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Aviation
Business

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March 1, 2014

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The decline of the national carrier has all the makings of a modern corporate tragedy. Adele Ferguson and Matt O’Sullivan tell the extraordinary inside story of how Qantas flew off course.

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It happened in a flash. A deafening sound, a gut-wrenching jolt and suddenly Qantas flight QF30 from London was in a 20,000-feet plunge.

July 25, 2008, was not like any other day for Qantas. Less than an hour into a well-worn trip from its stopover in Hong Kong to Melbourne, Qantas was put on high alert as a disaster began to unfold in the skies.

Emergency landing: A Qantas jumbo shows its damaged fuselage in Manila in July 2008. Photo: AFP

An exploding oxygen tank had blown a gaping hole in the ageing jumbo on its way to Tullamarine.

News organisations around the world were in overdrive waiting to see the fallout as the pilot and crew tried to remain calm and navigate the damaged aircraft to a safe emergency landing in Manila.

It was a profound event for the national carrier.

Peter Gregg. Photo: Luis Enrique Ascui

But so, too, was another incident taking place at its management bunker in Sydney’s CBD.

It was an event that would reshape the future of Qantas and bring it to where it is today: forced to shrink the company by axing 5000 jobs, a company-wide pay freeze, asset sales, route closures and a plea to the government for assistance in a last-ditch effort to save the company.

As lives were hanging in the balance on that fateful flight almost six years ago, the board of Qantas, led by its relatively new chairman, Leigh Clifford, were working on a plan to purge senior management ranks. To this end, chief Geoff Dixon – who had been tarnished a year earlier by a failed private equity bid for Qantas – was asked by Clifford to pass on the news.

John Borghetti. Photo: Rob Homer

He was to inform internal candidates Peter Gregg, the chief financial officer and a board member since September 2000, and John Borghetti, who was responsible for Qantas domestic and international operations, that their junior, the 42-year-old Irishman Alan Joyce, had got the job they wanted.

Borghetti was pulled out of the Mascot crisis centre, which he was managing, and told to come to the city urgently. He jumped in his car not knowing if Qantas had lost the aircraft or any of the 369 passengers and crew.

But after racing to the city, he learnt that the purpose of his summons was to be told the news about Joyce.

Geoff Dixon. Photo: Rob Homer

Gregg was told soon after. Later that day, Joyce walked into Gregg’s office, sat down, and asked him when he would be leaving.

The die had been cast. Qantas’ future was sealed and so began a tale of corporate tragedy – of big egos, public spats, betrayal, conspiracy theories, destabilisation and leak after leak.

Warring tribes

It is a story of senior executives who felt like jilted lovers, prematurely leaving the airline with Avgas still in their veins, and still wanting to prove they had what it took to run an airline as complex as Qantas.

It is also the saga of the rise of a major challenger to Qantas’ once near-monopoly grip on domestic air travel and how it managed to find itself in an air fare war that became bloody and personal.

Qantas is a company of tribes at war with itself, and anyone who questions its strategy. It also is suffering from a case of the Boy Who Cried Wolf after so many years of warning that it was close to collapse unless the government bowed to its wishes. At one time, a phrase was coined by Dixon known as “constant-shock syndrome”.

Qantas matters because it remains the national carrier in many Australian eyes. It is the carrier that evacuated Australians from civil unrest in Egypt and in the aftermath of the Bali bombings. But these ties, forged over decades, are becoming tenuous.

Peter Morgan, a veteran fund manager who ran 452 Capital and Perpetual, says: “After the Derby Day grounding, which basically achieved nothing, I now fly Virgin all the time.”

It is a blunt statement but it goes to the heart of the long-lasting impact of Joyce’s controversial decision on October 29, 2011, to ground the entire airline to break a deadlock with three unions.

It made Joyce a household name – for good or bad – and a pin-up boy for union busting, yet it left customers stranded all over the world, put the airline offside with the Labor government and hurt the relationship between management and staff. Qantas put the cost of the industrial dispute at $194 million.

While the three unions at the centre of the dispute in 2011 failed in their bid for job security clauses to be inserted into new labour agreements, they still gained pay rises of 3 per cent to 4 per cent a year for their members.

When Joyce became chief executive in 2008, he inherited a workforce of 34,295, including 2737 Jetstar staff. By last year, after almost annual big-headline job cuts, the number had fallen 3 per cent to 33,264, with Jetstar’s workforce doubling to 5201. As of this week, it was 32,000 with plans to shrink it 15 per cent within two years.

Biggest shake-up

With Qantas on Thursday unveiling its biggest shake-up since it was privatised, investors, politicians and the wider community are left asking when the rot set in and who, or what, is ultimately to blame.

How did the airline go from bullish outlook statements in August to, just three months later, issuing a massive profit warning and the ignominy of a downgrade in its once all-important credit rating to junk status?

Theories abound. Some believe it has been a brilliantly orchestrated campaign designed to hobble its rival Virgin Australia by driving its mainline business into the ground through a bloody price war, then getting the government to bail it out – which now might not happen – unfetter it from the Qantas Sale Act so it can attract more foreign investment and foreign staff and relocate some businesses. This would pave the way for its long-term ambition to squash the unions by flipping more passengers and routes to the less unionised Jetstar from the complex web of unions and higher cost base of the mainline Qantas.

Others believe the crisis is the culmination of a series of strategies that went horribly wrong due to inexperience, ego and misjudgments, and a view of the world from a budget-airline perspective.

A former senior Qantas executive says: “It doesn’t make sense when your business relies on customer loyalty. It is not a low-cost business where you can price them back in, you can’t do that in a full-service business. It was a big miscalculation.”

A third theory is that Qantas is a victim of the loosening of the country’s aviation laws, which began two decades earlier when the Keating government began privatising the national carrier. This allowed large foreign competitors to dump capacity on routes into Australia, which was good for travellers who benefit from a price war in the skies, but damaging to Qantas. According to Qantas, since 2009, there has been a 46 per cent increase in international airline capacity, more than double the global increase of 26 per cent.

The story of Qantas can fit any of these theories, depending on which side of the prism you are looking through. But the story cannot ignore the various personalities or the passion the airline provokes – as evidenced by unions which went so far as to hire auditors to prove their thesis that Jetstar’s expansion in Asia is a black hole and that Qantas is heavily subsidising Jetstar.

This theory is backed by suppliers who say when they perform work for Jetstar, they often receive their invoices from Qantas. The unions would argue that the latest results vindicate the Jetstar black hole, as they show the Jetstar Group made a $16 million loss from a $128 million profit a year earlier. The domestic business makes a profit but the accounts are complex with more than 129 companies.

But unless Qantas gives unfettered access to its books, the claims remain unproven.

The wrong man?

Fairfax Media talked to numerous sources linked to Qantas for this story but most would speak only on background because of fears of repercussions such as losing their jobs or contracts. Others were too embarrassed to put their name to this piece because it might reveal their misjudgments.

Those prepared to talk on the record included former adman and investor John Singleton, who felt so strongly about Qantas he joined a consortium – twice – to try to buy out the airline. Singleton blames the problems on the board’s decision to appoint the wrong man for the job. “As soon as they gave the job to Joyce instead of Gregg or Borghetti, it was all over,” he says.

Singleton insists he is no longer interested in Qantas as an investment. “We had a wonderful management team lined up with Gregg and others, but it fell over.”

But in 2008, the board, which had itself gone through wholesale change after the failed private-equity bid, decided that the ambitious Irishman running Jetstar was the right man for the job.

Then, Joyce had been grabbing positive headlines and seemed to have all the answers. He was young, fresh and, despite his working-class upbringing, found agreement with the rough and tumble Clifford, who had built his reputation at Rio Tinto for busting the unions in the mining industry and wanted to make his mark as a chairman of a heavily unionised corporation.

Whether by accident or design, as succession planning was coming to the fore, stories began to appear about how Joyce wanted to use foreign pilots employed on 457 visas, which would make it the first large-scale hiring of international flight crew in Australia since the pilots’ strike almost 20 years ago, as well as championing work agreements employing staff on more flexible terms and conditions.

It was in sharp contrast to the negative page-one headlines besieging Dixon, who, to the board, represented the old guard – even though he had created Jetstar.

At the time, the board was about to make a clean sweep of senior managers, Dixon was embroiled in a vicious union stoush with the Qantas engineers, fuel prices were skyrocketing and the global financial crisis was starting to engulf the high-yielding but high-cost Qantas mainline business.

With headlines including “Pain will ground aircraft and bring job cuts”, “Dixon won’t budge on pay despite strike threat” and “Qantas to strike, expect delays” Clifford and the board were all the more determined to sweep the broom through the airline.

Fate sealed

Joyce sealed his fate at a two-day management strategy meeting at New York’s plush Sofitel on June 18-19, 2008. He had been moving closer to Dixon after he was invited into the inner circle when he knocked back a job to set up a budget airline with Spain’s Iberia. Gregg and Dixon, on the other hand, were having more disagreements about the handling of the engineering dispute.

The thrust of Joyce’s presentation was what Jetstar could do for Qantas during such turbulent times. This included increasing the size of Jetstar within Qantas Airways as a backdoor way to deal with the unions and reduce costs. With a simpler industrial relations model, lower wages and lower overheads and big plans for Asia, it was music to the ears of Clifford and his newly assembled board.

So, too, was a plan to gut the senior management ranks.

After dinner at the Sofitel restaurant in downtown Manhattan that night, Dixon and Joyce were seen huddled together toasting the future.

Within months of Joyce taking control, some of the world’s most experienced and respected aviation executives had become statistics in Joyce’s purge, which led to 90 senior management roles, or 20 per cent, being sent packing – and with them a gaping hole in the airline’s corporate memory.

Gregg left almost immediately, Dixon’s handover ended a year earlier than he had planned, Borghetti quit after 36 years at the airline and Grant Fenn, a senior executive of strategy and investments, had also gone.

Early in Joyce’s tenure, he ditched merger talks with British Airways – something that would have put Qantas on a different path than it is on today – and focused his attention on what he knew best: Jetstar.

With fuel costs escalating, demand for business travel falling during the global financial crisis, his strategy seemed right for the times.

But that was then. As Joyce was mapping out his plans for Jetstar in the new Qantas order something happened that he hadn’t counted on: his old rival Borghetti turned up at Virgin and began a five-year “game change” strategy that raised the stakes.

At the same time, the global aviation industry was consolidating like topsy and international airlines were applying for more flights to and from Australia.

Unlike Dixon, who was the maestro at managing the media and lobbying government to keep foreign airlines from getting too much capacity, Joyce seemed oblivious to what was unfolding.

Whether it was a lack of corporate memory or a one-eyed focus on Jetstar and a determination to crack the Asian market, cracks began to appear in his strategy and he lost the backing of some shareholders.

By 2009, the dividend had been suspended and the share price was drifting towards record lows as concerns grew that its Asian strategy was confused and expensive and the war with staff was hurting customer service.

A former senior executive at Qantas blamed the crisis on a shift in the balance between Jetstar and Qantas. “There was a history of innovation and a history of courage,” the executive said.

“It seemed to me with the establishment of Jetstar the new board [headed by Clifford] embraced that model at the expense of the historic Qantas. In my view, the success was how you blend the two. There is always a balance between the two. If you lost that balance you potentially lost control of the two.”

When Joyce took control of Qantas, it was the only airline in the world that had a successful two-brand airline strategy: Qantas and Jetstar. Qantas was considered a premium brand that was so outstanding there was no confusion between Qantas and Jetstar.

Brand damage

The deliberate decision to make Jetstar a bigger part of the group created the perception that Qantas as a premium full-service airline had diminished.

Instead of trying to reverse this with strong marketing of the Qantas brand, the airline has done the reverse.

It is a far cry from the good old days of 1994, when Qantas won the rights to use Peter Allen’s song I still Call Australia Home in its ads.

It was unveiled during the AFL grand final between Geelong and the West Coast Eagles on October 1, 1994. Just before kick-off in this country’s version of the Super Bowl, Qantas took a big punt in airing its bold new ad on national TV.

“People were crying emotion – we were blown away,” a former Qantas executive recalls. “The switchboard lit up.”

The ad was to become as Australian as meat pies and Vegemite, linking Qantas indelibly to the national psyche – what it meant to be Australia.

Who can forget the children’s choirs who were rolled out two years later to sing the song in front of Uluru, a Masai village in Africa, or on the Brooklyn Bridge in New York?

But during Joyce’s reign, there have been more than eight brand campaigns that have gained little or no traction. One of the bigger flops was the “You’re the Reason We Fly” campaign, which was launched just after he stopped the nation with a decision to ground all planes in an attempt to take on the unions.

At the heart of everything Joyce does is an attempt to improve Qantas’ return on equity by using the Jetstar model as the magic bullet. To this end, he has deferred many of Qantas’ aircraft orders in an effort to reduce capital expenditure, particularly for international. This week, he sold or deferred 50 aircraft.

Decisions such as this have prompted many critics to question a strategy that is deliberately starving the international division of capital to a point where it is a shadow of its former self and to a point where taxpayers are now asking whether they should be extending a helping hand to Qantas.

Pressed into a corner, Joyce did a deal with the airline Qantas had previously cast as the devil.

“Emirates is the largest international carrier in the world and growing at an enormous rate,” Flight Centre managing director Graham Turner says. “In the short term it was a positive for them but we will see what happens in the long term.

“Are they just going to swamp Qantas [on routes] to places like Europe? You get into bed with a big player, the Goliath or the gorilla of international airlines, and that is one of the risks you might take.”

Joyce maintains the Emirates deal was “always a partnership of equals”.

“You go into these alliances knowing that you are going to get a benefit out of it, and they are going to get a benefit out of it, and you make sure going forward that both of you are happy with it.”

Vicious circle

The reality is that Qantas’ international division has become trapped in a vicious circle. It flies international routes with a fleet of aircraft that does not match the product standards of airlines such as Cathay Pacific and Singapore Airlines, and continues to burn more fuel than the competitors.

This means Qantas cannot attract the yield it did and has to charge lower fares than its competitors using less efficient aircraft that cost more to operate.

The numbers say it all. In terms of capacity and who gets the new planes, Jetstar is at the front of the queue.

Joyce has also closed routes or transferred them from Qantas to Jetstar to make them profitable.

With such a small international network and such low frequency, Qantas is becoming less relevant to Australians.

A study of Qantas’ routes show that over the past six years Qantas has dropped 22 international routes, including the Melbourne, Auckland-to-Los Angeles route and Perth to Hong Kong and added four new routes.

Most have gone to Jetstar, which has added 18 new international routes to its arsenal over a similar period of time. This week it announced it will shelve the Perth-to-Singapore route later this year following big losses.

But if the latest results are any guide, Jetstar – as the great white hope of the empire – has disappointed.

After years of talking up the potential of Asia, Joyce has this week decided to slam the brakes on Jetstar’s expansion in the region. Its Singaporean offshoot, Jetstar Asia, has made small profits at best almost a decade after Dixon declared that “this is going to be a very, very substantial airline”.

Now, Joyce has stopped Jetstar Asia’s growth, just as its competitors are about to surge in size.

Jetstar Japan has had to park planes due to delays in setting up a new base, while Jetstar Pacific has a troubled history operating in the murky world of Vietnam. The most recent joint venture, Jetstar Hong Kong, remains grounded almost two years after Joyce trumpeted its “first-mover advantage” in setting up the new airline in the Asian financial hub. Even with a helping hand from the flamboyant Hong Kong businesswoman Pansy Ho, daughter of Macau gambling tycoon Stanley Ho, it continues to hit brick walls.

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.

Jetstar boss Jayne Hrdlicka indicated on Thursday that approval was still a long way off.

It means Jetstar Hong Kong has had to store planes in France, and is incurring losses estimated by Macquarie Equities at almost $3 million a month.

Joyce insists the losses from the Jetstar offshoots in Asia – $29 million in the first half – “are tiny in the scheme of things; it is a small investment and they are in the start-up phase”.

“The big problem is domestic, it is not international, and it is certainly not Asia,” he says.

In the past six months, Jetstar suffered a massive deterioration, booking a loss of $16 million, from a $128 million profit previously. The domestic business posted a profit but something went radically wrong.

There is no question that aviation is one of the toughest industries in the world and Qantas is operating in an “unlevel playing field” due to foreign competition and the Qantas Sales Act, which caps foreign ownership at 49 per cent. Qantas is also saddled with 49 enterprise agreements covering 16 different unions, which makes it hard to compete with international rivals in Asia and the Middle East.

CLSA analyst Scott Ryall estimates the average salary at Qantas is about $100,000 a year. This puts Qantas’ total staff costs at about 24 per cent of revenue, which is high compared with Cathay Pacific (15 per cent) and Singapore Airlines (11 per cent). But this has always been an issue.

Joyce’s ghosts

What makes the current situation worse is the ghost of things past in the form of former senior executives who left the company when Joyce got the job and who keep complicating his life.

Gregg and Dixon got his blood pressure rising when they joined a consortium – twice – that was interested in taking control of Qantas after watching the share price fall to historically low levels.

It put the spotlight on the company, Joyce and the strategy and reopened old wounds as Gregg would have run the airline if the consortium had pulled it off.

But it resulted in a public spat between Dixon and Joyce in 2012. This caused a breakdown in relationships between Qantas and the country’s peak tourism body, Tourism Australia, which Dixon chairs. Joyce redirected tens of millions of dollars in funding from Tourism Australia to state bodies and called for Dixon’s resignation.

More than 18 months on, the scars remain. Tourism Australia has not bowed to Joyce’s demands and while Tourism Australia and Qantas have operational dealings, Qantas has frozen the tourism body out and they do not speak about other matters or opportunities.

Borghetti and Joyce also have issues.

Borghetti, who was the architect of the invite-only Qantas Chairman’s Lounge and strong brand and customer service, moved to Virgin after missing out on the job at Qantas. From the moment he took the job he has been a thorn in Joyce’s side as he set out to reshape the budget airline from a minnow trying to compete with Jetstar to a full-service carrier capable of kicking the butt of Qantas.

It put both men on course for a savage price war that has become as bitter as it has personal.

Airlines have a history of price wars. When Qantas launched Jetstar in 2004, it caused Virgin a mother lode of grief.

But the latest price war has become a battle royale.

Not even the latest losses will stop Joyce’s fight to the death with Virgin.

As one industry expert says: “If Joyce cut capacity and increased air fares by $5 a ticket, his profit would jump hundreds of millions of dollars.”

But on Thursday, Joyce made clear he would not back away from his key strategy of Qantas holding 65 per cent of the share of the domestic market.

Joyce wants to crush Virgin but Borghetti has lined up a set of government-owned shareholders and bought Tiger Airways to bolster his arsenal.

Joyce is looking for his own battalion, calling on the unions and the government to help his cause. He has called for a government-backed guarantee, a change to the Qantas Sale Act and a wage freeze.

Joyce is adamant that Qantas is blameless for its travails, and that he has the full backing of the board and his shareholders.

“There is nothing anybody in Qantas has done that has caused this issue,” he says.

Others might disagree.

Do you know more?

aferguson@fairfaxmedia.com.au

mosullivan@fairfaxmedia.com.au

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