Flagging spirit and a need for integrity
Australia’s national carrier is in decline. You, the patient reader, have had to endure consistently negative reporting of Qantas in recent times: accusations of a hostile board and management, and incompetence of the same; accusations of union unrest and ongoing sackings; accusations of outdated practices and poor fleet choices; criticism of offshore strategies, including Emirates and Jetstar; incidents in the air and on the ground; reports of poor staff morale and of uncompetitive service deliveries; and accusations of a dulling down of the brand, leading to customers seeking value elsewhere.
The airline’s recent announcement of an $A252m ($266.5m; all further amounts in Australian dollars) half-year loss has only added to Qantas’ woes and prompted further accusations, plus a week of heated name-calling in parliament.
How did it get to this? Does it have to be so?
Qantas is nearly as old as the revered Anzac tradition itself, shy by only about five years. Winton, Queensland, was the airline’s birthplace on 16 November 1920. After a year in Winton, Qantas moved to Longreach in 1921, remaining there until 1930 and then moving on again to Brisbane.
If Paul (Paddy) McGinnes and Hudson Fysh, returned flight officers from WWI, had not stopped to help grazier Fergus McMaster, broken down in a dry riverbed near Cloncurry, there wouldn’t have been a Qantas. The story of how the three men subsequently formed an airline in western Queensland that would go on to become an international carrier is an illustrious one — legendary, even — at least until about the end of the 20th century.
Like most things these days, all of this information is available on the internet. For those who still like their books, Sir Hudson Fysh, as he later became, wrote three excellent volumes (and highly recommended for the Australian Parliament’s library catalogue if not already listed): Qantas Rising, Qantas at War and Wings to the World.
The 21st century has not been so kind to the airline. Indeed, the international division can plot its steady decline from 2001 to the present, from a then 33 percent market share, down along the consistently negative gradient to a modest 17 percent at present.
Qantas International lost heavily yet again in the latest half-yearly report. Some question the division’s losses. According to the senator for South Australia, Nick Xenophon, the same senator who prompted a review of the Norfolk Island ditching and an inquiry into CASA, the Qantas books require examination.
Nick Xenophon has attracted increasing respect from within the aviation industry because for a number of years he has acted like a surrogate aviation minister. He is scathing in his criticisms of Qantas and its strategies and is currently leading the charge in a Senate inquiry into the airline.
His office has released the following recent statement: "Alan Joyce and the Qantas board have brought one of the world’s great airlines and a national icon to its knees. Their botched strategy of pouring hundreds of millions of dollars into Jetstar’s Asian operations seems to be the real cause of the demise, and Australians shouldn’t believe Mr Joyce’s lame excuses."
Senator Xenophon said a judicial inquiry, with sufficient forensic account resources, would reveal once and for all the cause of Qantas’ woes and help determine whether changes to the Qantas Sale Act and a government bailout were needed. He also questioned whether current Australian accounting and corporate governance rules needed to be changed.
"Right now, the consolidated accounts of Qantas Group, with over 129 entities trading under it, don’t need to pinpoint how well or how badly each division is doing," he said. "Since Qantas is asking for taxpayer help and a change in the Qantas Sale Act, the public deserves to know how the various parts of the Group are performing."
Senator Xenophon queried how Jetstar International, "the apple of Mr Joyce’s blinkered eye", could go from a $128m profit to a $16m loss in just six months. "For years, Alan Joyce has been bragging about how great Jetstar is, when it may be that Jetstar, not the Qantas Sale Act, has been the albatross around Qantas’ neck all along," he said.
(Please also see the separate relevant news item "No shining star" on page 4 this issue.)
Many in the industry have scratched their heads at the human resources malaise that appears to have descended on the airline in recent years. It would be fair to say that this has been frequently reported, not only in aviation journals but also by the mainstream media.
Management accuses the airline’s unions of being hostile and reluctant to negotiate. The unions, in turn, claim that management is disingenuous in its intentions and on a hidden ideological agenda to bust the unions, and either to remodel the airline more along US and Asian lines or to entirely cannibalise Qantas and transfer its remaining assets to an awaiting Jetstar.
The public hears from Qantas management that, despite recent setbacks such as losses in the hundreds of millions, sackings in the thousands and the odd recalcitrant staff member anonymously blowing the whistle, things are actually going reasonably well and that the airline is carefully being managed back to a full recovery.
And further, that this is despite all of the negative practices of competitors and unions, and how Qantas is, in fact, on track to a big turnaround just a little way off, perhaps a year or two, with a return to full profitability.
Unfortunately this message is starting to wear rather thin, with analysts now asking: when does poor performance finally get marked down?
Successive federal governments have appeared rather impotent in all of this, some analysts claiming that they made a rod for their collective backs by entirely privatising the airline back in the 1990s in the first place, and really ought to have retained 51 percent to ensure the airline’s ongoing probity.
But Qantas was indeed privatised, and a sequence of events has led to its culmination.
First, the government of the day (Labor) deregulated the domestic market in 1990. Qantas could then prepare to purchase, and finally merge, with Australian Airlines in October 1993. The Qantas Sale Act 1992 had already been enacted into law, preparing for the inevitable privatisation.
Before Qantas finally listed on the Australian stock Exchange on 31 July 1995, British Airways was permitted to purchase a 25 percent stake in the airline. Perhaps it was a further assurance, and acknowledgement, of the lucrative Kangaroo Route which had been pioneered by their former selves — Imperial and Qantas Empire Airways.
Readers may recall the bizarre shutting down of Qantas a few years ago, with management blaming hostile unions for precipitating the move. The shutdown is conservatively estimated to have cost the airline around $60m. That particular executive decision, and more recently while delivering the half-yearly report, the self-admonishing remark, "this is unacceptable and we must do better", evoke a perplexing impression of the CEO, Alan Joyce … an impression slightly redolent of how the black guy extricated himself from the gallows in Blazing Saddles.
More seriously, when the airline was shut down over that weekend, Joyce’s attempt to "verbal" the Transport Minister, Anthony Alabanese, regarding a statement that the minister had released only shortly beforehand, quickly prompted the minister to again appear publicly to refute the CEO’s misquoting.
This caused many observers at the time to question Joyce’s overall veracity, particularly as the entire sequence had been played out on national television. Many were confounded that anyone would seek to put words in the mouth of another, particularly a federal minister, in such a fashion. Perhaps yet another glimpse of a bizarre style of management.
At the time of writing, the Australian Senate has begun an inquiry into the questions of a debt guarantee and of lifting foreign ownership limits. Already startling allegations have emanated regarding Qantas aircraft serviced offshore, with various faults that include corrosion and detected loose engine bolts.
The Qantas Sale Act which, as previously reported, prevents the airline from selling more than 49 percent overseas, also contains further stipulations on foreign single holdings and on jobs and skills preservation within Australia. It was drafted to protect the national carrier prior to its becoming a publicly listed company, both from foreign takeover attempts and from vested interests seeking to skew future boards.
The Air New Zealand position
But of course this has a vaguely familiar ring for readers. Didn’t Air New Zealand do something similar back in October 1989?
It was then that Air NZ privatised, with a similar protection known as "Kiwi Share" to ensure that the airline remained in New Zealand hands. Twelve years later in 2001, Air NZ was in a most invidious position, coinciding as it did with the worldwide aviation downturn, itself brought on by the New York attacks.
Deputy PM Jim Anderton, fending off the negative soothsayers of the day, said, "The idea of selling our national airline is an anathema."
Indeed, in October 2001 Air NZ needed some nursing back to health. The airline had a $1.4b debt, it had written off another $1.3b after paying a too-high price to News Corp for a collapsing Ansett, and it had also posted an operating loss of $104m.
As most readers are probably aware, after the New Zealand government bailed the airline out with an $880m rescue (and thereby taking up 75 percent ownership), the airline has come back from the far side. Ralph Norris, appointed as CEO in 2002, started the airline’s miraculous recovery. The baton has subsequently been handed on to Rob Fyfe and Christopher Luxon, and the profits continue to rise, obviously imparting confidence to the government, which reduced its holding to 53 percent in November last year, raising $365m in the process. The recent alliance with Singapore Airlines has yielded greater largesse.
And does the question really need to be asked? Don’t Antipodeans prefer actually heading to Europe the old traditional way, via Singapore? Has Qantas lost out by ditching Singapore and migrating west? The greatest truths are to be had from passengers voting with their feet.
Following the poor company results outlined above, Joyce went to Canberra and requested the restrictions to be removed and also a debt guarantee. This prompted the debate as described.
A quick digression into politics (with apologies). The writer never took political science and thus will leave expert analysis to others. But from an aviation standpoint, there has been about a 40-year growing disillusionment with the political process itself.
Successive governments come along with their two, sometimes three or more terms of office, and then they depart, often with ignominy tugging at their sleeves. There were once dedicated aviation ministers, later absorbed into broader transport ministry portfolios.
This, the aviation industry claims, is the first of its many problems, given the intrinsic complexity of the industry and also in the integral role that it plays both in the economy and in peacetime security. An already despondent industry is then courted by the new political contender, still in opposition but with visions of splendour for all aspects of aerospace. Sympathetic listening invariably follows regarding all of the industry’s grievances and its perceived impositions.
Then, with a mix of indignation and sympathy, demands are issued from the capital for aviation documents and records. This time it will be different — things will happen! Alas, they rarely do.
So, now voted in and settling into the role, the new minister suddenly confronts a new reality — the party machine — driven by other motives. Does the new candidate then make a courageous decision, possibly risking a loss of voter and party approval, or does he go with the flow and ensure his (usually male) own survival? (The reluctant reporting in this publication of the Badgerys Creek issue surely confirms this.)
As we know, different political parties take ideological positions, and generally argue their cases along those lines, with doctrines fashioned to the varying hour.
Such was the case in Canberra recently when the LNP Government decided in favour of granting one of Alan Joyce’s requests, the foreign ownership restriction. The debt guarantee was rejected, with the government stating that the airline still had healthy cash reserves.
Perhaps the latter was merely a red herring anyway. The main game appears to be the foreign ownership issue, and in this the current government took a "let’s do it" approach while the Opposition took up a "no way" stand.
In the short term, Labor and the current Senate can block the act from being repealed. On 1 July 2014, the Australian Senate, initially assumed to have become more LNP-friendly due to last September’s poll results, is now up in the air. Voting irregularities during last September’s national election in Western Australia have prompted a new senate vote in the state’s affected seats, and it is due to take place in early April, around the same time as the release of this issue. Both the LNP and Labor are carefully watching, eager to see how the scales will fall.
The result could certainly affect the future of Qantas. One wildcard in all of this is Queensland billionaire MP Clive Palmer, newly elected Member for Fairfax and now sitting in the House of Representatives. Mr Palmer has formed the Palmer United Party and has candidates running for various senate seats, including in the contended WA seats mentioned.
During the Qantas debate, while his federal parliamentary colleagues, clad in pinstripe and silk, spent a week in the chamber debating the role and future of Qantas, Clive Palmer, contrastingly dressed in denim, called a press conference on the Gold Coast and made the statement: "I’ve been in business and I know bullshit when I see it."
He further stated that there was nothing really wrong with the airline and that Qantas’ real problem was the board and management, and that they should immediately be sacked, stating that they wouldn’t last a day in his employment. If PUP candidates get up in April, those opposed to a foreign sell-off may benefit from a strange ally.
In parliament, numerous comparisons were made between Qantas and Virgin, their funding in particular and whether they ought to be treated as equals. Virgin is a 21st century product, majority foreign owned and nibbling at Qantas’ domestic share of around 60 percent, particularly in the business market.
Qantas has responded to this by the old war-of-attrition approach — that is, to place an over-abundance of cheap seats on a competing route and send your opponent broke. Virgin, acknowledging that it needed careful steering through these still-tough times and itself posting a recent loss of about one-sixth of Qantas’, convinced its backers to provide a $300m influx of funds to counter the Qantas assault. This in turn prompted the latter to make its pilgrimage of exhortation to the capital.
And isn’t it just a little personal? John Borghetti, CEO of Virgin Australia, was once a rising star in Qantas’ executive ranks and an aspirant for the airline’s CEO vacancy in 2008. As we know, Alan Joyce assumed the role, and many have wryly observed that that has been to Virgin’s benefit and, by default, also to Air NZ’s.
The current government has argued that Qantas and Virgin are equals, and therefore Qantas ought not to receive any advantage in the form of a debt guarantee, but rather, in order to ensure a level playing field, Qantas ought to be freed up to accept foreign investment.
Labor is opposed to lifting the restrictions and in favour of throwing Qantas a lifeline, but appears not to have made other noteworthy stipulations. Labor also remains fairly reticent about its views on the current Qantas board and management performance.
Labor has been criticised by impartial political commentators of late because its own performance has been seen as lacklustre in parliament, and its perceived failure to gain resonance and traction in the debate is attributed to a lack of genuine conviction. This is despite many feeling that it has right on its side (that is that the national airline ought to be preserved as an Australian-controlled entity).
Big business machinations
Many are asking if Qantas can dodge yet another bullet, citing the attempted takeover by APA in 2006, involving the Macquarie Bank, which currently owns Sydney Airport, and a conglomerate of finance and equity groups. Apart from the airport-related conflict of interest issues at the time, it was revealed that board members and management were to benefit in commissions of many millions and that the takeover would ultimately saddle the company with an $11b debt.
It was also considered nefarious, in that while the syndicate appeared to satisfy the Australian ownership rule, many of those abovementioned groups had links back to well-known foreign banks — institutions later to be badly burnt by the Global Financial Crisis.
As we know, the GFC (the crisis that just keeps giving) came along the following year, 2007. Economists have asserted that, had the deal gone through, Qantas would already be gone.
Now the big question: can Qantas survive into the future?
And perhaps several other queries could be thrown in. What does the new model need to look like? If Qantas is disadvantaged by being an end-of-the-line carrier, what then is Air NZ doing right? Would it be a good idea for the current Senate to seek the views of Air NZ’s abovementioned CEOs?
Did Qantas need to be privatised in the first place? After all, it was profitable, with exemplary branding — did it need to be reinvented or was it just ideology again?
Back in the days when Qantas still had its headquarters in the city, in Hunter Street, the Qantas archivist and historian, John White (a lifetime employee who had delivered city messages for Sir Hudson Fysh), arranged a rare interview opportunity with the iconic ‘Scotty’ Allan for the writer.
George Urquhart Allan and his distinguished career are to be found on the internet. He commanded the first international Qantas passenger flight, flying the new DH86, a streamlined four-engine biplane, on 17 April 1935 from Darwin to Singapore.
Before joining Qantas he had trained and fought in the RAF with distinction; then, emigrating to Australia postwar, he flew with Kingsford Smith and Ulm in ANA until joining Qantas in 1934. Later he commanded flying boat operations, before and throughout WWII.
Scotty, as he insisted on being called, moved to executive roles within the airline, eventually rising to deputy general manager prior to his retirement in 1961.
On that pleasant Sydney day at his Palm Beach home, he answered questions regarding his flying experiences with good humour for a time, before pointing to my recorder and saying: "Have you now got enough for your general article? Well, turn that thing off and I’ll tell you something really interesting."
With that he proceeded to relate "ice-castle smashing" stories about the enormous temptations that Sir Hudson, and later himself, were subjected to when selecting aircraft for the postwar airline. Even in pounds, the figures quoted sounded impressive. Scotty joked that he could have moved to Bermuda and had his own private floatplane. His reverence for Sir Hudson was obvious, and he alone could refer to him as ‘Huddie’.
"Huddie and I would never have gone in for that sort of thing. That’s not what it’s all about. You don’t build an airline like Qantas up to tarnish it like that."
Even back then in 1988 there was talk of privatising the airline, and I sought his opinion on that possibility.
"It will probably happen eventually, though I’m not for it, because then you’ll get what I’ve been telling you — corruption. Crooks in suits looking for ways to take the company’s money, and with that much brass they don’t hesitate to put themselves above you. You’ve read Huddie’s books? You know what we did for this country during the war? That ought to tell you why the airline needs to stay in government hands, because there’ll always be conflict; that, and to keep the company’s coffers out of reach from the wrong sort."
Scotty Allan was far too prosaic to use expressions like "Spirit of Australia", but in his own eloquent way he conveyed the message of that very esprit de corps that the airline possessed for most of the 20th century, and it is still reasonably easy to understand.
Qantas traditionally promoted its executives from within, ensuring that people who knew and understood the Qantas ethos, and aviation, were the obvious candidates. Right from when the fledgling airline built its own aircraft in Longreach in the 1930s, the airline established its own code of excellence in its maintenance practices, and it adhered to that code throughout the decades.
The aviation industries of Australia and New Zealand, and by all accounts those of many other countries, suffer from high fuel prices and high regulatory charges. On both sides of the Tasman there is still an anachronistic view from without that all aviation endeavours are really just silvertail indulgences, and the industry therefore ought to pay its fair share.
Avgas is much more expensive than petrol, and while avtur is somewhat cheaper than avgas, basic gas turbine engines are very thirsty. A valve for a Lycoming engine is probably nine times the price of an equivalent auto part. Fanjet components quickly run into hundreds of thousands of dollars, and a bird strike can cost millions.
An airliner experiencing an incident early in a sector that requires a fuel dump and return to base port can result in the company losing its profit margin earned by many flights over that sector. At best, aviation typically returns a low profit, often in the 5–15 percent range. It is capital intensive and requires large outlays and turnovers for aircraft, fuel, maintenance and regulation charges.
"Turning over a hundred thousand to make five grand" is how one operator put it. Due to economies of scale, airlines are able to hedge on oil prices and take advantage of currency exchanges and commissions from frequent flyer schemes.
Regional airlines and general aviation rarely have such defraying opportunities. Qantas and Virgin are hurting, but the regional airlines and many GA operators have their backs to the wall, akin to indebted farmers stricken from drought and falling commodity prices.
If only there was an aviation minister who truly understood the industry. Part of the candidate’s portfolio ought to require obtaining at least a recreational pilot’s licence, funded by the government.
It would, in the opinion of many, be money well spent. As well as getting to grips with a worthy skill, they would quickly learn from the inside that people in the industry are mostly hard-working battlers, similar to most Qantas workers, trying to make do in an industry in danger of pricing itself out of existence. Who would service the nation’s 101 tenuous lifelines then?
And on the big picture, dedicated aviation ministers would be able to solely focus on a dilemma such as the current Qantas issue and possibly see one or more solutions. They may not choose to act, of course, for reasons stated above, but they ought to be able to clearly identify and enunciate the problem for others to solve.
Qantas shares have recently slumped to junk status. Was it Jan Carlzon of SAS, something of a guru for the introduction of total quality assurance into airline operations, who said: "If a company has a problem, management is 80 percent to blame."?
Who is to blame if an airline is allowed to continually haemorrhage away to nothing? A fickle fare-paying public has expressed its disapproval of the airline’s current service offerings, particularly international services, but that does not mean the public is impervious to being brought back by allurements of good service and value for money. Air NZ did it at the end of the line, and it can be done with Qantas.
If Qantas is again to have a healthy spirit, give it back that vital missing element — its integrity.
-Report by Peter Gamble, photograph via Peter Gamble.
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