Qantas needs tough love

I have an op-ed up at The Conversation regarding Qantas:

Qantas appears to be pursuing a strategy where it will provide a premium service while charging premium prices. I’m not convinced – as a long-time Qantas customer – that it’s succeeding in providing a premium service. Nor do I believe Qantas will be able to maintain its premium prices. As Sam Wylie explained in the Australian Financial Review, the capital markets share this opinion.

Qantas has a book value of A$6 billion and a market value of just A$2.7 billion. Qantas has turned each dollar invested into 45c. Turning that around is going to be a lot harder than being tough on unions or cutting back on the drinks menu.

Allowing Qantas to borrow at the government bond rate – even if it has to pay a fee – will distort the market. The thing is that Qantas can borrow – just at junk bond rates. Borrowing at the government rate would mean Qantas could borrow more and more cheaply than the market thinks it should. That means Qantas would maintain its size and dominance when the market thinks it should contract.

Government has no business propping up businesses that should be contracting. As things stand Qantas is a poor investment. Yes; unique government regulation is partly to blame for that and the Qantas Sale Act should be repealed. Yet I suspect Qantas’ current strategy has more to do with its troubles than the Qantas Sale Act.

By repealing the Qantas Sale Act Qantas will have to survive on its own terms – this is the outcome that would best serve the interests of the flying public (broadly defined). Any other form of assistance is likely to leave Australians worse off in the long run.

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38 Responses to Qantas needs tough love

  1. Ubique

    Weird audience at The Conversation. Some idiot commenting on Sinc’s article claims the Government is giving the mining industry $5.5 bn a year …

  2. Bruce J

    After more than 20 years of operating as a listed company, Qantas still has the public service mentality through all staff levels. I have flown with them (and the old TAA) for more than 45 years and the staff attitude to customers has not visibly changed in that time. They will only accept they are no longer part of the government when they join the redundant workers from Ansett, Holden, Ford and Toyota.

  3. Botswana O'Hooligan

    Sir, your article should be engraved on stainless steel plate 10m by 10m square and placed on every lamp post in the land. Qantas is doomed, buggered, kaput, and rightly reduced to junk bond status by the market, so why the hell should the taxpayer prop it up?

  4. Bruce of Newcastle

    That is all good stuff Prof Davidson, but at least part of the market value deficit is reflected in the carbon tax which cost Qantas $106 million last year.

    If you invest $2.7 billion for a return of $106 million you have an ROI of 4%. That is a serious pair of concrete shoes around Qantas’ ankles. CEO’s would just about kill for something which gave them another 4% ROI.

    The industrial relations problems at Qantas are quite serious, and a severe cull of the masthead may be the intended strategy all along to clean the padding out (since FWA and the unions would successfully resist any alteration of the historical conditions). Shifting the business away from Qantas legacy EBA restrictions to less restricted Jetstar would make a lot of sense. But Hockey and especially Shorten are responsible for the carbon tax and they should repeal it or at very least rebate it for the airlines. Their competitors don’t pay it.

  5. Joe Goodacre

    Is Qantas the only airline paying the carbon tax?

    If it’s not then it might explain why airlines in general struggle in Australia, but not why Qantas in particular does.

  6. Vicki

    Before a decision is made to give government assistance of any kind to Qantas, a forensic examination of the company’s accounts should be made by independent analysts. And I mean the accounts of BOTH Qantas and Jetstar.

    Claims have been consistently made by Joyce that the long haul flights of Qantas are unprofitable, yet these flights are always full. Joyce’s campaign to expand Jetstar into Asia, which airline analysts say is faltering, is promoted as profitable. What is the truth?

    It has been claimed that Jetstar costs have been “flicked” to Qantas. If this is the case, the government should be fully aware of what they are supporting.

  7. Bruce of Newcastle

    It cost Virgin $47.9 million last year. although they have a better IR situation because they are new. But I said “rebate it for the airlines” meaning them too.

  8. Joe Goodacre

    I agree that the carbon tax should be gone… my point is that if other competitors are paying it and they aren’t looking for a handout then other reasons are to blame for their demise.

    I don’t know for sure, but my thoughts are that it’s probably union costs and restrictions. Bailing out Qantas so unions can enjoy above market conditions puts the Liberals at risk of failing the pub test and being seen to support one form of cronyism but not another.

  9. Squirrel

    Perhaps their most important asset is the brand, for which there seems to be considerable public affection (if not current practical support) – now if there was a way to separate the iconic brand from the airline which operates in that name, and attach it to an airline which is more viable and effective at giving the public what they want, at prices they are willing and able to pay…… A role for private equity, after suitable legislative amendments?

  10. Sinclair Davidson

    So Yobbo your experience wasn’t any good? :)

  11. Yobbo

    Qantas simply don’t provide a high enough level of service to call themselves a full-service airline. You get better service on Air Asia than in Qantas economy.

  12. JC

    You get better service on Air Asia than in Qantas economy.

    Yobbo, have you ever flown a US airline? Ummmmm? Try the meals.

  13. Yobbo

    No, but I’ve flown on numerous different asian and middle-eastern airlines, and all of them blew Qantas away in the service department (and were also cheaper).

  14. Yobbo

    You can’t seriously think Qantas is anywhere near the standard of Singapore, Cathay Pacific, Etithad or Emirates right?

  15. Sinclair Davidson

    You get better service on Air Asia than in Qantas economy.

    That is what is going to kill Qantas – catching a plane these days is like catching a bus.

  16. Carpe Jugulum

    You can’t seriously think Qantas is anywhere near the standard of Singapore, Cathay Pacific, Etithad or Emirates right?

    +10

    The service on Qantas is woeful. Note to in flight staff, I’m the customer & i am not doing you a favour by flying with you.

    Korean Air also has excellent service, i recommend them highly.

  17. Andrew

    Some idiot commenting on Sinc’s article claims the Government is giving the mining industry $5.5 bn a year

    Yes. By not applying the Road Tax to offroad use diesel – farmers too don’t pay the Road Tax.

    In fact, they’re subsidising unions by $1tr by choosing to NOT levy a $1tr a year Unions Tax.

    I had some leftoid (who admittedly is trying to get help, she’s stopped voting ALP-Green, acknowledged that she had a problem and is working on overcoming it) tell me that negative gearing is an unaffordable “subsidy.” I asked her to find me the Negatively Geared Property Subsidy Act, or the Rental Property Tax Concession Act. She couldn’t. I pointed out that ANY expense in generating income is deductible unless specifically carved out – not a “subsidy” and it still didn’t seem to sink in that the govt would need to pass a specific law eliminating otherwise allowable deductions.

  18. Daisy

    Yobbo I think whats amazing is that people are still adding to your op ed.

  19. Andrew

    And remind me who gives a toss if the bondholders get bent over and have to do a debt for equity swap? Life goes on for the rest of us, and they learn not to lend to unprofitable airlines. Unfortunately, everybody else can run an airline cheaper than they can. It was $75 difference when I looked this morning (PER-SYD, one way in March). Sorry guys, unless you blow me your flight isn’t a $75 better flight.

  20. Notafan

    SMH readers were squealing about negative gearing in the Medicare copayment article
    It would make more sense to get rid of the CGT discount and go back to indexing the cost base not that it would make any difference to the squawkers.
    Repeal the Qantas act and let them do what they need if they don’t survive so be it.
    I couldn’t care less about service catching a plane isn’t an end in itself, just get me there on time. They could get rid of flight attendants altogether and let people bring a cut lunch like they do in the US.

  21. ralph

    Many of the problems of Australian businesses relate to the quality of their management an issue which is being experienced by QANTAS. Their decision some years ago to shut out their employees and stop flights was a disaster indicating that they would rather pursue a dispute than serve their customers – a big loss of trust. So why is management getting paid millions?

  22. Alfonso

    “Korean Air also has excellent service, i recommend them highly.”
    OMG….the ignorant Aussie strikes again.
    KALs’s flying standards in the past were so bad they had to ask Boeing to manager their flight ops and training before their reinsurers would allow coverage.
    Asiana currently has the same arrangement and that didn’t stop the locals pranging a 777 on approach in circumstances so bizarre but beyond your ken.
    Aussies with an amateur interest in aviation have opinions like they have arseholes.

  23. Combine_Dave

    KALs’s flying standards in the past were so bad they had to ask Boeing to manager their flight ops and training before their reinsurers would allow coverage.

    So Korean pilots fly the way Chinese/Taiwanese drive?

    It’s okay Carp, you can always switch to China Airlines or Eva Air, they have frequent flights to and from Japan. No recent crashes there

  24. martin

    I’m a bit sick of the Qantas bashing. If you pay for quality service you get it, and if you want the cheap stuff you get it at a far better level at jetstar than the euro giants offer. Dipping into virgin has invariably been disappointing for me, but that is one traveller in the millions they have. there is no argument for government assistance for either airline, maybe people need to pay for the level of service they demand from their own pocket instead of imagining Singapore Airlines will sweep in and give them 3 services a day to Dalby, free champagne and a blowdry job.

  25. Combine_Dave

    maybe people need to pay for the level of service they demand from their own pocket instead of imagining Singapore Airlines will sweep in and give them 3 services a day to Dalby, free champagne and a blowdry job.

    That’s the problem… other providers can provide superior service for less $.

    Whether qantas’ problems stem from their unions or the qantas sale act they need to do something quick else they’ll be going Holden’s way.

  26. Ubique

    On the way home tonight I turned on ABC’s PM to hear a union official slagging off on Qantas, heaping a torrent of abuse on management for investing in Jetstar, and only stopping short of accusing Joyce of being a paedophile. It was a rant worthy of Kim Jong Un. Turned out it wasn’t a union official at all but ABC “business reporter” Pat McGrath. The idea of the ABC haven’t the faintest clue about business is a scream. McGrath has obviously learnt all he needs to know about business from workshops at Trades Hall.

  27. Yobbo

    Yobbo I think whats amazing is that people are still adding to your op ed.

    After 11 years it is still the #1 result on Google for “Qantas Sucks” and “Qantas is Shit”, and #2 for “I hate Qantas”.

  28. Yobbo

    I’m a bit sick of the Qantas bashing. If you pay for quality service you get it

    But that’s just the point. With Qantas you pay for quality service and you don’t get it. Qantas economy is more expensive than its competitors which offer far better service.

  29. squawkbox

    You can’t seriously think Qantas is anywhere near the standard of Singapore, Cathay Pacific, Etithad or Emirates right?

    Mmmm, Singapore service is much better, Emirates a bit better (though with unbelievably thin and uncomfortable seats), Cathay much the same (I think Cathay have gone downhill in recent years) and I haven’t flown Etihad.

    My theory is that Quantas staffs its planes with by some weird form of Buggins’ turn, whereby the young, cute and enthusiastic staff start out on obscure domestic routes, and by the time they are judged ready for the premium international routes, they’ve become depressed old boilers counting the days until retirement.

  30. Combine_Dave

    Many of the problems of Australian businesses relate to the quality of their management an issue which is being experienced by QANTAS.

    Does the EB state that management should be recruited from staff within the business (akka union bosses become real bosses).

  31. JohnA

    Andrew #1205277, posted on February 26, 2014 at 6:51 pm

    Some idiot commenting on Sinc’s article claims the Government is giving the mining industry $5.5 bn a year

    Yes. By not applying the Road Tax to offroad use diesel – farmers too don’t pay the Road Tax.

    Time for some pedantry. Just to emphasise that ALL off-road use of diesel is eligible for rebate of the fuel tax. Not just farmers and miners, although they form the two largest groups.

    That might include Collins St and Pitt St wannabees as well.

  32. Joe Goodacre

    Alfonso,

    I don’t think Joyce had a choice to ground the fleet – he was between a rock and a hard place.

    Even after doing that the stranglehold of the unions wasn’t broken. It’s possible that the strangehold of the unions will only be broken when the business is completely destroyed.

  33. Old School Conservative

    In what other business do employees get a 90% discount on all products, including the premium lines? Does any one else get Qantas employee-like access to the best items on sale before the paying public? Do retired and redundant staff continue to get similar benefits well after they have left the company?
    The union-negotiated fringe benefits listed above that current and former Qantas employees receive must be a huge cost to the airline. Staff travel rorts are worthy of public analysis and if 5000 staff are about to be made redundant, we should be told how much their continuing free travel entitlements be allowed to burden the airline’s profit and loss statement.

  34. Ralph

    Yet it appears that the government is going to pony up and provide Qantas with a debt guarrantee (a bailout). Now Rex is asking for a bailout too. How does Qantas deserve a bailout but Rex doesn’t? This is disgusting and shows complete hypocrisy after SPC got knocked back for a bailout. Qantas will get a bailout because all the pollies want to continue popping into the Chairman’s Lounge whey they fly. At the very least, the government should make any debt guarrantee conditional on the replacement of the CEO and Chairman, since they are the ones that have presided over this mess. Otherwise, it is simply a case of bad behaviour being rewarded.

  35. Alfonso

    “In what other business do employees get a 90% discount on all products, including the premium lines? ”

    Not exactly, it’s on a last minute spare seats available standby basis on each leg. Staff ID 90 fares often leave the user not knowing whether he’s on until 15 minutes to departure. Qantas etc refuse to hold last minute auctions of seats at the gate for the public because of the uncertainty….. 6 extra days stuck on standby in Singers ensures next time you buy a a confirmed seat,.

  36. Combine_Dave

    At the very least, the government should make any debt guarrantee conditional on the replacement of the CEO and Chairman, since they are the ones that have presided over this mess. Otherwise, it is simply a case of bad behaviour being rewarded.

    Nope. Cut them loose.

    Who knows? Maybe they’ll take off rather than crash and burn!

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