Low Flying Kangaroo

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Low Flying Kangaroo

Posted 1/11/2011 by Vivien Banks

The dispute between Qantas and unions can be seen in the context of Qantas’ attempts to remain viable in a highly competitive domestic and international aviation environment. This article examines some of the sources of these competitive pressures and the strategies that Qantas has adopted, or proposes to adopt, in responding to this environment. It finds that these strategies are broadly akin to those that Australian companies in other sectors have adopted when faced with similar circumstances.

The aviation industry—domestic and international—has changed markedly in recent years. One such change has been the emergence of low-cost carriers—such as Ryanair—that have made inroads into markets previously dominated by so-called ‘heritage’ (often state-owned airlines) such as Alitalia and Swissair. In the Australian context, Qantas established Jetstar as a low-cost airline to compete against Virgin Blue (now Virgin Australia) when the latter was established as a no-frills airline. This strategy has contributed to Qantas and Jetstar combined having a two-thirds share of the domestic market.

Qantas’ position on the international market is more precarious than the domestic market, with Qantas losing market share and incurring losses on its international operations. According to data published by the Bureau of Infrastructure, Transport and Regional Economics, Qantas’ share of the international market (as measured by the number of international passengers) fell by almost 15 percentage points from 34 per cent in 2000 to 19 per cent in 2010. Qantas says that its international operations are unprofitable. Several factors have contributed to this situation.

One is the Australian Government’s policy of liberalisation of the international aviation market which aims to benefit consumers by keeping fares down and providing greater choice. One consequence of the system of bilateral air services agreements that govern international aviation has been to provide a degree of protection for Qantas. The winding back of this protection has led one commentator to state that “The Qantas dispute with its unions is, to a large extent, about unwinding excessive operating costs that have been built up behind that protection”.

On 16 August 2011, Qantas announced its new international strategy. This has multiple strands. One is to gain entry into fast-growing markets. With the Australian domestic market small and growing relatively slowly, and with competition increasing on Australia’s international markets, Qantas is seeking to tap into fast-growing Asian markets by offering both low-cost flights and a full service airline. Qantas entered the Asian low-cost market in 2004 when Jetstar Asia Airways—in which Qantas held a 49 per cent stake—began flights. Qantas also proposes to invest in a full-service Asian-based airline.

A second strand is cost-cutting. According to Qantas, its international cost base is around 20 per cent higher than that of its key competitors. To reduce costs, Qantas proposes to reduce staff numbers in its international operations by around 1000 and shift activities offshore. Qantas also proposes to reduce capital investment by $US2.3 billion in its international division. These are additional to the steps Qantas has already taken such as using labour hire firms.

Qantas’ responses to its fading international prospects as protection is wound back and as it faces cost pressures are similar to what many other Australian companies in other sectors have done in the past. Australian companies such as Pacific Brands have been investing overseas for decades. Qantas’ situation and responses are thus not unprecedented.

Authored by Richard Webb; Posted by Vivien Banks

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