Strong footing: A crew member cleans an aircraft as Qantas begins preparing for the return of international flights at Sydney Airport. Free cashflows last year hit a record A$1.7bil (RM5.2bil), allowing Qantas to cut its net debt by A$2.1bil (RM6.4bil). — Reuters
HOW can a chief executive officer who’s attracted as much ire from passengers as Qantas Airways Ltd’s Alan Joyce still be impervious to criticism? It helps to remember who executives answer to. Here’s a clue: It’s not the people buying tickets.
Joyce has experienced calls for his resignation from unions and Australia’s parliament and had his home in Sydney defaced with eggs and toilet paper in July following chaotic scenes at airports with long lines, lost luggage and delayed departures.
And yet shareholders are in a forgiving mood. Since reporting annual results last Thursday, the stock has gained nearly 16%.
With an enterprise value set at 4.1 times its forecast earnings before interest, tax, depreciation and amortisation (Ebitda) over the coming 12 months, Qantas is now sitting on a higher multiple than the average 3.6 times in the 10 years before Covid-19 struck.
That’s not surprising when you consider what a good pandemic Qantas had. While the shutdown of air travel caused the carrier to rack up an aggregate A$4.6bil (US$3.2bil or RM14.35bil) of losses over the past three years, the effect on its competitors was far worse.
Its main domestic rival, Virgin Australia Holdings Ltd, went into administration and was bought by Bain Capital. With an initial public offering on the cards over the next 12 months, the new owners aren’t looking to jeopardise their exit price with a fare war.
Outback carrier Regional Express Holdings Ltd has been moving in on the lucrative Sydney-Melbourne-Brisbane triangle, but remains too small to be a real threat.
A new low-cost airline trading under the name Bonza is hoping to start flights shortly, but with the demise of Virgin’s TigerAir brand in 2020 the discount flight market is already monopolised by Qantas’ own Jetstar.
The result has been an entrenchment of the flying kangaroo’s already dominant domestic position. Its market share, trending down in the latter half of the last decade, is now back at levels well above 60%, making it almost impossible for rivals to offer a competitive service in terms of connections and schedules.
That sort of position is rare in the global aviation industry. Domestic airline markets are often a precious asset, providing a haven from the fierce competition that characterises international routes – but even there, the likes of China, the United States and Brazil see ongoing warfare between three or more major carriers, while Japan is a duopolistic stalemate whose incumbents struggle to return their costs of capital.
Among the largest domestic markets, only India and, at a pinch, Russia can boast a player with as commanding a position as Qantas enjoys in Australia – and those developing markets are far less lucrative.
Such dominance has allowed Qantas to take risks that peers in other countries wouldn’t dare. Many airlines shied away from drastic cost-cutting, fearing the backlash from unions and politicians whose support they were counting on through the pandemic, not to mention the impact on customer service from skeleton-crew workforces.
The big three US full-service carriers have 5.2% fewer employees now than they did pre-pandemic. China’s top three have cut staffing by just 2.7%. Qantas reduced its workforce by 14%, more in line with the drastic surgery carried out by European airlines.
More than 40% of domestic traffic is now on Jetstar, which lacks the legacy costs of a full-service airline – up from around 25% when Joyce took over in 2008.
Joyce founded the discount carrier after joining Qantas from defunct Ansett Australia Pty. Born to a working-class family in Ireland and one of the country’s first openly gay chief executives, he’s clashed with unions as he’s reduced the workforce by about a quarter, and faced homophobic attacks during his support for Australia’s 2017 marriage equality law.
Record cashflows
During his 14 years as CEO, he’s cemented Qantas’s position in Australia despite falling short in efforts to break into Asia’s discount carrier market. As a result of the savings he’s made, free cashflows last year hit a record A$1.7bil (RM5.2bil), allowing Qantas to cut its net debt by A$2.1bil (RM6.4bil).
At a time when much of the industry is struggling under the weight of borrowings, analysts expect Qantas’s net debts to be just 1.1 times its Ebitda next year, falling to less than one in the two subsequent years.
It’s hard to cut costs to the bone without having a similar effect on service, and there’s no doubt that Qantas’s reputation has been deeply tarnished.
From levels of around 90% of flights arriving and departing on time, its performance has slipped to around 50%, and travellers have reported luggage going missing for days or weeks.
At the rural airport of Geraldton in July, more than 150 passengers were forced to sleep on the terminal floor after fog and staffing issues delayed a connection to Perth.
Frequent fliers have been offered lounge passes, a video message from Joyce, and A$50 (RM152.12) vouchers to apologise for the standard of service.
Shareholders have done better. Those who bought close to the bottom at the end of March 2020 have enjoyed a 65% capital gain, and last week were given a A$400mil (RM1.23bil) share buyback, too.
If the uptake of apology vouchers is much below 60%, Qantas will end up giving a bigger thank you to equity investors than passengers.
This is only to be expected. Customers hate businesses with excessive market share, knowing how little choice they have to seek alternatives. For the same reasons, shareholders love them.
So long as that situation prevails, Joyce’s job will be safe. — Bloomberg
David Fickling writes for Bloomberg. The views expressed here are the writer’s own.
