The Modern Qantas: Qantas Chief Executive Officer Geoff Dixon, Australian Institute of Company Directors
Brisbane, 24 November 2008
In a few days I will be stepping down as CEO of Qantas and I must say upfront I have been immensely fortunate to have one of the great Australian jobs.
I am not normally one for looking back, but if ever there were time to reflect it is probably now, after eight years as CEO, 14 years with the company, and 20 years in total in the Australian aviation industry.
The global environment for aviation today is extremely tough. Many airlines have gone broke this year due to fuel price rises, and more are going to be under enormous pressure due to the credit crunch and the massive economic slowdown.
Qantas is not immune from this upheaval, but we are in a relatively strong position. We have a very sound business; probably the world’s most fuel-efficient fleet progressively coming into service; an emerging portfolio of viable businesses; and not one, but two of the top airlines in the world as measured by the Skytrax global survey of passenger opinion. A rare combination of attributes indeed!
But this solid position was never guaranteed. It is the result of a series of key decisions made over time. Hard choices were made, often against considerable opposition. Other paths could have been taken, and the company today could have looked very different.
Today as Qantas confronts, yet again, a highly challenging operating environment, I want to look at some of the key turning points and decisions that have created the modern Qantas. The theme of all these decisions is competitiveness - the drive to create a competitive aviation environment in Australia - and the drive to make Qantas competitive in the world.
And of course, through all the changes, there has also been a great cultural continuity stemming right back to the original days of Qantas here in Queensland. This culture is characterised by constant innovation in product and service, leadership in aircraft purchase, over-riding commitment to operational excellence, and the highest standards of community citizenship.
Modern Qantas is the handiwork of many people, including successive Australian governments, Qantas boards, my two immediate predecessors John Ward and James Strong, and many thousands of Qantas people at all levels in the company. So I certainly do not claim credit for all that has been achieved, not at all. But I am certainly very proud and satisfied to have been part of this story.
The first turning point in our modern history was part of a set of broad deregulatory decisions made during the 1980s and early 1990s, when the government decided to liberalise the Australian aviation market, providing greater competition and choice for consumers. At the same time, the government also made the far-sighted decision to enable this country to have at least one strong, viable airline - allowing the international carrier Qantas to merge with the domestic carrier Australian Airlines.
There was a lot of opposition to this decision - but it was an absolutely critical moment which allowed Qantas to begin a process of transformation - upgrading the product on key business routes, upgrading and redeveloping domestic terminals and lounges, redeploying aircraft, and creating a genuinely attractive frequent flyer program.
The second turning point was the decision to privatise Qantas in 1995. Again, many people opposed the national icon going into private sector hands. Perhaps they forgot that Qantas was started by three energetic entrepreneurs right here in Brisbane, 88 years and 8 days ago. But privatisation was an essential decision, giving Qantas access to the capital that the government was quite rightly no longer prepared to invest in a single company. The process was conducted in two stages - with an initial trade sale of 25 percent to British Airways in 1993, in order to set Qantas up with a strong industry partner and increase its value, followed by the full public sale in 1995.
A concession to the fearful opponents of privatisation was the Qantas Sale Act, which limits foreign investment, particularly foreign airline investment, in Qantas. Now more than ever it is clear that the act is out of date.
As the 20th century ended, and as a fully commercial enterprise, Qantas had to face another key decision - what to do about its ageing fleet. In the year 2000 Qantas announced a 10 year, $9 billion program to buy 31 aircraft, including 12 of the huge Airbus A380s.
This fleet commitment was massive at any time in history, but to many people it looked way too ambitious after that week in September 2001 when aircraft were used to attack the United States of America and Ansett collapsed.
As a result of these twin crises both Qantas and the Australian government had to make some quick and hard decisions.
First of all, hundreds of thousands of people were stranded, under pressure, far from home. Qantas made a massive effort to remedy the immediate problems and I am very proud of our achievements in that period.
More significantly for the longer term, Qantas decided not to buy Ansett as a going concern even though the price was only one dollar. The government decided not to prop up a failed company and let the market take its course, recognising that there was now a very open regulatory environment that was conducive to new players emerging quickly.
And, at a time when other airlines were shedding capacity, Qantas chose to be optimistic and forward-looking, acquiring 15 B737-800 aircraft to take advantage of the vacuum caused by the Ansett collapse. Today we are now in the process of expanding the B737-800 fleet to 69, with 38 already delivered. And we kept on going. In 2005, for another $13 billion, we initiated the order for 65 Boeing 787 Dreamliners with options and purchase rights for a further 50. In total we have spent more than $12 billion on new aircraft since 2000, and expect ongoing outlays of around $3 billion a year.
This means that Qantas has committed to the largest fleet order book by any non-government-owned airline in the world. We could have watched and waited. We could have been put off by global events. But then we would have been waiting many, many years and potentially paid a far higher price to get the best and most fuel efficient aircraft into our fleet. Instead, the fleet renewal program will include the retirement of more than 100 aircraft and the creation of probably the most advanced aircraft fleet in the world. We recently ordered a further eight A380s, taking our commitment to twenty.
It is a measure of the extended timelines in aviation that James Strong was the CEO who presided over that initial decision - and as I leave, eight years later, only the first of our 20 A380s has been delivered, although two more will arrive by the end of this year. And I have to say, our A380 is already getting rave reviews from our customers.
The decision to buy some new aircraft was not of itself the major turning point - it was something that had to be done - but the size of the investment, the timing of it, and the big call with new aircraft models, will shape the Qantas group for decades.
By 2003 we were on a growth path, but costs were also growing and serious action was required. We had no option but to accelerate our change agenda….. So we established the Sustainable Future Program with a target of $1.5 billion in efficiency savings. Then we doubled the target to $3 billion, with our then Chief Financial Officer Peter Gregg playing a key role in driving the process. This year we achieved that ambitious target.
Sustainable Future has been a great success precisely because it was put in place before the need for it became critical.
It has never been about quick, short term savings that could do long term damage. Instead we looked for, and found, savings in all areas of the business – in the growth of the online sales channel, process changes in engineering, improved ground handling productivity and international fare simplification.
It was all about working smarter and more productively - permanent changes that provided lower costs every year. And we have achieved our goals on costs with very little industrial strife, no compromise with our commitment to operational excellence, and no drop in service to customers. In fact, our high quality service continues to be recognised by leading international customer surveys and industry awards.
The next big decision was driven by a rare transition in aviation. A completely new airline model had been invented, based on the premise that a large group of potential customers were out there, but without the right kind of offering to meet their needs. Within a few years, low cost airlines like Ryanair had created many happy new customers for the industry but also cut heavily into the level of demand for the established airlines.
At Qantas we could see that the Australian market, with its very open regulatory environment, would soon attract such a successful competitor – and indeed, Virgin Blue started up in 2000 and listed on the Australian Stock Exchange in 2003. The broader Asian market was also looking vulnerable as new airlines appeared and more were proposed.
So Qantas acted quickly by creating Australian Airlines, a leisure airline focused specifically on Asian tourism. As it turned out, that focus was not broad enough to cope for the rapid changes to the structure of aviation. We did not lose money but it became clear that we needed to take a more comprehensive approach.
In 2004 we took the huge step of adopting a full scale two-brand strategy with Jetstar as our low cost carrier. No other established airline had ever managed to make such a strategy work (we were told we couldn’t do it either). But our early, careful, move with Australian Airlines had taught us some valuable lessons and the timing for Jetstar was perfect. The Australian and Asian economies were growing strongly and regulatory limitations in Asia were being relaxed.
And we also had the wisdom to put a very talented aviation executive, Alan Joyce, in charge of the Jetstar operation.
Again, we could have chosen to sit back, and not take this path. The critics certainly took the view that an established airline like Qantas could not create the right culture for low-cost success.
But we made the right call at the right time - and put the right leadership in place - and now the two brand strategy is absolutely central to the future of the Qantas group. It gives us access to a much broader range of customers than Qantas alone could ever have achieved. It provides great flexibility in managing routes that may become marginal or unprofitable for Qantas, but are very good for Jetstar.
If we had not created Jetstar, virgin blue would have caused huge problems for Qantas in the domestic market, and entry for us into Singapore and Vietnam through equity arrangements would have been more difficult. The group would now be smaller and much less profitable.
The last decision I want to mention came in 2004 when we launched what we call our segmentation strategy. By establishing freight, holidays, engineering and loyalty as separate business entities we have been able to do two things: identify the real costs of each operation more accurately than ever before; and identify and pursue new avenues for growth. Management can now allocate capital to areas of the business that are most likely to produce the best return, and each segment is better able to attract new customers from outside the group and therefore grow more quickly.
We have now completed the establishment of the Qantas Frequent Flyer program and Qantas Freight Enterprises as stand-alone segments. For the first time our annual results provide separate disclosure of their profitability. And this year Qantas Holidays joined with Jetstet Travelworld to create one group with three of the strongest brands in travel.
Each of the decisions I have mentioned changed the company. None of them was inevitable. Other options were available, including the options to delay, defer, or do nothing. Instead, collectively, they have brought Qantas to where it is today – strong, viable, and certainly more sustainable as an enterprise. But of course, the challenges, and the work, never end.
The next critical turning point for the company will be one for Alan Joyce, my successor. The aviation world – as much as the world around aviation - is under great stress and changing rapidly. The future of aviation will not and cannot look like the past. For years now I have been saying that airline consolidation is an inevitable part of the industry’s future.
For Qantas, consolidation is highly desirable. It is in our interests to be at the leading edge of efforts to build a global airline grouping. This will be the way to preserve the best of Qantas, while providing an expanded network, delivering new avenues for revenue growth, and creating increased scale and sources of efficiency.
Consolidation will complete the modernisation process begun back in the early 1990s. Back then the Australian Government gave Qantas the opportunity to access investment capital to secure its future as a great Australian company. Now Qantas needs to be able to form the partnerships necessary to become a strong global company.
Qantas will certainly need the understanding of the government, the parliament and regulators to achieve this. But in return, Qantas will remain strong and stable, continuing to employ many thousands of Australians in good jobs at home, while carrying out its many responsibilities to the Australian community. The red kangaroo will continue to fly high.
Decisive actions at the right times have enabled Qantas to grow strongly since privatisation, and to maintain reasonable profitability over all of the last eight difficult years. We have made major transformations in virtually every area of operations.
Qantas is now a much bigger company than it was, around the tenth largest airline in the world, with over 200 aircraft and carrying nearly 40 million passengers a year. It is also leaner, more flexible and offers some of the best airline services in the world.
The history of Qantas, and the reason it is successful today – is because it has never run away from the future. Instead it has always sought to shape it.
Here in Brisbane, in the state where it all began over 88 years ago, I remain extremely confident that the same decisive, forward-looking spirit of Australia will continue to prevail in the years to come.
Issued by Qantas Corporate Communication (Speech)