How Qantas crashed itself

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Former chief economist at Qantas, Tony Webber, has penned an op-ed at the AFR that deconstructs Qantas’s margins:

…the carbon tax…added around $100 million per annum to Qantas domestic and regional costs.

…I estimate each time the Australian dollar weakens by 10 per cent, Qantas group costs increase by 4 per cent, other things being equal.

…The domestic business has also been affected by a significant switch in demand from the domestic leisure market to the outbound leisure market, largely as a result of an elevated Australian dollar…As Qantas’s 65 per cent share of the domestic market is far greater than its 26 per cent share of the international market, any switch from domestic to international travel weakens Qantas.

…The business response to any of these movements in the medium term is to cut capacity. Instead, management mistakenly decided to expand capacity to keep pace with Virgin.

…Since January 2007, Jetstar domestic capacity has grown on average by around 10 per cent per annum… I estimate every 10 per cent increase in Jetstar capacity reduces Qantas yields by between 1 and 3 per cent.

…Qantas management and the board must also take some responsibility, including that associated with letting the impressive John Borghetti slip through their fingers.

 

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. There is the real reason “Qantas management and the board must also take some responsibility, including that associated with letting the impressive John Borghetti slip through their fingers”
    JB could have solved all the above and kept the workforce onside, especially the engineers.
    To all those who push for a lower dollar, look at the effect on QANTAS,(and many other companies) Wake up to yourselves.WW.

    • WW,
      Don’t confuse costs with profits. Profit is revenue minus costs. If your costs increase but your revenue increases more then all is good yeah?

      The higher dollar has made the cost of Qantas international tickets more expensive relative to other international carriers and so it puts pressure on their 26 percent international share. At the same time the high dollar has pushed the domestic market into the overseas market and therefore also put pressure on their 65% domestic market share. They get a double sammy from the high dollar in terms of market share. I bet they would happily pay incremental amounts more in fuel to increase overall market share.

      Yxoc

  2. Hasn’t Borghetti just turned Virgin into another Qantas? I hear its got the same established bureaucracy that Qantas does.

    And didn’t Qantas charge a carbon tax surcharge to recoup costs?

    • YEs a carbon t surcharge, and a fuel surcharge, whenever they felt like it, but IMHO, JB and Virgin, consider themselves the underdogs and have the inspiration from R Branson, to innovate and wriggle and obtain every possible advantage to slip one into the King (QAN)
      The Legacy from Fysh and McGuinness has long since waned. QAN management need to rediscover the fire and inspiration and dedication which the founders of QAN started out with. I expect the equity teams now running the ruler over QAN have that fire in the belly and may be able to keep it in the air. If I was 30 years younger I’d have a go myself.
      I used to have on a wall in my office a Qantas poster of their start up facility in Longreach, to remind me how it was done, from very humble beginnings.WW

      • I believe they’ve just ended up like Telstra and the Commonwealth Bank but I suppose they manage to turn better profits…

  3. I have little sympathy. There domestic market share especially in the mining sector routes made it possible for them to reap hundreds of millions of dollars off air fares. There were times when a flight to Port Hedland or Karratha (that was full) cost more than a flight to Euro or South East Asia. One particular flight I had to take cost me in excess of $1400 and that was the cheapest option. I could have opted for an additional $300 to go all out but seriously for a 1.5 hour flight, sorry but they screwed alot of people and companies in the domestic mining routes during the boom and now they want to complain.

    I would prefer to put my support behind Holden to keep the auto industry going. Qantas can always cut its internation routes and concentrate on the domestic market where it makes money but no playing the unfair card is all to easy.

    Good bye Qantas

    • How about the QAN flight Brisbane to Mt Isa. or return.
      It was so expensive the locals couldn’t afford it. Virgin now has a cheaper option.WW

      • Yeah, I am sure there were a ton of them over the boom period. All I know is that their (QAN) model was only profitable because the domestic model due to the boom made up for the significant losses incurred overseas. If you cannot compete in the overseas market but you are making great returns domestically, even without the boom, would you not work on building your domestic partnerships and enhancing your share instead of trying to compete in a market that you cannot compete in. It is not possible to tackle heavily backed airlines that service the world without cutting margins.

        In my opinion Joyce and Co should review those international flights that they can compete on, scrap the rest and concentrate on markets that make money. Its pointless trying to push for a level playing field when you are so encumbered to do so. Its a risk and I am glad some people in government wont budge. Time to stand up and be accounted for.

  4. The latest China’s international trade figures, which were released during last weekend, are good but only limited to the Export from the Chinese side. The figures of Imports into China are weak and have actually dropped significantly. It means China’s demands on importing goods from other countries, e.g. Australia etc. has been reduced substantially.

    This is a not a good signal to Australia.

    In such unfavorable case, the Australian government should consider to adopt stronger monetary easing policy to drive the AUD downwards healthily. So, our Export competitiveness can be strengthened again and, our economy can be improved.

    If our A$ is lower, it can attract much more tourists to visit Australia. This can save Qantas and our tourism businesses.