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A Qantas Airways aircraft takes off from Sydney Domestic Airport. (Sergio Dionisio/Bloomberg)
A Qantas Airways aircraft takes off from Sydney Domestic Airport. (Sergio Dionisio/Bloomberg)

Qantas turning eyes toward Asia Add to ...

Twenty years ago, Australians used to joke that Asia was a place they flew over on the way to Europe. You don’t hear that joke much any more, and it is likely to disappear completely as Australians grasp why Qantas Airways Ltd., the national airline, left 80,000 passengers stranded around the globe when it suddenly grounded its entire fleet on Saturday.

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Officially, Qantas grounded its planes and threatened to lock out thousands of employees because of problems caused by a rash of strikes over pay and conditions. But the strikes are only a symptom of a deeper dispute about whether the group’s future lies in Australia or in faster growing Asia.

Alan Joyce, the affable Irishman who runs the airline, says the flyover continent has become the essential business location of the 21st century. He wants to shift capital investment northwards. The unions are determined to stop him, fearing a loss of Australian jobs. Whether they succeed will determine if the Qantas group becomes a major operator in the world’s biggest and fastest growing passenger market or retreats into its core market in Australia, where it still handles 65 per cent of domestic flights.

The group faces this dilemma for two main reasons. First, progressive deregulation has undermined the airline’s share of international flights to and from Australia, with 82 of every 100 passengers now flying with another airline. Competitors are flooding into the market, mostly from elsewhere in Asia, led by carriers such as Singapore International Airlines, Etihad and Emirates.

Second, the group’s cost base is about a fifth higher than key competitors, which largely reflects staffing costs in Australia. The group has fought back, cutting the airline’s costs dramatically, and helping to pioneer Asian long-haul budget air travel through Jetstar, a low cost carrier affiliate. Jetstar’s operating margins have averaged 6 per cent for the last three years, compared with 0.7 per cent for Qantas, helping to maintain the group’s profitability.

But Jetstar, too, faces growing competition from rivals such as Malaysia’s highly successful AirAsia and AirAsia X, and Singapore’s Tiger Airways, which has a subsidiary in Australia. SIA gave the formal go-ahead on Tuesday for a new Singapore based long-haul budget subsidiary to be called Scoot and is pursuing a formal alliance with Virgin Australia. Both will add to the pressure on the Qantas group.

Mr. Joyce’s strategy is twofold. First he plans to cut the costs of Qantas’s international business further, giving up some loss-making European routes and delaying the delivery of six A380 aircraft until existing planes are retired. That will shrink the premium long haul fleet and save a one-off sum of $2.3-billion (U.S.). About 1,000 workers will lose their jobs.

At the same time, he plans to join the Asian bandwagon by setting up an additional full-service airline under a new name, based in either Singapore or Kuala Lumpur, probably as a joint venture with an unnamed partner. There will also be a new operational hub in Singapore for Jetstar, and joint venture airlines in Japan and Vietnam.

Mr. Joyce faces serious criticism in Australia over his decision to ground the fleet. Julia Gillard, the Prime Minister, described the grounding as an “extreme step.” But Mr. Joyce’s bold move forced the Australian courts to intervene, ordering the strikers back to work on Monday in exchange for 21 days of negotiations, followed by compulsory arbitration if no deal has been reached.

The court order is a clear victory for the airline. In the short term, Mr. Joyce has put an end to uncertainty about whether flights will take off. In the longer term, the arbitration process will force a definitive agreement on the unions that will be enforceable at law, preventing a return to industrial action later.

What is more, the deal is very likely to be on terms that will allow Qantas to press ahead with its “Asianization” strategy.

That is because Australian arbitrators have in the past been averse to telling companies how to run their businesses and would probably be overruled by the High Court if they tried. Against that background, claims that expansion in Asia is linked to job cuts in Australia appear unlikely to convince the arbitrators.

There are costs. The suspension of Qantas flights may hit bookings over the next few months, and Moody’s put the airline’s credit rating under review for possible downgrade, which could raise borrowing terms. But continued guerrilla strikes might well have had the same effect. In any event, the short term loss of business is a small price to pay for ending operational uncertainty, as is the $40-million Australian ($41-million U.S.) cost of keeping the fleet on the ground for two days. Credit ratings can go up as well as down.

The key outcome is that Mr. Joyce has crystallized the issue, forcing the unions into a negotiating environment in which the company has the upper hand. There may be a further price to pay: arbitrators are happier dishing out pay rises than interfering in corporate decision-making. But Mr. Joyce’s bold move seems likely to pay off, even if there are nervous times ahead.

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