Qantas – Hanging on by the Skin of their Teeth
There has been much fanfare surrounding the venture between Qantas and Emirates, yet the small print reveals that Qantas will not physically fly into Europe anymore. The hoopla contained in the Flying Kangaroo’s restructure is really the beginning of the end for international operations. Paul Clough explains why.
Let us start at the beginning. To run any business successfully the owners/managers must ensure that the total costs of the business are less than the total income of the business. Nothing hard or tricky about that concept.
The risks arise when the owners cannot define or know with particularity the total costs of a business and additionally cannot define or know with particularity the revenue of a business.
The airline business is riddled with imponderables of cost and revenue. Qantas is no different.
However, the nature of democratic capitalism is that Qantas is not only subject to the internal dilemmas outlined above but it is required to compete with other airlines in the market place. Additionally its quality of service in every respect is compared with other airlines. The third hurdle Qantas has to overcome or placate is that its true owners expect to receive a dividend on their investment in the shares of the listed company owning Qantas operations.
The above is all common sense and not extreme economic theory.
Qantas has, on occasion, struggled to stay financially viable but on each occasion the management has been successful in either reducing costs or increasing revenue to satisfy the fundamental demand of profitability.
At this period of time however, Qantas has been beset by a number of imponderables that cause it to be unable to maintain profitability in the basic sense. We have experienced the Global Financial Crisis. This is an offshoot of the greed and demands of the good and great US of A increasing its control of the world’s economic levers, i.e. the global village. Europe has suddenly found out that the people of the Southern group of countries, such as Greece, are less hard working and energetic than the people of the Northern countries, such as Germany. The Euro currency has become something of a straight jacket.
Qantas is currently under the control of a leprechaun who is by profession a mathematician. Mathematicians usually deal with known quantities or qualities to derive a pattern. Aviation is a mass of compromises and variables.
So much for the statement of circumstances besetting Qantas. The shift of emphasis from direct operations of B747 and A380 aircraft to Europe to a form of code sharing with Emirates will not result in long haul profits for Qantas.
In a former life, this writer was an airline pilot with TAA, a domestic carrier in Australia. The financial viability of that airline was of great concern to pilots whilst working there, having joined in 1964 as a first officer on F27s. In the fleet were two DC6Bs registration VH-INH and INK. These aircraft were really Ansett-ANA aircraft. TAA had leased 3 Viscount 700s VHTVE, TVF, TVG to Ansett in exchange. The word was that the Federal Government had agreed with Sir Reginald Ansett, that he would get the more modern capacity aircraft and TAA would take the outdated DC6Bs. Additionally, Reg would not have to pay government charges for 12 months whilst the ANA takeover was bedded down. Effectively, Ansett’s costs were reduced and its revenue, in the speedier Viscounts, was enhanced. ANA was absorbed and the two airline policy adopted. The fundamental law of profitability was upheld. The fact that the Federal Government bent the open capitalist model to achieve the end was not commented upon.
All was well until inflation, the ever present downside of capitalism and greed reared its ugly head. Ultimately, TAA was cut loose from the cosy two airline policy and had to stand on its own financial feet. Between about 1975 and 1982 it was obvious that the airline was not profitable and needed injections of capital from the Federal Government to stay viable. Gradually, the position became worse. In 1978, the management hit on an idea that the airline would divest itself of its unprofitable routes and concentrate on the ones that paid – i.e. Sydney-Melbourne-Canberra. Brisbane-Adelaide-Perth could just scrape by and would be kept. The plan was hatched the F27s would be phased out and the network reduced to jet aircraft. The work of the F27s would be given to local airlines and the oncarriage from those sub airlines would flow to TAA. Premier Joh Bjelke Peterson hit that plan on the head swiftly and when he was deposed, James Strong of TAA moved swiftly and F27s were no more. However, at that time your correspondent had moved on to B727s as a captain. The point of the oncarriage proved to be contentious and resulted in a court case in the Supreme Court of Queensland. The dispute was over the on-carriage that flowed from Western Queensland to the two networks, TAA and Ansett. During the hearing, it was disclosed that three principal parties negotiated at length. Ultimately after much alcohol and food was consumed and cigars were smoked, the three heads of them at 3am nutted out an agreement that was committed to writing on beer mats and serviettes. Mr Graham MacMahon, the CEO of Ansett was asked in cross examination by Bob Douglas QC “well now after three days and three nights of negotiation and after a lengthy dinner and when you were all tired and emotional, why didn’t you call in your respective lawyers to document your agreement?”. MacMahon’s reply was a classic “We had enough trouble determining what we could agree about, why would we call in the lawyers to write gobledegook and screw up our good work”. The judge, Justice Des Derrington, then said “Mr Macmahon do I understand that after many hours and very late in the night you say that you three agreed to a settlement of the oncarriage of Bush Pilots the local airline. You then committed the details to beer mats and serviettes and now five years later these beer mats and serviettes are in evidence and all three of your companies are disputing what the words written down mean? “ MacMahon agreed with that assessment of the evidence. Des Derrington then said “You did not think it worthwhile calling in lawyers to put the agreement into formal words at that time and now five years later you are asking me, as a lawyer, to decide just exactly what the scribblings that you wrote when tired and emothional mean as to the value of the oncarriage?”. MacMahon was forced to admit that that was the position. The matter settled about an hour after the lunchtime adjournment.
The point of that explanation is that TAA started to downsize its operations and farmed out its services to another airline “Air Queensland” to fly round Western Queensland and deliver any oncarriage to TAA in Townsville, Cairns and Brisbane. In this way TAA hoped to reduce its costs and increase its revenue and return to profitability. TAA never became profitable, a pilots’ strike ensued and in about 1997, it was rolled in as a domestic rump into Qantas. TAA is no more.
The proposal put forward by Qantas is in strikingly similar terms. Qantas is abandoning its services to London, Paris, Frankfurt and Rome and giving them to Emirates. Qantas is hoping to sell its oncarriage to Emirates to these ports and others and in return pick up on carriage to Australia through Dubai. Like the fiasco of oncarriage described above, the prospect of oncarriage is doomed.
Turning to another solution for Qantas. The costs pressures on that airline are heavy. Many of them are Federal Government generated. It is common knowledge that Qantas pay for the heavy security imposed on airlines operating in Australia. It is common knowledge that Qantas pays dearly for the high quality of its maintenance. The competition airlines are less careful of maintenance issues. Therefore their cost basis is less than Qantas. I bring to your attention some instances of those maintenance and training defects. In about 2009, a bolt fell from a Singapore airlines B747 flap track on approach to Sydney. It fell through the roof of a house in Burwood. Almost nothing was said about the investigation if one was held. In 1980, a Singapore Airlines B747 took off from RW27 in Melbourne direct to Singapore. RW27 is about 8000 feet long and too short for such an adventure. The B747 gouged four furrows in the soft overrun of RW27 and launched itself in the valley near Bulla at the point of stall. The furrows existed for about two years until someone took pity and filled them in. There was no investigation of note about this departure from correct procedure. About two years ago an Emirates A340 took off from Melbourne and scraped its tail. The reason was that the crew miscalculated the take off weight by 100,000 lbs. The two pilots had both flown in excess of 95 hours in the previous 30 days and were now on a nine hour flight to wherever. The fact that they were both very tired and would exceed our flight time limitations by this flight was not a source of concern to anyone in Australia. Finally, for a period I flew an ex Singapore airlines B727 in the UK. It was a matter of record that the aircraft had not been maintained in accordance with the Boeing requirements for updating by way of ADs and had never been properly kept current whilst in service with that airline. It is little wonder that that airline can compete easily with Qantas because little is spent on progressive maintenance and currency of ADs. Perhaps the Federal Government should start governing for Australians and require these competing airlines to satisfy the stringent maintenance standards demanded of Qantas.
It behoves the government to restrict the various Middle Eastern airlines flying into Australia and diluting the Australian market for international travel. Qantas does not fly to Malaysia, Qatar, Abu Dhabi or India but each of these airlines fly into and out of Australia. Singapore Airlines flies to at least seven airfields in Australia into a market of 23 million people. Qantas flies to one airfield, Changi, into a market of 4.5 million people. Where is the level playing field? Secondly, there is no safety inspection regime for these foreign carriers to ensure that the aircraft used are maintained in accordance with Boeing or Airbus requirements. The Federal Government could impose spot checks on the foreign carriers to ensure that they have to comply in the same way as Qantas has to comply. Finally, the Federal Government should reconsider the imposition of costs recovery for the bureaucracy that they impose on the international carrier to reduce the cost burden on that carrier. Perhaps instead of featherbedding the federal bureaucracy in clover in Canberra, some of that taxpayer’s money could be better spent on ensuring that Qantas is able to fly our flag overseas instead of grabbing the coat tails of a Middle Eastern Airline.
It should not be forgotten that the capacity provided by Qantas in their B747s and A380s is a useful defence asset. When turmoil erupted in Lebanon and Egypt in the recent past, QANTAS was available to provide the emergency uplift to take Australian citizens of those countries to safety at short notice. Can you imagine Singapore Airlines coming to the party at short notice if Qantas is not there when the next revolution erupts somewhere in the world?
Watch this space…