Qantas’ success a product of failure

A report by Julie Johnsson in the Chicago Herald Tribune says that the death of a chief competitor helped transform Qantas Airways Ltd. into a global power.

The stunning collapse five years ago of Ansett Australia, Qantas’ chief domestic rival, spurred the airline’s executives and unions into action after they realized there was no guarantee Qantas would survive the post-Sept. 11 global industry downdraft.

“I don’t underestimate the impact that had on the psyche,” Qantas Chief Executive Geoff Dixon said of Ansett’s liquidation in March 2002.

Qantas emerged about $1 billion leaner and armed with a new competitive threat: a profitable, low-cost offshoot, Jetstar Airways. Qantas became the first legacy carrier, the industry term for airlines that flew in the era before deregulation, to create a moneymaking, fast-growing discount airline.

Today, the Flying Kangaroo is soaring, while U.S. carriers are struggling to make money and are deferring orders for new aircraft that some believe are essential to remain competitive in international markets. The situation illustrates what can happen when failing airlines are propped up by regulators or by bankruptcy reorganizations that some observers contend have left U.S. carriers financially weaker than foreign peers.

“U.S. carriers are in real trouble. They’ve got old aircraft, no money,” said Peter Harbison, executive chairman for the Centre for Asia Pacific Aviation, a Sydney-based market research firm. The failure of Ansett, he said, was “the best thing that ever happened to Australian aviation.”

Nicknamed for the winged red ‘roo painted on its planes, Qantas boasts a deep reach into the fast-growing Asian market. It has ordered nearly 200 aircraft and plans to bring Jetstar to the U.S within three years, flying new Boeing 787 Dreamliners.

Qantas is among a select group of carriers that threaten to eclipse traditional U.S. leaders such as Chicago-based United Airlines and American Airlines as trade barriers fall, opening the North American market to new competitors, and new foreign markets to carriers with long-range planes like the Dreamliner manufactured by Chicago-based Boeing.

“They’ve got a very strong brand name and the assets to capitalize on it,” said David Beckerman, an airline consultant who is director for analytical solutions for New Jersey-based OAGback Aviation Solutions.

“I’m very confident in the future of Qantas, I really am,” Dixon said. “I wouldn’t have said that five years ago. But with the advent of Jetstar, we’ve really been able to get our costs down. We have orders of aircraft, so we’re really well-placed to take advantage of what’s going to happen in the industry.”

The Aussie airline’s rebound also highlights the benefits that would accrue from remaking the U.S. airline industry, where no carrier is a financial powerhouse and four of the seven largest airlines have restructured under bankruptcy reorganizations this decade.

Now a small but growing cadre of U.S. investors and airline executives argue that U.S. airlines need to undergo radical surgery — mergers, spin-offs, even break-ups — if they are to ride out the next downturn and remain players in the global arena.

That outlook spurred Pardus Capital Management LP, a New York hedge fund, to attempt to engineer a merger of United and Delta Air Lines, say people close to the fund’s principals.

“There’s a sense of foreboding that we’re going down the same [boom-bust] cycle,” said former Continental Airlines CEO Gordon Bethune, who is advising Pardus on its dealmaking foray, launched with a letter to Delta’s management earlier this month. “Are we going to change the dynamics of this industry?”

United Airlines CEO Glenn Tilton, a proponent of consolidation and relaxation of foreign-ownership rules, also has been calling on industry participants and regulators to wake up to the emerging threat from overseas competitors.

“If there is one imperative for every business in the global economy today, it is simply this: evolve, adapt, reinvent … or risk irrelevance in the global marketplace,” Tilton told an audience in Tokyo on Oct. 30.

Unlike U.S. carriers, Qantas controls about 65 percent of its domestic market. In contrast, the U.S. market is highly fragmented. The largest player, American Airlines, has a 17 percent market share, according to recent data published by Aviation Daily.

The 87-year-old Qantas also enjoys a deep and loyal following among Australians, a nation of savvy travelers. About one out of every four of the country’s 20 million residents travels overseas each year, according to Australian tourism data.

Those attributes enabled Qantas to ride through the downturns that left Ansett bankrupt. First, Richard Branson’s Virgin Blue spurred deep discounting as it ramped up service across Australia in 2000 and 2001. Then the Sept. 11 attacks sent a chill through global travel.

Forced to innovate as Virgin Blue rapidly filled the void left by Ansett, Qantas formed Jetstar to fly on routes heavy with bargain-minded leisure travelers.

Launched in 2004, Jetstar has borrowed the concept of no-frills service and upbeat, young staff pioneered by Southwest Airlines, as well as a la carte pricing for everything, from soft drinks to portable video players, that is standard at European discounters such as Ryanair.

While United sought to create low-cost operations using existing staff and equipment, Qantas decided to run Jetstar as a separate entity.

One key to its success was persuading Australia’s powerful labor unions to agree to a separate wage scale that helped make Jetstar’s cost structure among the lowest in the industry: 10 percent to 20 percent below Virgin Blue’s and 40 percent to 45 percent lower than Qantas’ mainline service.

“Although we’re very heavily unionized, we’ve been able to work through union issues better than, obviously, American carriers have been able to do,” Dixon told the Tribune in an interview from a high-rise office overlooking Sydney’s harbor. “In Australia, there was a real live example of what happens, and that’s Ansett.”

In its first full month of operations during May 2004, Jetstar recorded a small operating profit and hasn’t looked back. For fiscal 2007, ended June 30, Jetstar had operating profit of $75.9 million, up from $10.7 million the previous year. By contrast, most U.S. carriers have folded their low-cost ventures. United still operates Ted, its foray into discounted flying, but doesn’t disclose its financial results, a spokeswoman said.

While low-cost carriers in the U.S. continue to focus on short trips, Qantas is rapidly expanding Jetstar into long-haul international flying, servicing Asia and plans to eventually fly to Europe and North America. Dixon is aiming at the two fastest growing sectors of the international market: leisure travelers and business fliers who seek comforts like sleeper beds.

Qantas plans to take its Flying Kangaroos upscale with luxurious comforts and a premium economy class, to be rolled out when its first Airbus A380 superjumbo begins flying from Melbourne, Australia, to Los Angeles next year.

Meanwhile, Qantas already is positioning Jetstar on tourist-heavy routes where Qantas struggles to make money with its regular service. This strategy has given Qantas a jump on an explosion in low-cost international travel that Harbison foresees as members of the huge, new middle classes in India and China take to the skies.

“The low-cost carrier is the model for growth for the next decade in Asia,” he said.

To support its strategy, Qantas has become the second-largest customer of the A380, with 20 on order and the largest airline purchaser of the 787, with 65 on order. Dixon estimates that the 787’s costs will be about 25 percent lower than equivalent-size aircraft, while the A380 will be 12 percent to 18 percent cheaper per passenger than the 747s that competitors like United use to fly the Pacific.

“Once we get that embedded, it’s a real advantage,” he said.

Dixon sees United, which operates more flights across the Pacific than any other airline, as a formidable competitor, especially given its hubs and its Mileage Plus frequent-flier program, the world’s second-largest airline loyalty program.

But he thinks that United’s refusal to replenish its aircraft fleet soon will place it at a disadvantage to other Pacific Rim carriers. “Old planes, that’s going to be the issue for American carriers,” Dixon said. “At some stage, the American carriers are going to have to buy some aircraft, aren’t they?”

United spokeswoman Jean Medina said the second-largest U.S. carrier doesn’t need to order longer-range planes like the 787 for at least three years and has no plans to expand Ted to long-haul routes.

The carrier intends to attract international passengers willing to pay top dollar by installing new luxury features such as lie-flat beds in the first- and business-class cabins of its existing wide-body planes.

United will order new planes “when there would be an economic benefit to the company to do so,” Medina said. “Our wide-body fleet is much younger, so we don’t really have a need there for a while.”

A Report by The Mole from The Chicago Herald Tribune