyce.

      • That is an excellent theory, perhaps Joyce will be the scapegoat for the whole affair. However in this instance everyone but the union gets what they want.

        Qantas puts down the union and has them either completely defeated or on the back foot for years to come. After Joyce is gone Qantas can do as you say Janet and just blame Joyce for his “UnAustralian” behaviour and Qantas can proceed as normal.

        Joyce has his large bonus package as well as a reputation for being tough on the unions. While that reputation wont make him any friends with his blue collar workers, company boards would love a CEO or Director who is willing to make the hard calls and deal with the backlash.

  3. As a regular watcher of “Air Crash Investigation” I am happy to pay more for a ticket so I don’t feature on a future edition of that show.

    The catch of course is to know that a safety price premium was actually being spent on safety measures such as maintenance and training.

  4. On the main question: I don’t usually subscribe to state ownership, but if we compare air travel to train travel, we find that the latter is both state owned and state subsidised. Why? History, mostly. The states were the only people in Australia with enough money and the will to invest in rail infrastructure in the 19th and early 20th centuries. Rail was privately developed in the US (and in the UK, although it was later taken over by the state there).

    I don’t really see the value in state ownership of airlines. Countries that don’t have an airline still seem to be well serviced. If there are any safety concerns, they should be able to be dealt with by regulation.

  5. Bring on the high speed railway. If there is a viable alternative to air travel, it may promote better comparisons. And maybe one day ocean liners…

    I spent some years in Japan, and my choice for flying home was generally Qantas. The first time I chose it over JAL because JAL had (and may still has) some safety issues. Then I discovered that any Qantas flight I booked would actually be on a JAL plane. At that point I accepted that a safety premium was not worth it- regardless of paying it I would end up on the same plane as I would have not paying it. (JAL/Qantas were the only ones running a direct Tokyo Brisbane flight). The service was much better though.

    Perhaps we will get to the point where we can see who is scheduled to fly a plane, and which craft it is before booking- ie when I book a Sydney -LA flight I also find out that it is being piloted by Captain ABC, the plane is Spirit of Broken hill and it was last serviced in Malaysia 3 years previously. Gives me the chance to consider whether I want to fly that option.
    Ability to compare on the spot would force some major changes. I would imagine that publically listing safety records would push airlines to be more proactive on the issue (or at least make the safety vs cost scale more obvious)

  6. This would interesting to put this into some sort of payoff matrix.

    Qantas seems to have a choice between safety and higher costs. They pay higher wages now and retain their safety record, or pay lower wages and perhaps decrease their safety level.

    A certain higher operating cost now traded off for an uncertain insured future cost.

  7. There is only one circumstance in which you would consider creating a state-owned airline, and that would be if there was no private capital both willing and able to do it.

    This was the original motivation for taking Qantas into public ownership – the private operators could not fund an international carrier. In the days of the two-airline policy – Ansett and TAA – the duopoly was created to protect Ansett. The competitive dynamics meant the private operators would routinely fail.

    Airlines have a wretched commercial record. They are risky businesses with high capital demands and high operating costs.

    In themselves, these factors should be enough to deter state involvement in the industry. But there political problems as well. The State has to regulate air-safety, and in principle should not be both the regulator and the operator at the same time. From the viewpoint of a Government, the last thing you would want would be to the owner of an unprofitable carrier that suffered a crash at the same time that you were responsible for regulating safety. The risks would always exist as long as you owned the carrier.

    So while there might be advantages for workers and the public in state ownership of airlines, there are only risks and possible conflicts from the viewpoint of the state. You would stay out of it unless there was absolutely no alternative.

    Since Qantas is not (yet) likely to fail, and there are other well-capitalised carriers in the market, the state can and should stay out of the industry.

  8. Can anyone tell me why a return air fare from the UK to Australia is significantly less than from Australia to UK? And qantas is the worst culprit for this.

  9. immy, basically this is to do with what marketers describe as perishability of service. Anytime a plane departs with unfilled seats, they have lost the chance to earn revenue on those seats. Their revenue opportunity is said to have “perished” – to be gone for good. So the ever-present task is to match selling opportunities to demand.

    The routes ex-Europe have many more potentially “perishable” seats than routes departing from Australia, simply because the traffic density is higher in Europe in the first place. So to increase absolute revenue/minimize perishability, the airlines are forced into price-competition – the last place you really want to be, but the place they nevertheless have enter.

    So in a route-rich/choice-rich market, such as the European flight hubs, price competition is super-intense. So all the usual promotional devices – discounts, up-grades, extra-flight-miles, round-the-world-offers – are used to attract customers. Considering passengers are often on-sold between carriers on multiple-leg journeys, if you can reduce perishable revenue on even one travel segment, and then pass on the passengers (and their costs/revenues) to an allied carrier for subsequent segments, then you’ve made a windfall gain.

    The same dynamics apply out of Australia, but the relative number of “perishing” revenue opportunities on any given day or flight is far less than in Europe, so the discounting is less intense.

  10. Tassie TomMEMBER

    Does anyone have an opinion on Virgin Blue’s likelihood of crashing compared to Qantas? Or Jetstar or QantasLink compared with Qantas? Or Jetstar compared with Virgin?

    I’m not an aviation expert but I don’t want to die either.

    (I fly Virgin over Jetstar given that Qantas doesn’t service Launceston.)

  11. AFAIK, TT, none of these airlines have ever crashed a plane, so it is impossible to judge on their record. All other things being equal (which of course they are not) you are in more danger on a smaller plane compared with a larger one. The smaller ones have fewer engines (less redundancy if one fails) and less experienced pilots, in general.

  12. Ronin8317MEMBER

    The advance in automated aviation means planes in general are much easier and safer to fly, and it is now cheaper to attain the same level of safety. However, the Qantas fleet is aging. Some of the older 747s are so old they are written off in the books, they use more fuel compared to newer models, and require a much higher level of maintenance. Under Joyce, the older planes are not being replaced, and most of the new jets goes to Jetstar.

    One of the main lesson of the A380 incident is the importance having your own maintenance team. The Rolls Royce engines on the A380 uses a ‘power by the hour’ maintenance contract, where engine maintenance is effectively outsourced to Rolls Royce, and the airline pay for the hours the engines are used. Unfortunately, even when Rolls Royce learns of a defect in the engine, Rolls Royce did not bother to inform Qantas, nor did they rectify the problem. Rolls Royce took a gamble, with Qantas passenger lives, that the engine won’t blow up until the next maintenance.

    I do not believe the public find this acceptable. This is why ‘safety’ must always be regulated by a non-commercial body.

    Labour cost is one of the many problem facing Qantas. The biggest issue is geography. Australia is a ‘end of the line’ destination, and Australia is too far away to take advantage of the growth in air travel as Asia becomes richer. Furthermore, the amount of fuel that must be loaded increases as a square to distance since the fuel itself also have weight. Therefore, flying to a ‘hub’ midway will be cheaper than flying direct for long distance flight. High paying corporate customers wants a direct flight, and is willing to pay a premium (well, more like their company) for it. Qantas therefore must decide whether it wants to be a ‘cheap’ airline or a ‘premium’ airline. Being ‘in the middle’ will not work.

    When Qantas tried to sell itself off back in 2007, it lost a lot of political support from the Government. What follows is the ‘open sky’ regime, and many profitable international routes becomes open to foreign competition. Take Sydney LA as an example : it used to be a major money earner when only 2 airline is flying it, but it start losing money when 4 airline is allowed to fly it from 2009. Even if the labour cost is reduced to ZERO, Qantas will still lose money as there are not enough customers for 4 airlines. It becomes an endurance race, and the airline that can bleed the longest ends up the winner. Warren Buffet is right. The commercial logic of an airline is dismal.

    While the current Qantas strategy to focus on Asia is understandable, nobody on Qantas board have Asian aviation experience, and Alan Joyce never worked in Asia. It’s a totally different environment, and the idea that a foreign player can simply ‘walk in and make some profit’ is extremely naive. I have very little faith that Qantas’s ‘Asia hub’ strategy will be executed successfully. The more likely scenario is for Qantas to lose their shirt, and it’ll be owned by Temesek before the end of the decade, Qantas Sales Act or not. Jetstar Pacific (Vietnam) is a total disaster, and I can’t see RedQ (of whatever it’ll be called) to be any different.

  13. The comments were well selected and I enjoyed the Tube’s post.

    My partner looked at an exec role with an airline in the middle east and I understood that the 30% bonuses were essentially an offset for the falling USD, which totally devalues the salary as soon as the expat tries to convert it into home currency.

    Boards will have their own views of Joyce but my thought is that he has pretty much tanked his career for wielding power so bluntly.

  14. On the subject of airlines, this will inspire more angst….

    http://www.bloomberg.com/news/2011-11-01/singapore-air-unveils-budget-airline-scoot.html

    “Singapore Airlines Ltd. (SIA), the world’s second-largest carrier by market value, unveiled budget long- haul unit Scoot as competition from low-cost carriers lures passengers from its main business.

    Flights will begin in mid-2012, and destinations in the first year will include China and Australia, the company said in a statement today…”