Alan Joyce Speech: Flying In Crosswinds

Melbourne | Published on 1st July 2009 at 10:43

Address by Alan Joyce, Qantas Chief Executive Officer (opens in new window)
The Committee for Economic Development of Australia
Langham Hotel, Southbank, Melbourne
27 May 2009

Let me begin with a stark reality.

The current global downturn is a crisis for the aviation industry. It is certainly the worst
environment that I’ve seen in my 21 years in the airline business.

Leading airlines like Singapore, Cathay, Lufthansa and Air France/KLM have all recorded
quarterly losses over the course of their trading year. British Airways has announced its first
annual loss since 2002. Over the past 15 months, 40 airlines have gone under altogether.

In mid-April, Qantas revised downward our 2008/09 profit forecast – and announced a set of
decisive measures to deal with the crisis. We expect operating conditions to remain
immensely difficult for the foreseeable future.

So, we are making the hard decisions. We have made capacity cuts, we’ve grounded some
aircraft and put them on sale.

We have deferred aircraft orders and frozen capital expenditure.

We are also reducing labour costs, using tools like part-time work, job-sharing and leavetaking
to minimise job losses wherever we can.

Qantas does not have the advantages that some of our competitors enjoy. We are not
government owned. Our activities do not form part of a national strategic agenda. Australia
is not an aviation hub.

But we do have two of the world’s best airlines in their categories in Qantas and Jetstar.
This gives us the capacity to mix and match our offerings to meet and stimulate customer
demand.

We have maintained a strong balance sheet and an investment grade credit rating.
We have successfully gone to the market to raise more funds.

We have financing facilities in place to cover our aircraft purchase obligations to October
2010. And we have strong liquidity with more than $3 billion in cash.

So we are well prepared if the economic “glimmers of hope” turn out to be false dawns, and
the downturn extends for some time.

And we are positioning ourselves to grow and prosper when things do improve.
During the last growth cycle, demand for premium travel drove high returns for Qantas
International in particular.

Premium travel has now slumped, but Qantas Domestic and QantasLink are still performing
solidly for us.

And Jetstar is able to respond rapidly as demand switches to low cost travel and travellers
take advantage of new routes.

Frequent Flyer is Australia’s leading loyalty program with 5.5 million members and more than
400 partners.

Next month our Woolworths partnership goes live, which will increase our market penetration
significantly.

And our Freight and Jetset Travelworld businesses are focused on being fit for the future.
Ours is a portfolio business: we really are the Qantas Group. It means we can use our scale,
skills and flexibility to manage the present volatility.

Business stress certainly drives short-term change.

But we are not distracted from our long-term vision of having the best premium and low-cost
airlines able to deliver on behalf of our shareholders.

We will achieve this by ensuring that the Qantas and Jetstar brands stay strong, and by
matching the right aircraft with the right configurations to the right routes.

Safety is our number one priority and underpins all that we do.

In terms of our customers, our goal is nothing short of excellence.

Qantas has invested $1.7 billion in new product over the past five years, including lounges and
aircraft interiors. All our executives, and now about 20,000 staff, are being trained through our
new Centre of Service Excellence.

So far this year, an average of 88 per cent of Qantas domestic flights are taking off on time.
The figure would be higher but for some recent difficult weather around the country.

Qantas international on-time performance has been steadily improving since last year’s
industrial disruptions and we are now on track to post our best monthly on-time performance
in six years.
What is really good news is that the level of customer satisfaction with Qantas in 2009 has
improved significantly and is now at its highest level in five years.

But we equally know that our long-term competitiveness depends upon achieving maximum
operating efficiency.

We have now taken out 90 senior management positions and we are in the process of
removing 500 more management-level positions to make us a flatter, faster and more
accountable organisation.

We can do this without compromising quality because we are finding ways to simplify and
streamline, through process improvements across the organisation.

We are modifying our segmentation program, by which we set up businesses as individual
segments to service third parties.

In cases like Qantas Frequent Flyer and Freight, segmentation is working well for us.
But we’re now moving engineering back under the Qantas Airlines banner, with the primary
intention to service Qantas.

That means we can remove overheads in terms of accountancy, management and marketing.
We believe this approach will retain the strength of the portfolio model, while lowering costs
within a more traditional airline structure for Qantas mainline.

We are also energetically pursuing back-of-house efficiencies so that we can continue to
invest in outstanding product and service for our customers.

To take one example, the Qantas Group spends around 3.5 per cent of our revenue on
information technology.

Jetstar spends less than one per cent of its revenue on information technology – and it has
superior systems because they were designed for a start-up carrier.

So in our IT arrangements we’re looking at creating a more responsive culture, with a shift to
high value, critical in-house capabilities, supplemented by outsourced services to deliver
simplicity and higher productivity.

Qantas Shared Services is another instance where we have been driving down the cost-base
while improving services to staff, culminating recently in a prestigious Award for Best
Australasian Shared Services Operation1, with our Shared Services Executive Manager,
Suzanne Young, named industry thought-leader.
1 Shared Services and Outsourcing Network 2009 Asia Pacific Conference

And we have now put in place a program to extend our internal financial disciplines and
process improvements right along our supply chain.

We have recently gone to major suppliers across all parts of our business.
IT and telecommunications vendors, certainly, but also airports, providers of uniforms,
crew accommodation and engineering spare parts among others.

With all our vendors, we are looking at ways we can, together, drive down costs and share
the savings.

We are working on a series of mini-projects, challenging ourselves and our suppliers to find
process efficiencies that really enhance the quality of the business.

And there’s certainly one area of our business where we can claim a reputation as a marketleading global buyer.

In a month Qantas celebrates the 50th anniversary of the arrival of its first jet aircraft, the
Boeing 707.

We were the first non-American customer for that plane and of course it ushered in a great
new era of travel.

Half a century later Qantas remains an influential aircraft buyer whose purchasing decisions
can lead the broader market.

Our approach is to combine an appetite for innovation with rigorous technical reviews
and careful commercial arrangements to give us maximum flexibility.

During this downturn, as a major aircraft buyer, we have been able to enter into constructive
discussions with manufacturers about purchase deferrals.

But our fleet renewal program continues, and our fleet will progressively become younger,
greener, more efficient and easier-to-maintain, and offer latest generation in-flight product for
our customers.

So we are using our purchasing strategies to manage the short-term downturn, while paving
the way for long-term success.

Another key area for us is airports because Qantas pays out more than $700 million each
year in airport charges, property costs, licenses and staff car parking.

The larger Australian airports generate massive returns from their non-aviation revenues like
car parking, duty-free sales and retail outlets.

But of course these revenues depend upon airlines enticing the customers in.
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Now, like other airlines, Qantas is discounting heavily to stimulate travel, especially on our
international routes.

But these low prices that keep customers buzzing through airport terminals are not
sustainable over the long term.

We need airports to become partners with us in reducing overall costs, and we have limited
leverage given that most have a monopoly advantage.

Of course, we appreciate that many airports, particularly privatised airports, have big capital
burdens that require servicing.

We understand this because big capital investments over long lead times are a constant and
challenging reality for airlines.

We are certainly having constructive discussions with various airport partners.

The Gold Coast is an example, where the owners have worked hard with us to develop a
strong and cost-effective base for Jetstar’s international operations.

They’ve been responsive and sensible about keeping operating costs low because they can
see the long term benefits.

Recently Melbourne Airport’s proprietors have also been helpful, proactively working with us
to reduce the cost of our operations.

But so far no major airport has agreed to lower its charges in an effort to cooperatively
stimulate passenger demand.

Worse, we are still getting proposals to increase leasing and staff car parking charges
significantly.

Qantas, and for that matter, other airlines around the world, operate at relatively low operating
margins.

Contrast that with the operating margins of the largest Australian airports: