Case study B

QANTAS AiRliNES
By Dr Quamrul Alam,l Monash University
BACKGROUND
The airline industry in Australia has encountered major changes in its operating environment
over the past 16 years. These changes include the collapse of the Ansett group, the ahsorption
of Impulse Airlines into Qantas, then the entry and rapid growth of competitor Virgin Blue and
the demise of Australian Airlines, Freedom Air and Jetconnect. The deregulation of Australasian
air services in the 19905 has continued in stages since the establishment of the 'Open Skies'
agreement hetween Australia and New Zealand. To compound an already turbulcnt industry
\vhcrc volatility is through government deregulation and the difficulty of driving
profits year-in year-out, terrorist attacks in the United States in 200t, and the Iraq \var and the
SARS crisis in 2003, led to significant downturns in the Australian airline industry, resulting in
further change.
The industry's turbulence has been ubiquitous in the] 6 years that have elapsed since
the termination of the nvo-airline policy in 1990. Unsustainable growth h"lS occurred in the
domestic airline industry marked by a cyde of the entry of new players (Compass, Impulse,
Freedom), the culiapse of some players IAnsett, Compass, lmpu!se), and the unsuspecting
emergence of others (Virgin Biue, Jetstar). Extreme capital costs have additionally contributed to
the high-entry costs into the domestic airline industry, ultimately increasing the market pO\vcr of
the big players such as Qanws and Virgin Blue. In this highly competitive environment Qantas
has to pursue policies and practices for organisational change and development to reposition
itself. In this case study an attempt has been made to discuss some key organisational change
and development srrategies that Qantas pursued to stay competitive.
Changes in the airline industry
The airline industry has gone through rurbu!em times since 2001. The government tighteneJ
laws in both international and domestic sectors to prevent terrorist attacks, but this
has brought about a dtamatic drop in passenger volume leading to increased competition
in the Australian airline industry as airlines compete aggressively to try to attract customers
ro gain a small share of the pie. Although the airline indusrry is recovering, oil pricl's
have surged to an all"timc high, threatening the aviation sector's profitability, Like m,-my
airlines, Qantas nC!iJ to respond to these marker conditions by its fuel surcharge on
hoth domestic and international flights, which raised concern as to what may to irs
,,('ne,er volume.
iUnniltn 8re Dnf\til11E on containment of cnSf U)
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Case study B Q;lnras Airlines I 455
government, linking railheads in western Queensland. In 1934, Qantas Limited and Britain's
Imperia! Ainv,-lys (the forerunner of British Airways) formed a new company, Q,lnras Empire
Airways Limited. partner held 49(;h, with 2(j{} in the hands of an independent arbitrator.
Qantas Empire Airways, the sole Australian international carrier, commenced services
benveen Brisbane and Singapore using de Havilland DH-86 (now a strand of 1100V Boeing)
Commonwealth Airliners. Imperial Airways operated the rest of the service through to London.
By the 1960s, Qantas was operating from Australia to London via Asia
and the ;\1iddle East, and to South America viC! the USA and :vtexico. lvLmy of these roures were
dropped in the 1970s following the airline slump after widc--body aircraft were introduced.
Qantas purchased Australian Airlines in 1992 and integrated its domestic operations into the
company. In its current form the Qanras Group employs approximateiy 38000 staff a
network that spans 142 dcstinations,2 Qantas was privatised in 1995.
The Qantas Airways Group has extensive commercial and ownership links with variolls
regional carriers, and Qamas has code-sharing"' and alliance agreements with international
carriers through the 'oneworld' alliance, which is the second-largest airline alliance and
underpins true globalisation in the airline industry. Hamel; (1989) noted the need to collaborate
with one's competitors to win. Qantas used alliances to gain market share as the international
airline industry moved to reach a globalising industry. It is these alliances that have enabled
Qanras to maintain a signitlcanr share in the international airline market through connecting
customers internationally with renowned airline carriers.
Although the company's main business continues to be the transport of passengers, the
Qantas Group refers to a diverse portfolio of airline-related businesses, including engineering,
catering, freight and travel wholesaler subsidiaries. In conjunction \vith this, Qantas Airways
Limited owns 44.5% of Orange Star, which owns and operates the value-based intra-Asia
airlines Jetstar Asia and Valualr, based in Singapore. Qant<ls also holds a 46.3 (;<! sbareholding in
Ajr Pacific, the international airline of Fiji. \
As part of tbeir strategy since 2004, rhe flying businesses of the Qantas Group have been
branded under two major labels - Qantas and Jetstar - which domestically operate over 500
flights a week serving 62 city and regional destinations in all stares. Internationally it operates
nearly 700 flights a week, offering services to 80 international destinations {including code-
share services} in nearly 40 countries. Despite recent turmoil in the aviation industry, Qamas
has remained surprisingly profitable, and was recognised as 'Airline of the Year 2004' by Air
Transport \'(/orld magazine.'; Recently celebrating its 8S-ycar anniversary, Qantas has maintained
its reputation for providing a premium aviation service, which has grown to cater to all aspects
of the market. Prior to Ansett's liquidation, Qantas encompassed approximately 5S(X} market
share; however, it now has approximately 70{XJ of the travel market on the domestic trunk route
network.
7
With the entfY of Virgin Blue into the Australian domestic mal'kct, Qantas has bad to
respond to the growing popularity of discount air travel to competitively challenge Virgin Blue's
'low-far' end of the market. To meet such competition in such a turbulent industry, Qantas
had to huild on the operating model it inherited in \riay 2001 's acquisition of Impulse
Airlines. By retaining Impulse Airlines (which has evolved into Jetstar) as a stand-alone unit,
Qantas has been able to derive cost savings from utilising Impulse's Imv operating cost,
class and streamlined staffing/labour practices. The change in policy has enabled
to implement some of its strategic learnings from this low-cost model to develop Jetstar.
DEVELOPMENT AND CHANGE IN QANTAS
The Australian government dercguLi.tcd the domestic airline industry in 1990 with a staged
termination of the two-airline agreement. The primary driving force for thc deregulation
initiative \vas to promote increased competition and pricing flexibility, aiming for
crtlCJ"n,:v in the industry and bene6ts to the customer.
s
Since deregulation, Qantas
additional comperition from region,d especially Air New Zealand. Through the
government reducing the entry barrier from a legislative point of it enabled sm:'lllcr airline
carriers to gain market share from major players like Qanras>
456 I Integrative .::tSe studies
The JereguLuion shifted the industry from guar::lllteeing exactly two airlines; with
parallel schedules and identical planes and prices on major domestic routes, to almost complete
freedom of entry to the market, subject only to safety restrictions.
9
The Prices Surveillance
Authority (PSA) estimates that the real cost of air travel declined by 24 ':';).l'J However, further
strategic analysis is required when investigaTing bow the deregulation impacted the competitive
dynamics of the Australian airline industry.
A major problem identified with the airline deregulation is that the structure of the industry
has not been modified like the government anticipated. Under the deregulation, two airlines still
serve the same domestic routes without any divergence in the pricing, l1urket share and greater
efficiency in-scheduling. Despite government deregulation attempting to lower the entry point
for competitors into the industry, the entry barrier remains high as the market is mature and
dominated by an oligopoly such as Qanras and Ansett in pre-200] and Qantas and Virgin Blue
in post-2001 period.
\\/ith the revoking of the two-airline agreement under the Airline Agreement Termination
Act, II Compass Airlines entered the domestic market with a low-cost operating model, offering
a single class of service at industry-low prices. The established airline carriers had to respond
with deep price cuts and special discounr offers. The new entranrs were poorly capitalised and
the expensive barriers to entry forged by the incumbents, such as their control of terminals, ,:mJ
(;xternal environmental factors resulted in Compass's demise.
Since deregulation encouraged new entrants into the market, the incumbents were forced
to build up other alternative barriers to entry hy offering services that nc\v entrants could not
match due to operating on a low-cost provider model. Other factors determined change in the
airline industry:
1 Existing competitors struggle to make profits.
2 The industry is highly volatile, risky and uncertain.
3 The market is mature.
4 Buyer demand is slowing due to external factors (terrorism, war, interest rates etc.).
Another factor that helped Qantas to develop and grow was that the attt:mpt by regional
airline Impulse to enter the capital city market failed in 2000. Shortly after Impulse commenced
service, a fourth player, Virgin Biue, also entered the market. Unlike previous entrants, Virgin
Blue had the backing of an international carrier. The success of Virgin was largely due to
Ansett's collapse. The entry of Virgin has resulted in the replacement of the symmetrical
oligopoly imposed under the two-airline po hey.
Qantas's main defence mechanism to remain competitive is to continually upgrade its core
competencies across the multitude of customer service platforms and to continue to pioneer
innovations such as the CityFiyer services on key trunk routes. It is reportedly considering
investing about $1.5 billion to expand its fleet of Boeing 737-800s to around 30 ;lireraft. This
development strategy a!lows Qantas to remain competitive with Virgin Blue's- all-economy
configuration.
12
Qantas's introduction of new products/service such as frequent flyer programs,
dub lounges, holiday packages upgrades of IT systerns wefe Jynamic development
initiatives introduced at intervals (spacing) according to a set schedule. Greent', \\falls and
Schrcst
U
believe such a development strategy should be hased on the similarities between nnv
and products/services in order to ease the absorption process and to ensure that ongoing
successes lend credibility to the overall internal promotion straregy.
There are some unique factors that Qant3s introduced as developmental initiatives to
achieve unique rnarktt attnlCrivene,<,s. OzJct WilS bunched in :\h)\-'ernber 2005 to target
business travellers on the Sydney-Melbourne route, the third husiest in the \vorlJ,p with
c(juiv;dcnr to Qantas economy fares. failed to win of the
flurket to Jffect and vvas unahle to rr,akc returns; three nlrJCtllS after
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Case study B QantJs Airlines!
isolation and urban dispersion, air travel is a nccessity in Australia unlike any orher country
on earth. Therefore,: the threat of substitutes in the form of other modes of (bus, .
train, boat erc.) is effectively negligent, espcciaily with the ,ldvent of lo\v-cosr air travel. Despite
a population of just 20 million people, Australia is ranked fourth in the world conccrning
domestic passenger-kilometres performed, which is indicative of the viability of the domestic
aviation marker (see T<lble B.1).
While Europe, Asia and the US markets are drowning in red ink, with both discount carriers
and incumbents struggling to survive, Qantas has the undeniable benefit of a stranglehold
on the albeit small Australian market. Given such a stranglehold Qantas has not been aversc
to deploying predatory hehaviour in restricting entrants. i7 In May 2002, the Australian
Competition and Consumer Commission (ACCC) investigated Qantcls for alleged predation on
its Brisbane-Adelaide routc.
1k
Responding to Virgin Blue's ;lfrival, Qantas changed its fare policy
and increased capacity from twO to three nights per day. The additional capacity meant an
operating loss for Qantas at the expense of more significant losses for Virgin Blue. The ACCC
could not find any misconduct but it is indicative that due to a limited number of popuhr routes
it is difficult for new entrants to squeelc ;::my significant market share from Qantas. Qantas's
poiicy changes helped the company to withstand market pressure.
In Australia, Qantas and Virgin Blue are the two main players. A major reason for the
continual profitability of Qantas is its policy to initiate and implement changes. Qantas
offers the full-service carrier and Virgin Hlue offers a lovv-cost carrier withouf any major
competition from any other airline carriers. The collapse of Ansetr left a large gap in services
in the Australian airline industry. Lacking capacity and operating on a very limited number of
routes, Virgin Blue was unable to 'fill Ansett's shoes'. Nor was Virgin Blue willing to modify
its low-cost provider model and provide an in-flight service. In the absence of competitors,
Qantas restructured its management team, outsourced non-core services, implemented contract
management and managed to increase its domestic market share to 70% in 2005.1"1
Responding to the ever-changing Australian airline industry, Qantas implemented
developmental policies in a proactive manner. The sudden upsurges in demand required
rescheduling more flights and using smaller aircraft to cater for the increased demand at lower
costs. W'hen international terrorism impacted on the global airline industry, Qantas diverted its
international fleet to domestic routes to further capitalise on the domestic upsurge in demand. A
key factor that further has galvanised the oligopoly in Australia is the small number of routes.
While the United States is characterised by a population and geographic diversity that allows an
entrant to capitalise on literally thousands of routes, Australia has only eight capital cities with a
handful of other smaller centres.
Table B.l Top 10 countries by air traffic passenger.kilometres performed (millions)
]
337354 907340
2 44603 157358
3 190543 9790
Germany 4 182508 172799 9709
Japan 5 153289 82227 71062
France 6 135017 107526 27491
Aus-fraHa 7 99614 56.275 43339
Canada 8 94980 55650 39030
Singapore 9 82904 82904
Netherlands 10 82269 82258 l1
Source: adaped (rom 'Annual Review of Civil /wianon 2005', f( AJ) juunwi, n 1:<;" rScpremxr/Ocrobcr 2006}.
457
458 Ilntegrativc case '>tudil'S
DEVELOPMENT STRATEGIES AT QANTAS
In 1999, Brett Godfrey, an Australian executive of Virgin Express, proposed to Richard
Branson (Virgin guru) the establishment of a 'Virgin-hranded, low-cost, carrier
operating in the Australian domestic market' .21 This low-cost carrier was similar to Southwest
Airlines (SWA}, which was renowned for being a 'no-frills' airline. Godfrey said: 'fT]he
airlines that are clearly succeeding are those that have stuck to the
Southwest low-fare model'.2-2 Qantas continued to introduce changes to execute its broad
differentiation strategy. This strategy was based on it 'seeking to provide products or services
unique or different from those competitors in terms of dimensions \videly valued by buyers,.n
The unique offerings by Qantas were different classes, frequent flyer programs, dub lounges,
catering services and corporate freight-carrying services, truly bracketing itself as a broad
differentiation strategic organisation.
Since Virgin Blue's aggressive expansion was based on lower costs, which were 30-40%
lower than Qanras\ 24 Qantas CEO, Geoff Dixon, drew a 'line in the sand' by creating Jetstar
to restrict Virgin Blue and other carriers from taking more than of the domestic market,25
Qantas adopted a broad differentiation strategy that included 'pincer-movement' tactics.
Qanras's strategic platform had three principles:
1 establishment of a low-cost carrier, Jetstar, to compete with Virgin Biue
2 growth in the leisure markets, through expanding Qantas Travel agencies and inclusive
holiday packaging with airfares
3 maintenance of its quality as a full-service carrier.
Qantas used a market segmentation strategy, adopting two brands to target different markets
to bridge the gap at the of the domestic market, a concept that occurred in the UK with
British Airways and its low-cost carrier, GO.:u, Qantas's hrend differentiation strategy in the ]ow-
cost carrier market seemingly strengthened the competitiveness of the oligopoly market, as prices
became increasingly competitive to retain and regain market share. When investigating types
of competitive low-cost strategies, Virgin Blue adopted the Southwest Airlines carrier
model, whereas the Qantas Jetstar model was a selection of the best features from the leading
carriers around the world, tailored to meet the demand of the Australian market.
Qantas aimed to adopt the efficiency (cost) of Ryanair, the branding of the innovation of
JetBlue and the customer service of Southwest Airlines'?'?
Implementation of change
Qanras Airlines has been effective in using its core competencies (() provide premium customer
service across a variety of platforms to numerous customer types. Due to spc.:ialisarion Qantas
has a reputation for providing quality service to its customers. Additionally, its efforts with
internal marketing were aimed at providing optimum levels of satisfaction to customers. The
combined efforts acted as a key enabler to providing all streams of customers with a greater
trave! experience.
A survey conducted on Qantas
2S
shows that the organisation has a repeat customer level of
42!% of their airline sales. This relatively wide base of regular customer activity and a revenue-
generating market base highlights that customer service is an integral component of Qantas's
policy goal.
Qant3s h35 been good at establishing and nuintaining a network of agents. Qantas sells itself
through highly developed networks of established agents around the world. This major strength
allows the business to maLntain desirable rdations \virh its agents.
breadth of saits and channels has also a!iz)Wed to nn:w:de "'l"""'"
cusnm::er service across a 11uml)(:[ of DU1F':Jf!1lS,
husincss travel ro be sold via t:-commcrce.
enters corporate C(imLlcts for
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Case study B Qanras Airlines!
transformed the organisation from a government-run reactive organisation into a high-performing
strategic corporate organisation. In '1993, Qantas CEO James Strong took the challenge to
build J. nc\v partnership between staff J.nd management. The challenge was to instil a need
for 'suff understanding that it is necessary to make a profit'1'! by contributing ro a profitable
company. Strong immediately implemented business strategies to drive profits hy reducing costs
and building up ;1 focus, Key initiatives sll(h as an extensive training program,
development of work reams, new classification structure's, a share ownership schemc, L-hanges
in the management structure, 'roi1d shows' communicating company performance, outsourcing,
competitive tendering and downsizing \vcre introduced to improve comp,:ll1Y performance.
There was a strong emphasis on implementing an integrated approach by appointing various
group and general managers to manage the turbulent organisational and industrial changes
that Qantas had to pursue, This strategic restructuring at the top allowed Qal1tas to implement
poiicies for change, downsize its labour force and reduce costs, The reduction of labour cost has
been a central plank of employee management in Qantas since deregulation, Senior executives
in the industry regarded reduced bhour costs as one of the necessary features of survival. It is
not the sole of ensuring profitahility3il a competitive edge, but is part of an overall
corporate strategy, and has been on the 3genda in Australian airlines since the pilots' dispute of
1989-90. ,j Qantas has been very effective in implementing change without major disruptions in
[he post-deregubtion period,
On the inttrn3tional from, Qanras took some targeted measures to withstand market pressures.
Due to the lull in the industry in the post 9/11 era and because of spiralling fuel costs, Qantas
withdre\v from J number of infeasible routes (for example, Buenos Aires, Rome and Paris} in
bvour of growing markets sw,::h as !vlumbai and Shangh3i,,)2 In Qanras deferred a number
of infeasible Asian and rrans-lasman routes to newly established low-cost alternatives: Australian
Airlines ;::md Jetconnecr. The redirection towards internatiorullow-cost carriers was further
cmph<lSised by Qantas in 2004 when it agreed to a partnership (49,9(%) based in Singapore, and
the launch of Jetsrar International in December 2005, Qamas has built a bigger footprint \vith the
maximum range of price options to help cope with tbe recent turmoil in the industry.3,'
On the domestic front, the leisure market has grown from 35(X) ro 6(y>;\,:q Qamas launched
the low-cost carrier, Jetstar, in .\1ay 2004 to restrict Virgin Blue's inexorable growth and to alter
industry attractiveness, warding off ne\v entrants from the domestic duopoly that delivers 57'\)
of its earnings," Through a new reservation system that emphasised direct distribution channels,
new low-cost ground handling and catering alternatives, more favourable labour agreements
and higher aircraft utilisation through a production-driven schedule, Jetstar aimed to acbieve the
lowest cost base in the market.
3D
\XJith the addition of Jctstar and low-cost international affiliates,
Qantas exploited their competence for market reach to broaden its differentiation strategy, It now
covers all aspects of market (regional, domestic and international}, offering both
low-cost and premium services, Peter Gregg
l
the CfO of Qantas
l
proclaimed: 'The success of our
domestic operations is due principally to our differentiated business and leisure Due
to its competitive position, Qanras was able to replicate Virgin Blue's low-cost leadership strategy,
while maintaining an inimitable broad differentiation strategy. Thus, through aviation expansion,
Qantas's uniqueness was protected and a strategic competitive advantage ""vas achieved.
Management of related businesses
Aside frol11 their main purpose of carrying passengers; Qantas has also invested in related
business opportunities as part of its development and growtb strategy_ For instance, through
a joint venture with Australia Post, Qanras operates Australian Air Express and road freight
operator Startrack In October 2006, Express Freighters ;\uStrali8, a newly formed
subsidiary, was set up to support their growth in domestic freight operations. 'c' Since Q:wt<-lS
relics heavily on logistics throughout the husiness, the benefit from co-ordinaring and
centralising these businesses is significant for greater and As
Dixon proposed, '\VC Jrc to build 3n transport company' with il numher of
spc::ialirics, \7 I'v!osr this has involved discussions 'with the country's
freight operator, Lindsay Fox, to buy his trucking business, Linfox. \X7ith the DCp<lftlHenr of
Transport forec]sting freight transport in Australia ro increase 73%) by 2020, Qaf1us is iO(IKlng
to make SUfe it has the biggest piece of the
459
460 I IntegraTive (;,lS<: studies
:V1canwhilc, other related businesses (Qantas Engineering, Holidays, Flight Catering, Express
Ground Handling, and Qantas Ddence Services) have consistently outperformed the core
husiness in terms of 5(3.1(',41 providing returns above their collective cost of capital for rdatively
little incremental capital expenditure.42 By building the company around businesses whose value
chains possess competitively valuable strategic fits, Qantas has a competitive advantage of
business resource transfer and lower costs, ::111 while building brand recognition. As Porter argues:
'Interrelationships among business units are the principal means by which a diversified firm creates
value.'43 This also spreads investor risk across a broader business base, protecting the organisation
from the full extent of variations in operating conditions. Given the maturity of its main business,
the strategic investment in vertical1y integrating profitable segments of the value chain was vital in
sustaining profitability. Investing aggressively in creating sllch sustainable competitive advantages
was Qamas's single most dependable contribution to above-average profitability. The change
management capability of Q;:lI1tas has provided it the ability to implement pioneering technology
and maintain flexibility in organisational structures and employee management.
Nlanagement of employees
Due to entrenched union positions, Qamas \vas operating with higher than market pay for
Jess productive work. For instance, B737 captains \vere getting paid 36(j{) more than at Virgin
Blue.-
H
Consequently Dixon stressed to Qantas's 14 unions that they were 'going to have to
realise that some employment practices contributed to Ansett's demise';fs and pointed to wage
reductions of 16 (/.) at Singapore Airlines since 91l 1. as indicative of \vhere the airline had to
gO.-k In order to align its !abour costs more closely with those of its rivals, Qantas enforced
increased redundancies, increased use of accumulared leave to reduce staffing numbers, began
an expanded program and increased use of part-time workers. Qantas signed
agreements with unions to set up Jetstar, like Virgin Blue. The three union agreements and its
slim-line union status provided the template for Qantas to further challenge established labour
agreements. In this regard, the strategic implementation of Jetstar was not only a means to
differentiate the brand and restricr competitors but also to influence labour reform.
QantJs introduced a bold policy initiative in February 2003 to use overseas labour markets
as part of its COSt-cutting strategy. When the union staged a 14-hour strike, a \vell-prepared
Qanras drew strike-breaking labour from four different sources, including Thailand and New
Zealand. Qantas management argued that the reality of the aviation industry today requires
relocating work offshore. Since 2004, has shifted a fifth of its flight attendants
offshore in an effort to cut $18 million annually.4!
Nlanagement of a sustainable cost-reduction program
Following unsustainable growth in net operating expenses (from $7,8 billion in 1999 to S10.7
biJlion in 2002-03 },4g there was increasing to eradicate Costs from the supply chain.
In addition, given the substantial advantage Virgin Blue had in its cost structure-
abour 3W;{, less than Qantas - management argued that this 'differential is not;1 situation
that can continue''';'; and devised the 'Sustclinable Future Program' in August 2003 to reduce
operating costS $l.S billion through productivity initiatives and re-engineering processes. In
the six months up until December 2003, alterations towards labour productivity resulted in a
LV;:;') improvement in dornestic cabin (few utilisation, while net operating COSt per
kilometre:., fdl 7.2(1,;.': By new efficient were made on fuel
maintenance while abo on-time arrivals dom,,sticallv
2004 were
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Case '>fudy 13 Q;lntas Aidirh's I 461
them to manage yields more effectively and at little cost. 'if> The updated fleet also addresses
corporate social responsibility concerns through a reduction in carbon
The Sustainable Future Program resulted in an 89% lift in the airline's proflr in
its first year, despite a decline of 02 i;() in consolidated revenues. The best practices of Virgin Blue
made the oper,lting inefficiencies of cxpensi.>hloated Qantas idemifiablc, and thus provided the
impetus for this strategy. But more importantly the cost-cutting straregies didn't
undermine Qanms's competence for providing J full-service product; rather, they enhanced
efficiency.
:Management of restructuring program
Given a new corporate strategy, modificcltions to corporate srrucmrc are required, So commencing
in 2003, Qantas undertook a resrructuring process that involved the establishment of eight different
businesses in three categories: flying businesses, Hying services and associated businesses. \X/hile
maintaining a corporate centre to provide information techno!ogy, human resource and financial
services, all businesses were to stand alone and compete for invcsrmcnr, Aimed at optimising
accountability, collaboration and agility, Qantas management \vas cOllvinced th,)t adapting to
evolving market conditions would be difficult with a traditional organisational structure. As
Porter'!' suggests, success in strategy lies in the realisation that nothing laStS forever: only change
and regeneration afe constants. This is a contention Dixon endorsed: '1 believe the reorganisation
will better enable us to manage the constant change and drive initiatives now in place - and others
that will be required - so we maintain our reputation for excellence in everything we do.'S?
Management of partnerships and alliances
The restructuring emphasis on collaboration was also reflected in Qamas and Singapore Airlines
uniting to share costs on new training and maintenance f3cilities for the super-sized Airbus-380,
Doz and Hamel"'\) argue that a strategic partnership is an effective way to pursue opportunities
that are uneconomical to pursue alone. The alliance of Qantas 3nd Singapore Airlines was also
emblematic of the global shift from the days of national flag carriers to\vards consolidation, This
was first made evident through strategic alliances: the only viable means to gain access to foreign
markets since getting airline mergers past competition Juthorities and complex bilateral air rights
remains virtuaily impossible. Qanr3s was;] founder of the oneworld alliance in 1998, which
aimed to unify code-sharing so capacity utilisation and domestic hub traffic could be optimised,
while realising savings in combined marketing and cusmmC'f loyalty programs, The one\vorld
,-llliance represented another means for Qantas to expand irs net\vork while reducing its costs.
LESSONS FROM THE QANTAS CHANGE MANAGEMENT
STRATEGY
In a period where global aviation has suffered 543 billion in losses
61
Qantas has become the
most profitable airline in the world,"..'. largely because it bas been strategically well managed. On
a global Qantas has led the way in effective utilisation and management of its asset base,
effectively reducing costs by addressing inefficient practices and expanding networks through
bold diversification.
Despite sustained profitability, Qantas has lost some ground since privatisation in 1995. Back
then it had 45
t
J;) of Australia's international airline business, compared with 31 % now.1-3 The plan
for Jetstar Asia (of which Qantas owns drafted in 2004 is far from the reality of its $27.4m
losses in the nnal hatf of 2005.64 Subsequently, complicated questions arose in the alliance about
'how to divide efforts among partners and about who has effccrivt: control'.h'i Unfortunately
because of irs less than majority stake, Qanras is incapable of assisting through scheduling,
capacity or fare decisions, and has called on the ACCC: to revise international regulation.
The Australian airlines have responded to entry in much the same as airlines in No-nil
America and Europe. They have been selective, :lnd this has limited the cost to them, \"Vhcn
entrants offer low f,lres. QantJ.s has m;:nched the fares. Qantas has not had to reduce the fares
462 IlnrcgrJ.tiv(' <:;1S(' studies
for all traffic, however. The low-cosr entrants typically offer inf1exible fares, which appeal to
leisure travellers; they may offer higher-priced flexible fares to appeal to business tr3vellers
(Virgin Blue), but they do not offer higher-quality service (business class, executive lounges). In
the recent entry period (2000), the spread of fares increased; Qantas lowered their discount fares
but increased their higher farcs, on \vhich they were not experiencing much compctirion.
66
Qantas has restructured itself to focus on the important business priorities. The company is
happy with the COSt structure, and is now planning transition from cost centres to profit centres.
Adopting best practices and striving for continuous improvement, Qantas instituted a cost-cutting
program to crC:lte a leaner campi-my. Qantas has been able to restructure its business vvith minimal
unrest, One of the reasons for this was good communication informing people at work of what was
happening and why it was taking place, Waddell et aL6:" rightly argue that effective communication
about changes and their likely consequences can reduce speculation and unfounded fears.
Leadership plays a key role in Qantas. Nlargaret Jackson, the Chair of the Qantas board, and
Geoff Dixon, the CEO, have formed a formidable partnership. They have been able to lead the
company through some difficult times in the market and still deliver on its strategy. The success
over this period shows that the company's senior executives support [heir leaders and helped
drive the message through to the rest of the company.
CHALLENGES AHEAD
The consensus in the airline industry seems to be [hat both competition and collaboration
will soon be inevitable in all parts of the world. Qantas already has partners in oncworld,
and it has American Airlines 3S its strategic US partner and British Airways as its strategic UK
partner. A new change environment is emerging in which strong regional giants are not only
becoming stronger, but are also teaming up gtobally to form larger and more formidable glohal
partnerships/alliances. By 20'10, the process may converge into a state of a small number of
strong and strategically networked global partnerships/alliances.
The formation of such strong and strategic global airline partnerships/aJliances will result
in competition being elevated up to the highest levels. This means that size \vi11 be of strategic
significance, and \vi1l be used as a strategic weapon. \\lith global consolidation occurring on a
grand scale, only a small number of consortia/alliances, each comprising lead airlines from all
key regions of the \vorld, would ultimately supply most of the world's air transport demand. It
is critical that Qantas throws its hat into these global consortia/alliances and wields considerable
power, highly differentiating it and expanding its clientele base and market share. Faced with
the competitive challenges, Qantas may transform itself into a lean and sleek markering- and
strategy-led powerhouse. The 2006 takeover bid, and the management decision to accept the
offer, demonstrates that Qantas has developed organisational and strategic capabilities to accept
challenge and manage changes.
One of the key challenges for these global players will be to offer and compete on the basis
of consistency!compatibiJity of service standards and operational integrity throughout
rheir globalistrategic network. \'Vith its alliance with oneworld, Qantas appears placed to meet
this chaUenge because the major airlines in the alliance have similar strategies implemented in
their domestic mJrket; therefore, transfercnce of clientele can be c3sily made.
With the omnipresent driving force of COSt efficiency, Qanras managemcnt considers that
it is at a disadvanugc to its mostly "subsidised' competirors in the global market. The market
has changed since 2003. The combined share of and Air New Zealand has fallen from
90 to because of the of Emirates and Pacific Blue
such klS bccn the in recent more
taxation inJrfcntiv Ulillias ,'!llgllplllT 1[\
ZealanJ's three rcstrictJons on
depresses the
comln"; soc)al prey;ures ro reduce noise CnilLltHm
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Case study 13 Qantas Airlines!
and corporate issue. Preservation of the environment is paramount and the governlnent may
further introduce rcgubtion that may require Qantas to refine its noise pollution and current
emissions from fuel consumption, There will be cost involved in any change in policy to comply
with corporate social responsibility obligation,
REVIEW QUESTIONS
Critically discuss the changes that Qantas implemented to become one of the most profitable
airlines in the world.
2 Identify the developmental features and evaluate their impact on Qantas's success.
3 What challenges will Qontos face in the 21 st century? What change initiatives would you
recommend for Qantes?
NOTES
The author 'vvishes to thank ,'-1athew ,'viarchingo and Nichobs Doble for their support in coHccting inform<1tion
and in the preparation of this case.
2 Qamas Fact File, www.qantas.com (2006).
3 w,yw.avlationaustralia.ner.au (accessed 1 S October 2006).
4 G. Hmnd, 'CoHaborate with your competitor,; and win', Harvilrd Business RC1!ieru Uanuary--Febnl;lry, 1989j.
5 Qantas Fact File, op. cit.
6 w\vw.atwoniine.com.
'7 IBIS\Vorld, 'Qamas Report: 2006', www.ibisworld.com (2006) (accessed J2 October 2(06).
8 Australia, House of Representatives (1990): 650.
9 J. Quiggin, 'Evaluating Airline Deregulation in Australia', The Australian Eamornic Reuierti, 30: I (March,
J995).
10 Prices Surveillance Authority (1994).
11 P. Forsyth, 'Low-cost carriers in Austr<llia: experiences and impacts', jrJUrna/ of Air Transport /VLwclgcment, 9
12(03): 277-84.
12 J. Kain and R. \Vebb, 'Turhlllcm Times: Australian Airline Industry hsues' (2003),
13 W. Greene, G. Walls and L. Scnrcst, 'Internal marketing: the key to extemal marketing success', }Gurnal oj"
Seruices Marketing, 8:4 (1994): 5-13.
14 S. Creedy, 'Another crash landing', The Australiatl (14 ;"larch 2(06).
15 ibid.
t6 Qaora" Fact File, www.qamas.com (2006).
17 B. S,mdilands, 'Airlines take aim as low-cost \var heats up', Austrafian Financial Rcuiew (24 February 2(01).
18 Forsyth, 'Low<osr carriers in Australia: experiences and impacts', op. cit.
19 G. Batnber, A1arketing Strategies ilnd Labour-Aiarket Behaviour of Full-Sen'ice and Low-Cost AirlirlCS: An
Australian Study (Brisbane: Griffith University, 20(6).
20 Kain and Webb, 'Turbulent Times: Australian Airline Industry ISSUeS', op. cit.
21 Virgin B!ue, 'Prospectus', ww\v,virginblue.com.311/pdfslinvestors/snareoffer/Virgiu._Bluc. hospcctus_17nov03.
pdf (accesscd 13 Ocwber 2006).
22 ibid.
23 G. Johnson and K. Scholes, Exploring Corporate ,)'lratcf:,'Y: lext {lnd Readings, Srh edn CHerne! f-kmpstcad:
Prentice-Hall, 1999).
24 www.afr.com.auiaccessed 21 October 2006).
25 T. Harcourt, 'Qamas in Radical Plan for Jemar', Australian Financial Review ;25 Feb-ruary, l004j: 1.
26 www.ba.co.uk ia.ccesscd 17 October 20(6).
27 A. Joyce, 'Address to National Aviation Club', media reblse (22 July 10(4).
28 w\vw.qanras,com.au (accessed 1 S CkrobC'r 200S).
29 Intervie\v with Jarnes Strong (19')5), in J. McDonald and B Millett,'A Case Study of the Role of Collect;n:
Bargaining in Corporate Change - Qantds Airways Limited', University of Southern Queensjand (t 9%): L
30 D. Jenkins, 'E,voiution I'n the Airline Industry: The Imp:Kt of Structural Change on Productivity ,md
Reorganization" Ceorge Wasbington University IorCJTlatlonJj Imritute of Tourism Srudic5 and Tr:lvd Te.:hnic:\
i 1995).
,)1 J. !VkDoncdd, 'Some features of industria! n:btions in the deregulated airline' i1992i.
463
464 Ilntcg:r:l[ive <::as'c stlldies
32 www.qanms.cnm .
. L' R. !Vlyef and C. Donnan, -Air Wars', The Age, Husiness. 17 l),xcrnber 20(5).
34 P. Gregg, 'Qantas PrcselltJtion', UBS Transport Conference l31 ?vl:1rch 20041
35 l Durie, 'Dixon can HOW run his O\\/n race', Australi,;n find,,<.-'ial ReI/jew (<) September 20U4}.
36 www.qJnrcls.com .
1 i Gregg, 'Q:wws Presenrarinn', op. cit.
38 www.q.nr .... com.
39 J. Flottall, 'New Horizons', Auiatiol/ \Y:/eek SlUti' TI!Chnoiogy, 16 t:2 fDeccmb,;r, 20(4): 42.
40 A. Ferguson, 'Dixon delays depanure', Business Rel'iclU ')'/akl), (25 .\by 10(6).
41 www.ba.co.uk.
42 G. Dixon, '2002;03 Full YCclf Results: Presentation to Investors' (21 August 2003).
43 M.E. Porrer, Competitiuc Advantage York: Free Press, In5): 97.
44 S. 'Thc Secret QanrJs', Business Rel'iew Weekly (10 July 2003;.
45 A. Ferguson, 'Blue sky for Qant:ls', Business Review Witek!), (27 September 200 l J.
46 T. HJf.:ourt, 'Qamas seeks help to fight rivals', .r1ustraiiun Filldlldal [{elfiel!) ,20 Augn5r 20tH).
47 Washington, 'The Secret Qant<ls', op. cit.
48 Harcourt, 'Qantas seeks help to fight rivals', op. cit.
49 \\!ashingtoll, 'The Secrer Qanms', op. elt.
50 Gregg, 'QantJs Preselltarion', op. cit.
51 ibid.
52 ibid.
53 D. Crowe, 'Qantas contracts worth S1.4bn', AustraliaJl Financial Revinl/ (18 \by 2004).
54 HJrcoun, 'Qantas in Radical Plan for Jetstar', op . .:it.
55 R. 'Qantas raises fuel hedging, nc\v delay for jumbo', Sydney Morning Herald (28 September
2006).
56 C. Dixon. '2003/{)4 Full Year Results: Presentation to Investors' i 19 August 2004 j.
57 J. M,Kkcn, Take: Airlines r1$(; to dimatt challenge', Austr,-;/ian hnancial Rcdew (!! August 2006).
5,s Porter, Cornpelitiv' Aduutttage, op. cit.
59 Dixon, '2002/03 Full Year Results: Presentation to Investors'. or. cit.
60 YL Doz and G. Hamel, Aifiana! Aduant.Igr:: The Art of Creating l,lalue through Partnering (Boston: H.arvarJ
Business School Pr(;ss, 1998).
61 Durie, 'Dixon can now run his lwm LH:e', op. cit.
62 Harcourt, 'Qantas seeks help to i1ght rivals', op. cit.
63 .7v1yer and Dorman, 'Air \\'ar5', op. cit.
64 A. Ferguson, -Troubled flight', Business Review W,lcckly (30 June 1005).
65 CK. Prahabd and Y. Doz, TiJe i'vluitinatiun.li Iv1ission: Baiancing L(}cui Demdnd$ and Global Visiun
York: The Free Press, 1987}.
66 IBIS\'Vorld, 'Qantas Report: 2006', op. cit.
67 D. Waddell et 3:1. (2004).
rig P. Kerin, -Good for Qanras, not good for us', Business Rcuiew W/eekiy i8 June 2(06).
69 T. Harcourt, 'Turbulent times unire Q:lI1tas, Singapore', Australian Financial Review (4 August 2(04); Kerin,
'G(j()d for Qantas, not good for us', 0[>. (it.
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