singapore hotel: As storm clouds close in, Qantas" distress calls go unanswered

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The Sydney Morning Herald

Business

Date

December 7, 2013

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Matt O’Sullivan

Business Reporter

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Alan Joyce is desperate to convince the government that the Flying Kangaroo needs help. But he may have cried wolf once too often, with the PM and his ministers keeping him at arm’s length.

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When Ansett boss Gary Toomey went cap in hand to the federal government in early 2001 he made a fateful remark. Meeting prime minister John Howard, Toomey pointed out that $1 billion in cash was sitting on the airline’s balance sheet. According to those present, Howard’s focus shifted almost immediately to his next appointment, and Toomey’s pleas for the government to step in to save the airline fell on deaf ears.

Eight months later Ansett collapsed.

Apart from reinforcing government reluctance to intervene, it illustrates starkly the rapid rate at which capital-hungry airlines can burn through cash like almost no other companies.

Now, 12 years after Ansett became a casualty in an industry littered with the carcasses of failed airlines, Qantas is flying towards its own calamitous moment.

Shocking investors on Thursday by warning that it will slump to a half-year loss of up to $300 million, Qantas chief executive Alan Joyce signalled radical surgery that could include what would have been unthinkable just months ago – part sales of its prized Frequent Flyer business and Jetstar.

Delivering a further blow on Friday, credit ratings agency Standard Poor’s slashed Qantas’ all-important investment grade rating to junk status.

It puts Qantas in the same category as every other airline in the world – bar US airline Southwest and Germany’s Lufthansa – and threatens to push up its borrowing costs by more than $100 million a year.

To be clear, Qantas is still far from becoming our next Ansett. It has well over $2 billion in cash, access to credit facilities and an extensive portfolio of assets across every segment of the airline industry.

And it continues to hold on to a 65 per cent share of the domestic market, which has been the engine of its earnings since Ansett collapsed over a decade ago when it was gifted a near monopoly in Australia.

Lurching from one crisis to another, Joyce has sent a mayday call to the Abbott government as the de facto national flag carrier steers to a full-year pre-tax loss now tipped to near $900 million.

The Irish maths whiz has painted a doomsday scenario as Qantas comes under attack from competitors in both its domestic and international networks.

”The challenges we now face are immense,” Joyce warned.

He laid the blame for Qantas’ rapidly deteriorating financial situation squarely on arch-rival Virgin Australia, which in his mind has been allowed to get away with creating ”an unprecedented distortion” of the domestic market.

Now, with Virgin backed by state-owned airlines in Air New Zealand, Etihad and Singapore Airlines, it was in Qantas’ view free to maintain a long-term price war.

Joyce’s options are narrowing by the day. He has been playing to an era that placed a high value on a national flag carrier. Today, top of mind for many travellers are cheap fares.

The airline has for years been riding on the coat-tails of its legacy as the national carrier, be it flying home Bali bombing victims or injecting itself into the national psyche through sponsorships such as that of the Wallabies rugby team or its use of Peter Allen’s almost unforgettable song, I Still Call Australia Home.

But these days, travellers’ loyalty to one of the most recognised brands in Australia is tenuous at best. It leaves Joyce, 47, fighting for his own position as he attempts to orchestrate a rescue mission.

He remained defiant on Thursday when asked about his tenure, which last month clicked past five years in the top job, saying he had the full support of the Qantas board.

In the dog-eat-dog world of capitalism, he is sending SOS signals for the second time in two years.

In late 2011, he grounded the airline to get the Gillard government to intervene in the damaging stand-off with three unions. Qantas wore $196 million from that industrial turmoil, angered thousands of passengers and a large slab of its 30,000-strong workforce, and lost a decent chunk of its hard-earned political capital.

So what does Qantas really want from the government this time?

Joyce won’t reveal that secret but most believe it remains some form of loan guarantee. And the need for that has become greater with Qantas downgraded to junk status.

But government ministers are digging in.

Front of the queue is Warren Truss, the Transport Minister and Deputy Prime Minister, who has been the least receptive to the idea of extending government aid to the Flying Kangaroo.

”Qantas is still a very strong company. It’s got a lot of assets. It’s got a lot of goodwill. It’s got a lot of advantages in the domestic market,” he said on Thursday.

”We’re not normally in the business of guaranteeing loans or any other kind of funding mechanism of that nature. We’re not really attracted to the idea of re-nationalising the airline. Nor is it clear that that would actually make any real difference as far as Qantas is concerned.”

Joyce remains desperate to convince politicians that he is not crying wolf.

But it is proving difficult because politicians on both sides of the fence have become used to what many have perceived as crocodile tears over the last decade from Qantas. Behind the scenes, Qantas holds out most hope for Treasurer Joe Hockey. So far, he has been the most sympathetic. He is also the minister to whom Qantas has some of the closest links, with senior executive Olivia Wirth having once worked for him when he was tourism minister in the early noughties.

But the idea of financial assistance for a public company is anathema to a conservative government, which is asking itself where the handouts will stop if it buckles to Qantas’ requests.

Prime Minister Tony Abbott made clear the government’s position on Friday, saying: ”Qantas is a private company and it’s incumbent upon all private companies to run themselves effectively and profitably and that’s what Qantas has to do. If we offer a guarantee to Qantas, why not offer a guarantee to everyone?”

Earlier in the week, Peter Costello, a former treasurer and now an elder Liberal Party statesman had urged the government not to step in, warning that doing so would set a dangerous precedent. He also reminded everyone that Qantas mounted the strongest opposition to a government bailout when Ansett was on its deathbed.

Since that time, the domestic market has been the driver of its earnings.

Importantly, Ansett’s departure allowed Qantas to grab the lucrative corporate and government travel market, giving it room to focus on setting up Jetstar and pursuing forays into Asian markets.

But those days are quickly disappearing as Virgin chips away at the most lucrative part of the market.

This in a year in which Qantas was finally supposed to be reaping the rewards of its four-pillar strategy.

Instead, it will post its second bottom-line loss in three years. It was just two years ago that Qantas notched up its first loss since the Keating government privatised the airline in the early 1990s.

While its battle with Virgin in the domestic market is now its biggest threat, the expansion into Asia via Jetstar has yet to produce substantial dividends. Its biggest investment in the region, Jetstar Asia, is still struggling to break even almost a decade after it was set up in Singapore.

The most recent joint venture, Jetstar Hong Kong, remains grounded almost six months after the date Joyce had set for it to begin flying. Its fate rests in the hands of Hong Kong’s aviation authorities. They have been dragging their feet on whether to grant it approval to launch commercial services in the face of stiff opposition from flag carrier Cathay Pacific. It means Jetstar Hong Kong’s first three planes are stuck in storage in France.

And last month, Qantas was forced to inject more funds into another joint venture, Jetstar Japan.

The industry is also questioning whether the Emirates alliance will live up to its hype. The fear has been that Emirates will be the biggest beneficiary of the deal as Qantas passengers are fed onto its network.

Load factors on the 484-seat Qantas A380s, which ply routes from Melbourne and Sydney to its new base in Dubai, have been weak. Crews have pointed to a large number of empty seats on the flights over the last month.

Emirates has also said it has no plans to buy a cornerstone stake in Qantas.

Joyce now finds himself paddling faster, but against a king tide that threatens to swamp the airline.

His predecessor and the man he fell out with in spectacular fashion last year, Geoff Dixon, frequently talked about the need for a circuit breaker when he was trying to steer Qantas through a crisis.

This time, the hoped for circuit-breaker from the government appears increasingly unlikely.

It leaves Joyce having to dig his own way out of a rapidly deepening hole, giving him little choice but to press ahead with cuts to spending and jobs, and the possibility of partial sales of its crown jewels.

It is by far the biggest test Joyce will face as the Qantas chief executive.