Qantas to emerge from the pandemic stronger than ever
While COVID has proven terminal for many of its peers, Qantas is set to soar even higher than before.
It’s the final Wednesday of January 2020, the coronavirus has yet to claim anyone outside of China, and Qantas CEO Alan Joyce is all smiles and handshakes.
He’s flown almost two hours north from Sydney to the mining town of Toowoomba to open a pilot academy.
In the sweltering heat of the open hangar, he tells a crowd of staff, students and local politicians that graduates will one day captain the giant Airbus A380 or Boeing Dreamliners that anchor the iconic Australian airline’s long-haul network.
There’s little mention of the virus that weeks later would lay waste to global aviation.
Yet on the plane trip back to Qantas’s headquarters that afternoon, Joyce is already focusing on the looming battle. In an interview from his usual seat – 1A – he says he’ll do whatever it takes to come out of the pandemic on top. “It’s survival of the fittest,” he predicts.
That was an early glimpse of the determined, even ruthless, approach that has seen Qantas not just survive the biggest crisis in aviation history, but become almost unassailable in its home market.
While losses at airlines globally from Covid-19 are set to surpass US$174 billion by the end of 2021 – wiping out half a decade of profits – Qantas has become one of the most financially secure carriers anywhere in the world.
Its stock has surged 120% from a March 2020 low and its market value has swollen to A$8.9 billion. Qantas says net debt has peaked and it’s on track to deliver an underlying profit for the year ending this month.
The 100-year-old carrier’s market position, Joyce declared on May 20, “is stronger than it has ever been.”
Qantas’ muscular recovery from a crisis that was terminal for many of its peers is a tale of commercial opportunism and political guile.
Australia’s improbable feat of almost eliminating Covid-19, not to mention subsidies for fliers, created a haven for air travel that Joyce has exploited to its fullest.
Joyce’s springboard was Australia’s closure of its international borders in March last year.
The government didn’t just stop visitors coming in – it also barred citizens from leaving. So within months, travel-loving Australians who’d normally jet off to Aspen or the Mediterranean started emptying their wallets at home in a domestic holiday bonanza.
Qantas, by far Australia’s largest airline, was inevitably one of the biggest beneficiaries.
The boost was turbo-charged this year when the government started subsidizing 800,000 half-priced airfares to support tourism. Air travel in Australia has become so popular that Joyce said in May demand was about to surpass even pre-Covid levels.
“I don’t see any way Qantas won’t come out of this very strongly,” Ian Chitterer, a vice president at Moody’s Investors Service in Sydney, said in an interview. “You can’t imagine the opportunities would have presented themselves to the same degree were it not for the pandemic.”
Strength in numbers
Joyce, 54, hasn’t held back. A former flight scheduler himself, he’s been busy orchestrating Qantas’s biggest network expansion in a decade, adding 45 routes during the pandemic.
Sydney-Ballina is one of them. Ballina is a short drive from Byron Bay, the coastal town in New South Wales famous for attracting Hollywood A-listers like Chris Hemsworth and Matt Damon.
Before Covid, Qantas hadn’t flown there from Sydney for 15 years. These days, the airline and its low-cost division Jetstar operate as many as 55 flights in and out each week to meet surging demand from Australians who can’t leave the country.
A Tuesday evening flight from Sydney to Ballina this month shows how Australia’s near-elimination of Covid is working in Qantas’s favor.
The 74-seat plane was more than 80% full for the 80-minute flight. That’s a benchmark for an airline at any time, let alone mid-week, out of season in chilly June, during a pandemic.
In Byron Bay itself, small businesses from hat-fitters to souvenir shops said the flow of domestic visitors has helped keep them afloat.
“Definitely a savior,” said 47-year-old Bert Reid, who’s run surfing shop Wreck Surf near the beach for almost 25 years.
The holiday boom has been enabled by an unlikely victory over a virus that has killed almost 3.9 million people in the rest of the world.
Australia, which has suffered fewer than 1,000 deaths, only has about 150 active cases and life has largely continued as normal.
The country came in third out of 53 nations last month in Bloomberg’s Covid Resilience Ranking of the best places to be during the pandemic.
Self-containment isn’t the only thing underpinning Qantas’s recovery. Australia’s vast land mass – more than double that of India - makes flying the only practical way to travel between most major cities, plus a meager 26-million-strong population also puts a limit on viable airline competitors.
And Joyce, who has led Qantas since 2008, has been merciless.
When Qantas’ closest rival Virgin Australia appealed for government help just a few weeks into the crisis, Joyce argued successfully against rewarding “badly managed” companies.
Without the kind of aid that propped up carriers across Europe and the U.S., Virgin collapsed in April last year, riddled with debt after trying in vain to go head-to-head with Qantas.
While Bain Capital rescued Virgin two months later, the buyout firm shrunk the airline’s fleet and relaunched it with more modest ambitions. Joyce soon went after Virgin’s frequent flyers – the core of any airline – with an offer to fast-track their loyalty status with a switch to Qantas.
Increased market share
Those efforts are bearing fruit. Qantas’ market share touched 74% in December and was 69% in March, up from 61% before the pandemic, the competition regulator says.
That’s a degree of dominance unthinkable in the U.S., where American Airlines leads with a 20% market share, according to March data from the Department of Transportation.
To be sure, Covid-19 didn’t bypass Qantas.
The airline estimates the pandemic has cost it A$16 billion in lost revenue, and its pretax loss for the year ending June will be more than A$2 billion, a figure that includes plane writedowns and redundancy costs.
Joyce, who studied physics and mathematics at university, has had to deploy the bare-bones budgeting skills he later honed as the head of Jetstar. He’s cutting 8,500 jobs from Qantas and carving out A$15 billion in costs.
In a statement, Qantas said: “We’ve been clear that we have to make fundamental changes to our business in order to survive. Our focus has to be making sure we’re in a position to repair and recover.”
It’s not the first time Joyce has turned the airline around. In a three-year program that ran until 2017, he chopped 5,000 jobs, sold planes or delayed their delivery, and froze wages.
That generated record earnings and splashed Qantas shareholders with dividends, but the profitability made it hard to argue for more job cuts.
“It’s very difficult for a company against a backdrop of record profitability to talk about restructuring and wage freezes,” said Jakob Cakarnis, a Sydney-based analyst at Jarden Group.
Survival or opportunism?
The pandemic changed all that, but the bullish statements from management while Qantas cuts thousands of jobs has rankled union leaders.
In May, Qantas also announced a two-year pay freeze and offered voluntary redundancy to international cabin crew, in addition to previously announced job cuts.
Teri O’Toole, federal secretary of the Flight Attendant’s Association of Australia International, says Qantas is taking advantage of the crisis to part with some of its best-paid cabin crew and reduce their influence on salary negotiations.
“They’re using the pandemic,” said O’Toole, who’s also a Qantas cabin-crew member. “They’re telling employees how bad it is, but they’re telling the market they’re making money.”
In response, Qantas said in its statement that revenue losses have been so large that “difficult decisions” have been necessary. “Job losses have unfortunately been part of that,” it said.
Australia’s Transport Workers’ Union National Secretary Michael Kaine says state funding to Qantas should be conditional on keeping its workers. Most of the A$1.2 billion in government aid given to the airline in 2020 was designed to keep staff in their jobs, filings show.
“Joyce seems to have quite a capacity to be able to move this current federal government wherever he wants them to go,” Kaine said in an interview. “He’s persuasive.”
Joyce is often affable and jocular in public.
Appearing with Prime Minister Scott Morrison on March 11 at Sydney Airport, he praised a government support package that included close to a million discounted air fares. “It has more components than an A380,” Joyce joked. “Thank you, Prime Minister, in particular.”
But there’s a harder edge. Joyce famously grounded Qantas’s entire fleet in 2011 to tackle a labor dispute, leaving some 70,000 passengers stranded worldwide.
Early last year, he threatened to bring in hundreds of cockpit crew from Asia if Qantas pilots didn’t agree to a new pay deal for planned ultra-long flights.
There’s little immediate threat to Qantas’s dominance at home. Domestic revenue will more than double over the next two years, according to Jarden’s Cakarnis, who expects the stock to hit A$6.75 within a year, 43% above Wednesday’s closing price.
Joyce’s biggest test may come from the Australian policy that Qantas has so benefited from. While the U.S. and parts of Europe are reopening to foreign travel, Australia is in no hurry.
The government says borders are likely to stay shut until the middle of 2022, with public support for the closure still high and vaccination rates slower than elsewhere. International business generated about a third of group income before Covid-19.
A new dawn for Project Sunrise
Just before the pandemic, Qantas was poised to push ahead with Project Sunrise – the first non-stop services linking Sydney with New York and London. That’s now on ice.
To get back on track, Qantas set out a three-year plan last June that included raising A$1.4 billion from institutional investors and grounding its entire fleet of 12 A380 superjumbos for at least three years. Qantas expects its cost-cutting program to deliver A$1 billion in annual savings from June 2023.
The plan suggests Qantas could come out of Covid not only stronger at home, but able to gain market share against international rivals that have become weighed down with debt during the health crisis.
Qantas looks set to “capitalize on the relatively soft competitive landscape,” analyst Richard Jones said in a June report.
Willie Walsh, the former head of British Airways who like Joyce started his career at Aer Lingus, said the Qantas CEO has won wide respect in aviation circles.
“He made a lot of brave decisions,” Walsh, who is now Director General of the International Air Transport Association trade group, said earlier this week. “He’s a very, very, smart guy.”
This article is published under license from Bloomberg Media: the original article can be viewed here