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Qantas CEO Speech - Qantas: Agenda 2011

Melbourne, 03 February 2011

The folllwing speech was delivered by Qantas CEO, Alan Joyce, to the Melbourne Press Club today.

Thank you. Today I'd like to kick off the Qantas year by taking you through some of our key agenda items for 2011.

Of course we will be building on progress made last year, when:
• We introduced our groundbreaking Next Generation check in.
• Our domestic and regional business segments performed strongly.
• We consolidated Qantas Frequent Flyer. It now has 7.5 million members and penetrates half of
all Australian households.
• We grew Jetstar aggressively at home and abroad.
• We trebled our underlying profit in our 2009/10 annual results, and
• We celebrated 90 years in business, a milestone achievement.

This year, as part of our broader strategy, we will be focused on:
• Navigating the recovery
• Positioning the Group in Asia
• Securing the future for Qantas International
• Engaging our workforce, and
• Strengthening our brand

Navigating the Recovery

I'll begin with the recovery.

The Qantas Group is a portfolio business. Our premium and low fares airlines, loyalty program and freight business all contribute to our success. Together the two airlines form a natural hedge for our business. They help us succeed through the upswings and the downturns.

Now we are in recovery but, like many of our customers, we remain cautious about prospects ahead. US unemployment is still above 9%. It is not clear to what extent the European debt crisis will affect European growth. And while Chinese growth continues to be good news, China faces a big challenge in managing its own internal asset bubbles and inflation concerns.

The aviation outlook reflects this mixed scenario. Globally there has been an improvement in revenues, but the International Air Transport Association is cautious about forecasting a smooth upward path for aviation. There are concerns that a weakened Europe will offset strong Asia-Pacific growth. Aviation as an industry is struggling to deliver sustained competitiveness. Consolidation is still too difficult. And there are short and long term challenges in managing security and the environment.

Fuel prices are a major issue. Crude oil prices are currently trading at their highest levels since the global financial crisis. The Qantas Group has a big exposure to fuel prices, although exchange rate movements partially offset their impact. But over the past four months, the Australian dollar has appreciated by 6%, while jet fuel prices rose by around 24%.

Today we announce an increase in fuel surcharges for Qantas International flights of between $20 and $50 one-way, the first such increase since January 2008. This follows a move by other airlines, including Singapore Airlines and British Airways, who have increased fuel surcharges this year. We don't do this lightly, and it comes after four fuel surcharge decreases over the past three years.

Jetstar is committed to offering the lowest fares, and will address the fuel price issue via selective changes to air fares and increases in ancillary revenue, including baggage charges. As a Group we will be monitoring the situation, and we cannot rule out further changes in the future.

The Australian economy is performing well, relative to the rest of the globe. Of course, the economic impact of the Victorian, NSW and Queensland floods- not to mention the devastating impact of Tropical Cyclone Yasi - is not yet clear. The human cost has been terrible and our hearts go out to all those affected.

In economic terms there will be a stimulus effect as reconstruction gets underway. There may be a negative impact on mining, farming and agriculture. And retailers are reporting a negative impact on discretionary spend. Finally there is the question of inflationary pressures in the broader economy with food and skills shortages and so on.

Now to the Qantas Group. Domestically we are strong. We are holding and building upon our 65% market share across our two airlines, which are the most profitable in Australia.

Business and corporate travel has rebounded for us. Overall domestic capacity has increased by more than 10% with the Qantas Group a major participant. In the leisure market, some have walked away, providing a major opportunity for Jetstar as the leading low-fares carrier.

With Qantas domestic we are seeing the results of investing tens of millions of dollars to upgrade our offering to our most valued customers. We launch our Next Generation Check-in here in two weeks, we have completed a lot of work upgrading our terminals and lounges, and we are aligning our domestic and international business product, so that our business customers enjoy a consistent offering at home and overseas.

QantasLink is the quiet achiever in the portfolio. With 42 turbo-props, and 11 B717 jets, QantasLink is part of life in regional and rural Australia, servicing 54 destinations. An additional seven aircraft were ordered at the end of 2009/2010 - with the first to be delivered shortly. I don't know how many of you have flown a Q400: it's such an efficient aircraft that on any given route we can outperform our competitors.

Queensland and the mining industry growth have been very important to recent
QantasLink success, and we have been doing good business in NSW. We recently acquired Network Aviation to build our presence in the West Australian resources industry and the fly-in-fly out business.

Jetstar in Australia and New Zealand is surging ahead, with 14 extra A320 aircraft last year contributing to a fleet of 50 narrow body aircraft, and projected growth of more than 30% in the Australian and New Zealand domestic markets this calendar year.

Qantas Freight is performing solidly coming out of the economic downturn, although it was affected by the grounding of the A380s and the flow on effects of that. It operates four 737 freighters domestically, three dedicated 747s, plus a new Qantas Freight-branded 767 freighter across the Tasman, which has 40% more capacity than the previous aircraft.

So our Qantas Group domestic operations are strong today, and well-positioned for the future.

Positioning the Group in Asia

Now to Asia. We all know that Australia's future is tied up with Asia, and with China in particular. Six of Australia's top ten trading partners are in Asia. But if we are to make the most of this incredible opportunity we need a broad approach that embraces trade and investment, tourism and culture, research and education.

Strong aviation links will play their part in building these broader and deeper ties.

The Qantas Group plans to contribute to Australia's Asian future, and also benefit from it. We are already laying the groundwork with Jetstar.

Jetstar has an aggressive pan-Asian strategy with huge potential. It is already Asia's largest low cost carrier by revenue. By next month, Jetstar will be flying from Singapore to 25 destinations in 13 countries, including seven ports in Greater China. Jetstar Pacific serves seven destinations in Vietnam's high growth economy of 87 million people.

Jetstar's approach will be to sustain its fast growth while keeping costs down; build up its brand strength in Asia; and develop its interline and code-share arrangements, with oneworld™ carrier Finnair its 21st and latest tie up.

But it is not only Jetstar that has a lot of potential in booming Asia. We think premium airlines will also have a role to play.

Asian consumption is 70% of the US today but will rise to 140% of the US over the next ten years. Substantial portions of the Chinese and Indian populations already have significant purchasing power. Last year 56 million Chinese people travelled abroad, with the Chinese outbound travel market forecast to grow at around 16% per year until 2020. India too has a young and affluent consuming class.

We are looking closely at all opportunities to participate in the Asian opportunity and benefit ourselves, our customers and shareholders, and Australia.

The long term future of freight will also be about Asia. China is obviously key, but Qantas Freight is doing business in Singapore, Bangkok, and Shanghai and just added a Seoul-Miami service. Qantas Freight is also now marketing Jetstar Asia belly-space.

Securing the Future for Qantas International

Now to Qantas International.

Obviously the incident last year and the subsequent grounding of our A380 fleet was a major setback for us. But the issue has now been fully resolved to the satisfaction of the manufacturer, Rolls-Royce, all the authorities and our own experts.

This was the engine manufacturer's issue, and we are currently in dialogue with them.

Today we are back to full flying. We have every confidence in the A380 and the fleet will grow to at least 11 by August this year. That will allow us to support the great demand for the A380 from our customers on both our London and Los Angeles routes.

In September we commence our fleet reconfiguration program to translate those premium A380 features across our B747 fleet. Our aim is to have a consistently excellent international offering in-flight and on the ground.

We are now looking to get our first B787 for the Group towards the end of next year. It is going to be great for our business, and for our customers. It will help us simplify our fleet across both our airlines with significant fuel and maintenance efficiencies. Our customers will enjoy the improved flying experience with bigger windows, lower cabin pressure, and more direct flying to more destinations.

I have seen some speculation that Qantas leaders made an error back in 2000 and 2005 by committing the Group to the latest and best aircraft types in the A380s and the B787s. Don't believe it. This company's greatness is based on being the first with the best aircraft. We were the first airline outside the US to fly the B707s and enter the jet age, and we're proud to be leading the way again today.

Our network continues to grow, giving our customers better connections and more destinations on their regional, domestic and international travel. We recently announced the introduction of direct flights to Dallas from Australia in May. A great opportunity for Australians who want to make the most of the high Aussie dollar in the USA.

From a customer perspective, therefore, we are very confident in the quality of our international business. But the fact is, in a financial sense, we are falling significantly short of where we should be.

Capacity has flooded into Australia from China, the Middle East and elsewhere. To give you an idea, total growth in direct aviation capacity to Australia between 2003 and 2009 was 39%. Meanwhile total inbound passenger growth was only about 10%. So that tells us these carriers are not growing the market, but simply taking existing demand. And the result is that Qantas International market share has fallen from 35% to 20%. Meanwhile the majority of our Qantas assets are tied up in this part of the business and it absorbs the majority of our capital expenditure.

As an end-of-the-line carrier, serving a market of 22 million people, in a marketplace flooded with so much capacity that our competitors aren't even using their full quota, we face severe limits to growth.

If we continue on our current path, there will be a real question mark over the viability of Qantas International. And I have no intention of letting our flagship business decay through lack of action.

So we have set up a task force headed by one of our executives, Lesley Grant, to explore options that will invigorate the business, generate new and profitable markets, and protect our jobs and assets. Qantas is a great national and international airline. It is time we looked at opportunities to become a great global airline.

Engaging Our Workforce

In all that we do, our workforce is central to our success. Bringing out the best in everyone at Qantas is a priority.

The Qantas workforce is 35,000 people, 93 per cent of them based in Australia.

There's a bit of a myth developing that we have sent all our engineering and maintenance offshore. Tell that to thousands of Qantas engineers! Frankly, this myth wouldn't worry me if it were true because all the world's other great airlines do their maintenance outside Australia. Aviation is a global high-tech industry, and there are centres of engineering and maintenance excellence around the world.

But the fact is that last year we undertook 93% of all our maintenance in Australia, and over 80 per cent of Qantas heavy maintenance. Far from it disappearing offshore, we have an engineering community of more than 5,500 people, including 357 apprentices in training and a further 60 due to commence training this month.

So we actively invest in the long-term future of onshore maintenance and engineering, just as we invest in the training and skills maintenance of our pilots, cabin crew and others.

This major investment in our people pays off in the renowned quality of our skills.
But it is also reflected in the low attrition rate which means we don't have the high turnover costs faced by some other companies.

This year we will be negotiating a number of major industrial agreements. Like many Australian companies we are looking at a tightening skills market and this is putting pressure on many industrial frameworks.

Our aim will be to bring our people with us as we continue to innovate and improve our business.

Strengthening Our Brand

Finally I want to say a few words about the Qantas brand.

Qantas was certainly hurt by the events of last year and we know there is rebuilding to do. We never take the loyalty of our customers for granted. Every day we work hard to earn that trust.

Having said that, our research shows that our customers have been very understanding of the events around QF32 in November.

As you know, we reacted to the situation in accordance with our values, by putting safety first and grounding our A380 fleet. We also made sure that we communicated openly and honestly with our customers through all available channels. We wanted our customers to know exactly what was happening and why.

As a result of this approach, we have seen our brand rebounding quite quickly. Our customers understood and appreciated our safety-first approach. And they recognised the great performance of Qantas people in the air and on the ground.

Any good business, from the local corner store to the biggest corporate, has a role to play in its community. It's about being part of the neighbourhood. Well, Australia is OUR neighbourhood. Qantas is there when Australia needs us, at home and overseas. With practical contributions to flood rescue and relief here in Victoria but also in NSW and Queensland. We are evacuating Australians from Cairo on behalf of the Australian Government, and providing free flights to Australia. We will do all we can to support our fellow Australians in the recovery post-Cyclone Yasi.

We have the resources, the skills and the know-how. And we always stand ready to help.

Conclusion

Let me conclude. The Qantas Group has made an annual profit every year since 1995, a claim only two other major full service carriers can match: Singapore and probably Emirates, both operating under very different models.

We have new aircraft arriving, with many more to come. Our Australian domestic base is very sound. We have a skilled and stable workforce. And we are laying the groundwork to maximise the enormous opportunities of Asia.

There will no doubt be challenges ahead. There always are.

But the underlying strength, resilience and potential of the Qantas Group is the real story. Our portfolio allows us to succeed no matter what aviation throws at us - from economic cycles to fuel price rises and even natural disasters.

Our portfolio sets us apart from the competition, and gives us tremendous potential for the future.

We'll continue to unlock that potential in 2011.

Issued by Qantas Corporate Communication (S12011)
Email: qantasmedia@qantas.com.au