Qantas used to have more or less a license to print money. In the early part of the last decade its main domestic rival Ansett Australia had gone under. And it had strong pricing power on key long haul routes.
Come the latter half of the last decade, its international routes were hemorrhaging but a near monopoly domestically helped hide losses.
Qantas’ expansion in Asia, and its shift to a joint business venture with Emirates rather than British Airways, has helped shore up its international business to some extent (although mainline expansion in Asia has done less well than that of its low cost subsidiary). As has their cutback in routes offering international first class, and offering of more seats on the same planes as a result. But an increasingly competitive domestic market has caused Qantas to lose substantial money overall (hundreds of millions a year).
It has higher costs than Virgin Australia, and both airlines are expanding domestic routes rapidly despite insufficient demand to support both airlines’ flights.
It could raise cash by spinning off its frequent flyer program (which it has looked at in the past) or selling its Jetstar subsidiary, but that wouldn’t change its underlying business problems.
And they’re looking to the government for debt guarantees (which would also just mean the ability to sustain more losses, hoping that circumstances change rather than doing something about it) and to life foreign ownership rules (Australia already allows 49% foreign ownership, compared to 25% in the U.S.).
Qantas argues state supports are fair because Virgin Australia is majority owned by Singapore, Air New Zealand, and Etihad and can sustain losses because the airline’s parents are themselves subsidized.
Most likely though is cost cuts. Virgin Australia has a lower cost structure, so doesn’t lose as much as Qantas does at the same ticket price point.
Job cuts — between 1000 and 5000 positions — are expected following tomorrow’s announcement of financial results. It’s hard to invest in a premium product, though (even if that maximizes revenue) at a time when you’re taking away money from your employees unions. The optics of fine dining and top notch wines, and a spa on the ground, are tough in a unionized environment. So I have to think that if they enter a period of cost cuts that passengers will feel the pinch as well.
Big changes coming to Qantas, with tomorrow a flash point and more news to come. The frequent flyer program is profitable. They have assets. But they’re bleeding on their airline operation amidst heavy competition and high costs. And they’re going to make changes.
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