Qantas - Some food for thought....

[Jack B]

Originally Posted by Owen H

same service standards.

In many cases expected to deliver a higher level of service! While at the same time going to work every day to know some PTVs will be out of action, passengers unhappy with "old" aircraft compared to what they had on Emirates etc

[Ash W]

But how can Qantas invest in all that new product if it is costing the airline too much money to run what they have and the competitors, both locally and overseas can do the same, if not more cheaper AND just as safely? Hence the issue that we have today.

[Owen H]

Other companies that Qantas competes with have costs too. Sure, some like Emirates are a lot lower. But AirNZ and CX do not have cost bases that are substantially below QF's. And they do not have the advantages QF has.

Except those advantages are not being exploited, and are being traded off to compete on price alone, something Qantas can never do.

If you compete on price, Qantas loses. If you compete on product, history, tradition and standards, Qantas can most definitely win. Its a shame that Qantas seems to be trying to compete on price alone.

[Ash W]

Originally Posted by Owen H

If you compete on price, Qantas loses. If you compete on product, history, tradition and standards, Qantas can most definitely win. Its a shame that Qantas seems to be trying to compete on price alone.

To compete on the criteria you mention above you need to charge more, which is not something the market is willing to do when they can fly others offering the same service, if not better for less. I also doubt anyone would pay more for history and tradition in particular.

This has been rather apparent on the international market for sometime, and domestically with Virgin Australia moving to at least match Qantas's service levels at a significantly less cost to the company, Qantas is left with NO option but to seek to reduce costs.

[Owen H]

Except thats not true. The market has been accepting a premium for those things for a long time, and continues to do so. Singapore Airlines doesn't undercut on most routes - they use their advantages to charge a premium. Cathay Pacific don't undercut on most services. These are carriers that quite successfully offer a service and product at a premium rate, and they do very well. Cathay in particular.

Qantas is the same. Passengers have chosen to fly Qantas over many other airlines on routes for decades, despite higher prices. That is due to loyalty, and those things that Qantas brings to the table that other airlines are unable to. Australian staff is a MAJOR component of that. Survey passengers as to why they pay more and still fly Qantas, and you'll find the results.

Qantas over the last 10 years has reduced their offering in those departments, by outsourcing its product and removing those little premium elements, and suddenly they're struggling. Funny that.

[Ash W]

Originally Posted by Owen H

Except thats not true. The market has been accepting a premium for those things for a long time, and continues to do so. Singapore Airlines doesn't undercut on most routes - they use their advantages to charge a premium. Cathay Pacific don't undercut on most services. These are carriers that quite successfully offer a service and product at a premium rate, and they do very well. Cathay in particular.

I am not talking about under cutting, I am talking about offering a competitive price (read not the cheapest) for the product and still being able to cover costs and yes return money to investors. Clearly Singapore and Cathay can do that and still return money to investors, but at present Qantas is struggling in some markets to do that (international) and domestically are facing the real possibility of loosing important yield which will make that market and the company as a whole struggle.

On international routes it is already happening. For years the European market has been in decline with a large number of passengers flying Emirates (~10 flights a day to Dubai and more importantly to many destinations beyond), Singapore (about same number of flights and onwards destinations), Thai etc. All quality airlines with good service, competitive pricing all at a lower cost to the airline, so better return to investors.

In someways I would blame the decline in Europe in the fact that the competitors can offer a 1 stop service to most of Europe, but with Qantas being in bed with BA, most European destinations are two stop, with a long flight to the far end of Europe then back tracking to main land Europe. If Qantas had a partner one hop from Australia with a large European network, such as Thai or Singapore then maybe they would have a fighting chance of taking share back from Emirates etc. But with Cathay as a partner and with Malaysian joining OneWorld both of whom serve less destinations in Europe than TG, EK, SQ then the chances of that happening soon are remote.

So that leaves Qantas to service directly a small number of routes in Europe, but again with a higher cost, so of course the return is going to be small. No one will pay a premium to cover that cost if the competitors are offering the same or more for less.

Towards the America's Qantas has had a hold of the market for a long time due in no small part to their superior product that many were willing to pay for. However with added competition (both Australian and US) now offering the same level of service at a cheaper price to the consumer and to the airline Qantas's share and more importantly their return in that market has dropped. I read once that the American market alone generated half the income for the international sector, so clearly loosing a lot of that dosh is hurting.

Originally Posted by Owen H

Qantas is the same. Passengers have chosen to fly Qantas over many other airlines on routes for decades, despite higher prices. That is due to loyalty, and those things that Qantas brings to the table that other airlines are unable to. Australian staff is a MAJOR component of that. Survey passengers as to why they pay more and still fly Qantas, and you'll find the results.

Qantas over the last 10 years has reduced their offering in those departments, by outsourcing its product and removing those little premium elements, and suddenly they're struggling. Funny that.

The key in your comment is they HAVE chosen to fly, meaning in the past. Think current loadings show that internationally many are now choosing to fly the competitors. You mention the loss of premium elements as a reason, to a certain extent that may well be true. However maybe stop and think for a second why the airline felt they needed to do that, and it will be apparent it was to reduce costs, not to be cheap but to remain competitive and to cover operating costs. If they didn't then maybe they may well be loosing money on those routes because loyalty will only get some many customers through the door.

The problem area though is domestic. For 10 years or so Qantas has been the only choice for the 'premium' market in Australia, and have been able to charge a premium for that service, especially at the front of the bus. Down the back they have been offering a competitive price with a better (?) service than that of the competitors, yet said competitors, including Jetstar have continued to grow. Sure Qantas's market share hasn't declined that much, but then again neither has it grown.

No doubt detractors will say that is because Qantas has channeled the growth into Jetstar, which is true, but yet again cost will be the reason why the growth has been directed that way. If it had been directed towards Qantas the return on investment would have been significantly smaller or non existent because Qantas HAD to chase the LCC end of the market.

Now with Qantas's major competitor finally evolving from an LCC into an almost full service carrier pressure will now be placed on the milk cow of Qantas domestic, the premium market. Made all the worse with Virgin Australia partnering with Singapore and Ethiad, who will no doubt start channeling their domestic connections passengers Virgin's way.

If Qantas were to loose even a small amount of the premium domestic market as predicted they will be in a whole world of hurt. So something must give BEFORE that happens, and sadly for some reducing costs is what is needed. After all if the competition is offering the same, if not better (with Australian staff too) for less and passenger numbers are falling then Qantas will be left with no option but to compete on price, which is not something they can afford to do at present so costs must fall.

There are many ways to reduce costs without cutting wages, which I don't think will happen anytime soon, nor actually do I think they need to. Things like new gen check-in, as much as we love to hate it, will help, and getting new fuel efficient aircraft such as the 787 will also help. However neither is enough, so clearly other area's need to be looked at, such as getting the work force to operate more efficiently, sending some work parcels offshore (just as ALL their competitors do) and yes giving work to Jetstar.

[Lee G]

Said like a true analyst, Ash.

Do you work in the banking or investment sector, by any chance?

[Jayden Laing]

Just found this on YouTube & thought it was quite funny.

http://www.youtube.com/watch?v=BZ3yq...layer_embedded

[Owen H]

I do not. Obviously airlines try to keep it pretty quiet...

I would imagine that CX has a cask that is lower that Qantas - but not substantially lower, which is the point. As you know (although others seem to question) it is entirely possible to compete without having the lowest cost base in the industry.

The next logical next question is of course why one airline has a higher cost base than another - and I'm betting that pilot and engineer costs are not a significant part of that. Leasing, tax rates, and in particular the aircraft type being operated will make pilot and engineer contribution look like peanuts.

[Ash W]

Originally Posted by Owen H

I do not. Obviously airlines try to keep it pretty quiet...

Whilst not an ASK, relative financial reports are freely available in company annual reports. Below is the report of Cathay Pacific. Page 26 is quite interesting, in particular the bit that shows the greatest operating cost to the company is fuel (about 1/3rd total costs) with staff coming in a distant 2nd at about half the cost of fuel.

http://downloads.cathaypacific.com/c...-report_en.pdf

Qantas also do the same. Here is there report, refer to page 47. This table show's Qantas's operating costs, with staff costs as their highest cost with fuel a close 2nd.

http://www.qantas.com.au/infodetail/...nualReport.pdf

So based on that comparison with Qantas labour and fuel take about 1/4 each of total operating costs, but at Cathay labour is about 1/6th and fuel 1/3 of total costs. Big difference I would say.