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Qantas still calls Australia home

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In Brief

Qantas’ advertising has long used the tag line ‘I still call Australia home’.

 

Around the Olympics this year, a new strategy was launched with the focus on the tag line ‘you’re the reason we fly’, driven by the observation that Australians believe in openness, and getting out there and doing more, seeing more and expecting more.

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The irony is that while the airline’s Australian customers might be ‘getting out there’, Qantas itself, in its traditional modes of operation, is being pushed back to its Australian home — and even there, life is not easy.

Qantas has always struggled with being at the end of long-haul routes. At first it was the Southeast Asian carriers who competed with substitute services, then came those in the Middle East and now China. And the high cost of its Australian base did not help Qantas’ competitiveness. While Qantas has tried to maintain its international business, its recent forecast of losses confirmed that it is currently facing some challenges.

Last year, Qantas announced plans to shift parts of its business offshore in two formats: one through providing high-quality services and the other through a series of low-cost carriers. It has to set up its offshore operations in the form of joint ventures because of the rules and regulations of international aviation markets, which make the rights to fly between countries available only to airlines that are identified by their national ownership and control.

Qantas has made no progress on the high-quality option. In March this year it ended talks with Malaysia Airlines on a premium carrier. But it has made progress on the low-cost carrier option in Singapore, Vietnam and, more recently, Japan. Another is planned for Hong Kong in partnership with China Eastern Airlines as Qantas attempts to tap into the rapidly growing low-cost carrier traffic in the region.

In advancing this strategy, Qantas recently announced it is in talks with Middle Eastern carrier Emirates about an alliance. Qantas could potentially carry traffic to the Middle East and hand over passengers there for distribution across Europe. Qantas is also considering another alliance with Chinese airlines as well as tapping into the Indian market. But Singapore looks like a less prospective option since Virgin grabbed Singapore Airlines as its partner earlier this year. Nevertheless, Qantas can turn itself into a series of networks with new hubs, mostly in Asia, that are linked to its Australian domestic system. Beyond these points, it mainly relies on its international partners.

The Middle East and China options, however, challenge the existing alliance with British Airways and the oneworld system, unless that system captures the interest of another Middle Eastern carrier such as Qatar.

Qantas may have hoped that its position in its domestic market would continue to be one of its major assets. But even there, Qantas is facing some challenges. Virgin launched business-class services in January, and business fares fell by 40 per cent from January until July 2012 compared to those in October–November last year. These challenges will be a shock to Qantas’ domestic revenue yields.

Meanwhile, in February 2012 Virgin split its international and domestic operations. The former continue to meet the rules of the international aviation system, but foreign investment in domestic aviation is not restricted, which creates scope to attract finance and alliance links to international partners. In July, Etihad announced it would raise its stake in Virgin from 5 per cent to 10 per cent, adding to Virgin’s capacity to take traffic from Qantas.

Qantas is moving in the same direction, shifting to a structure of domestic and international operations for Qantas, and a separate operation for Jetstar. But the Qantas Sale Act stops it going as far as Virgin, arguably disadvantaging Qantas.

As these changes illustrate, there are ways around the ownership rules in international aviation — if necessary with new domestic legislation — but the structural changes would be easier if those rules did not exist. The industry continues to apply pressure to remove them. One explanation for their resilience is that governments use them as a de facto competition policy, since the extent of mergers can be restricted in this way. But airlines will find other ways to cooperate. It would be better to tackle the mutual interest in competition policy between jurisdictions. That is a useful agenda item in systems of regional cooperation, such as ASEAN and APEC.

It is also important to let airlines review their own ‘supply chains’ and relocate activities to the best location. Fears of job losses generate bitter debates about this strategy in aviation, but restraints on that option only make the adjustment more difficult and risk an even greater number of jobs. Ken Henry recently called for Australian businesses, including those in manufacturing, to think differently about themselves and consider outsourcing their operations. That observation applies just as much to services firms, like the flying kangaroo, as it does to manufacturing.

Christopher Findlay is Executive Dean at the Faculty of the Professions, University of Adelaide.

One response to “Qantas still calls Australia home”

  1. What about the spin on changing The Spirit of Australia to Australians? Looks like they are locked in to an Emerites-like offshore option that will threaten their One World membership and with their inferior and more expensive Business and First Class services, the headline could be right in terms of being buried at home.

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