The Global Australian: Qantas in the New Era. Qantas Chief Executive Officer Geoff Dixon, American Chamber of Commerce in Australia
Melbourne, 29 October 2008
First of all I would like to say how pleased I am to be here with the American Chamber of Commerce today. Less than ten days ago we took our first A380 passenger flight to Los Angeles - and it was fantastic to be met by such a warm reaction. Of course, there is no better place than Los Angeles to premiere a blockbuster like the Qantas A380 - it is really a step change in technology, style and comfort...I hope you are all booking your tickets.
Today I want to talk about a new era that is unfolding - for aviation and for Qantas. And I want to set out how Qantas needs to be positioned in this new era, if the company is to secure its future as the great global Australian airline business that it can, should and must be. And it is a timely subject.
First of all, as you probably know, Qantas is about to have generational change in leadership, with Alan Joyce taking over as Qantas Chief Executive Officer in a month's time. I have thoroughly appreciated my time at Qantas, and I am proud of what has been achieved, but now it is time for Alan...I know he is eager to get on and lead the next phase in the Qantas story.
Second, we are about to see a once in a lifetime change in long-haul flying. Our first Qantas A380 is big - but in fact it is just a small part of a much wider story. It is perhaps not widely understood that Qantas right now has the largest order for new aircraft of any airline in the world - $35 billion dollars worth of orders in fact, at list prices. Nor is it widely recognised that 65 per cent of Qantas assets are deployed internationally. So we have a vital stake in the form of the global aviation industry as it rapidly evolves.
And thirdly, the global events underway are a bit like a slow moving earthquake, exposing cracks and fissures, laying waste to established landmarks and reconstructing the landscape forever. No industry is unaffected. In the case of aviation, the crisis is vividly exposing the weaknesses of the current global model. And accelerating the inevitable push to a new aviation world order, with airline consolidation as one of its main drivers.
The plain fact of the matter is that the present aviation model is not working as it should. It is based on international regulations that are 60 years old, a persistent global over-supply of aircraft seats, and therefore a failure of most airlines around the world to achieve acceptable returns for their investors. The largest airline in the world still has less than five percent of the market.
The head of the International Air Transport Association is an eloquent Italian named Giovanni Bisignani who circles the globe entreating governments, regulators and airline managements to face up to this reality and address the urgent need for modernisation. His vision is for airlines to obtain greater commercial freedoms, while recognising that governments must retain responsibility for providing a level playing field and sensibly regulating safety, security, competition issues and environmental standards.
This does not seem too much to ask, particularly now as the current crisis accelerates the long standing imperatives for change in the global aviation context.
In aviation, the turmoil began in the second half of last year when a major hike in the fuel price tipped the balance for many precarious airlines...No less than 26 airlines have gone out of business as a result of the current financial crisis and global economic slowdown. Oil prices have now dropped back but, of course, demand is weakening and more airline collapses appear likely. Many of the surviving airlines face sharply lower profits that will not provide an adequate return on capital invested.
No airline can be immune to the upheaval taking place.
At Qantas, we have certainly seen a deterioration in booking intakes, particularly in international markets, for travel over coming months. Consumer confidence has been dented. Exchange rate fluctuations also appear to be reducing demand and overseas holidays have become relatively more expensive for Australians but, at this early stage, we have not seen an offsetting lift in inbound demand.
We reacted quickly to the change in operating conditions earlier this year by suspending recruitment and by reducing capacity and, as a consequence, jobs.
Fuel is still a major concern and despite recent movements in fuel prices and foreign currency exchange rates, we still face an increase in our fuel bill of approximately aud1 billion this financial year compared to last year. This figure is changing - significantly - by the day...Four months ago, the expected increase in this year's fuel bill was $2.6 billion and we cannot be sure what it will be tomorrow.
However, even with these very serious challenges ahead, there is no doubt that, relative to our aviation peers, Qantas is extremely well placed to get through the present crisis...We have fought hard to achieve this strong position through a lot of work and a consistent readiness to change the way we do things.
We have spent years finding efficiencies to bring down our underlying cost base.
We have made major and continuing investments not just in fleet, but in product and in training...Qantas was once seen as an airline that was well run operationally, but in the second tier of marketing and customer service...Now with Qantas and Jetstar we have not one - but two - of the top airlines in the world as measured by the Skytrax monitor of worldwide passenger opinion.
We have made ourselves a global leader in segmenting the non-flying businesses in order to produce greater efficiencies, enter new markets, and unlock shareholder value. We have now completed the establishment of the Qantas Frequent Flyer program and Qantas Freight Enterprises as stand-alone segments, and for the first time in our annual results we provided separate disclosure of their profitability. As you know, we have successfully launched our new Frequent Flyer program. And Qantas Holidays joined with Jetstet Travelworld to create one group with three of the strongest brands in travel.
Critically important, with our two brand strategy of Qantas and Jetstar we have given ourselves the maximum flexibility to meet changing customer needs.
In recognition of this strength, while many companies will find it more challenging to fund investment and growth, we have no significant unsecured refinancing requirements over the next 18 to 24 months. We have the advantage of an investment grade credit rating- recently affirmed by Moodys - a strong cash position, quality assets which provide attractive security and access to export credit agency funding. As a result, we continue to successfully secure financing for aircraft due for delivery over the next 12 months, using a combination of secured debt and operating leases, and our margins have not increased by anywhere near the extent that they have in unsecured markets.
And, central to aviation, Qantas operational standards remain exemplary...And I would like to address this specifically as there has been a great deal of focus on Qantas maintenance issues in recent times.
On 25 July this year a serious depressurisation incident occurred on flight QF30 from Hong Kong to Sydney, which resulted in a diversion to manila.
The flight landed safely and there was widespread recognition - deservedly so - of the way the flight and cabin crews managed this tense situation. The Australian Transport Safety Bureau made a preliminary finding in late august that one of the aircraft's 13 passenger oxygen system cylinders failed.
Earlier this month an Airbus A330-300 operating QF72 from Singapore to Perth experienced a computer malfunction that caused it to climb, then descend suddenly twice. This was a frightening experience for the passengers and crew, and Qantas has been providing assistance to everyone on board - and particularly to those who suffered injuries. Again, the flight landed safely, with the pilots responding quickly and expertly to get the aircraft down at the nearest port.
The investigation into this incident is also yet to be concluded, but it is now clear that it is an issue for the manufacturer, Airbus, to deal with, and potentially affects every airline operator of a range of airbus aircraft types.
It appears that in both instances the investigators are increasingly focussing on manufacturing and design issues. In fact, the Civil Aviation Safety Authority conducted a review of Qantas’ engineering and maintenance operations and specifically found that there had been no significant change in Qantas' rate of reported incidents.
Qantas flies 6,720 flights per week. That is 960 flights every single day.
That is a Qantas flight, on average, every one and a half minutes. We have earned our reputation for operational integrity by scrupulous attention to maintenance standards. And recent events in no way alter our standing.
So overall, in the fractured world that is the global aviation industry, Qantas does stand out as one of the more successful airlines.
But as I prepare to leave Qantas, one thing is abundantly clear. 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 aviation industry's necessary transition to stability. Well, consolidation is now underway in earnest.
Within their single market, the Europeans are leading the way. Lufthansa and KLM/Air France are now global leaders in finding ways to achieve scale, stability and reach through various forms of consolidation. British Airways has signed an agreement with American Airlines and is in merger talks with Iberia. Delta and Northwest are merging in North America. Even within the developing aviation markets of China and India, early moves to consolidation are underway. In fact, aviation is rapidly heading beyond consolidation within markets to an era of true cross-border aviation consolidation.
At Qantas we certainly see further airline consolidation as inevitable and desirable. This will be the way to preserve valuable brands, provide expanded networks, deliver new avenues for revenue growth, and create increased scale and sources of efficiency.
There are specific reasons why Qantas would benefit from a well thought through and compatible tie-up with another airline or airlines in the coming years. As I have said before, we are at the end of the world. We have no hub advantage so we cannot connect many point-to-point routes to easily build networks. Our home population is comparatively small. And while we are private and commercially run, some of our strongest competitors are government owned and supported airlines.
Of course, the very nature of the business means that in aviation there will always be an important role for government, that is other than ownership!
For instance, Qantas has welcomed - and contributed to - the Australian Government's broad ranging aviation policy review process that will result in an aviation white paper next year, encompassing domestic and international aviation, as well as safety, security and infrastructure.
We have also made a detailed initial contribution to the government's review of the architecture of the nation's tax and transfer system. Like all Australian businesses, our international competitiveness is directly affected by the taxation regime, and we have made a particular reference to the need for accelerated depreciation and investment allowances to support fuel-efficient fleet growth and reinvestment.
Australia is recognised as having one of the most liberal, deregulated domestic aviation markets in the world and we welcome the fact that the federal government has also been active in concluding an open skies agreement with the US and is pursuing comprehensive liberalisation with the EU.
We are also engaging constructively with the government on the climate change agenda, and have underway a series of initiatives to minimise greenhouse emissions, primarily through the purchase of more fuel-efficient aircraft, but also through optimising speed and flight paths, reducing onboard weight and switching to ground power when aircraft are at the terminal. In fact, our first A380 flight employed new technologies and advanced air traffic management techniques to save up to ten tonnes of fuel and 30 tonnes of carbon emissions through a ground-breaking collaboration between Qantas, Airservices Australia, and the US Federal Aviation Administration.
The Federal Government also administers the Qantas Sale Act of 1992. And obviously we are well aware that there is a lot of sensitivity around the iconic status of Qantas in Australia - and the Sale Act reflects that sensitivity. I will not go into details about the elements of the act today, except to affirm this point.
We understand the requirements of the Qantas sale Act - and know our responsibilities. Indeed, if we were ever in a position to bring forward a consolidation proposal for formal review and evaluation under national interest criteria, we would be very mindful of all our responsibilities and we would seek to achieve our objectives within the requirements of the Qantas Sale Act, while continuing to argue for change in the medium term.
There is no doubt that Qantas is a critical national strategic asset. We provide essential services that underpin trade, tourism and business, and connect Australians to each other and to the world. We have an unrivalled record of experience in safely carrying millions of Australian travellers. We are one of Australia's biggest employers and training businesses. We are an important part of rural and regional Australia.
We take all our commitments to the Australian community very seriously.
But we believe there is a compelling case for Qantas, if the right opportunity arose, to be allowed to participate freely in the new global aviation order. This would provide further opportunities for growth in jobs and benefits for shareholders and the nation as a whole.
And the truth is, no one should fear that Qantas would be less than it is today if it chose the consolidation path. The "anxious icon" mindset is misplaced. As long as the company is free to compete and perform, Qantas will always be Australian, and will always have the majority of our operations, jobs and investments here in Australia.
The central challenge for the future of Qantas is the need for a shift in focus away from the old international structure to the new global marketplace. Globalisation is at last becoming a reality in aviation and for Qantas to build on its current success we need a framework for positive progress.
The aviation world - as much as the world around aviation - is changing rapidly. The current turmoil will no doubt speed up the change process. There will be no let-up for Alan and his management team, as Qantas confronts intense competition at home and abroad, this challenging global economic environment and volatile fuel prices.
But if the broader settings are appropriate, if Qantas gets it right, as I think it will, we will continue to grow and prosper. And I think that is in the interests of our customers, our staff, our shareholders, and all Australians.
Issued by Qantas Corporate Communication (Speech)