Increased competition puts Qantas in a quandary
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Five years after taking the top job at Qantas, Alan Joyce is facing a crisis that could break his career.

Following a profits warning, a plunging share price and the loss of the Australian flag carrier’s investment grade credit rating, the 47-year-old chief executive is poised to unveil a turnround plan this month.

“He is under a lot of pressure,” says George Cairns, professor of management at RMIT university in Melbourne. “Qantas is a national icon at home and the public face of Australia abroad.”

Qantas has flown the skies over Australia for almost a century, developing an unrivalled regional network and establishing itself as the country’s most recognisable company.

But for the first time in a decade the so-called “flying kangaroo” faces an aggressive competitor in Virgin Australia, which is taking on Qantas in its backyard, just as the airline’s international unit is in trouble.

In December 2013, Qantas warned it would report losses of A$250m to A$300m ($223m-$267.8m) in the second half of that year. It blamed unfair competition from Virgin on domestic routes and unveiled a A$2bn programme of cuts to reassure investors.

That has not worked. Since the announcement, Qantas’s shares have languished close to record lows. Standard & Poor’s and Moody’s have slashed its credit rating to junk, the latter citing a “marked deterioration” in its domestic business.

Qantas says Virgin is playing fast and loose with Australia’s airline ownership laws by restructuring operations to take on board foreign capital to absorb mounting losses. “The agenda of these foreign airlines is to terminally weaken Qantas,” Mr Joyce wrote in a November email to staff.

The bitter battle has a personal edge, as Virgin is led by John Borghetti, a 58-year-old long-time Qantas executive who left the airline shortly after Mr Joyce pipped him to the chief executive role in 2008.

Since joining Virgin in 2010, Mr Borghetti has taken over regional airlines, boosted capacity and added business seats to challenge Qantas in its lucrative domestic market.

In response, Qantas has increased capacity on domestic routes to protect its 65 per cent market share, a level Mr Joyce refers to as a “line in the sand”. But the cost of taking on Virgin at home, as well as other airlines abroad, is mounting.

Qantas’s international unit is haemorrhaging cash as it combats competition from Middle Eastern airlines, which enjoy cost advantages over the legacy carrier thanks to lower labour costs and the location of their hubs, within easy distance of Europe and Asia as well as Australia.

Qantas’s market share has fallen from 32 to 17 per cent in a decade.

After shunning alliances, Qantas changed course in 2013 and agreed a partnership with Emirates. But restoring profitability to its international unit will be challenging.

“Qantas may be a national icon but Australians will follow their wallets when booking flights,” says Neil Hansford, chairman of Aviation Strategic Solutions, a consultancy.

He says Qantas should copy Virgin and separate its domestic division from its international unit to attract foreign capital. By doing this, Virgin circumvents the Air Navigation Act, which imposes a 49 per cent foreign ownership cap on Australian airlines operating international flights.

This enabled Etihad Airlines, Singapore Airlines and Air New Zealand late last year to back a A$350m capital raising, which took their combined stake in Virgin to 67 per cent.

But removing regulatory barriers to allow foreigners to control Qantas is politically sensitive and would require the repeal of the Qantas Sale Act, a law that limits any single foreign investor to a 25 per cent stake and total ownership by foreign airlines in Qantas to 35 per cent.

“It is a regulatory straitjacket for an airline that needs access to capital,” says Dan Tehan, a Liberal MP and convener of the ruling Liberal-National coalition’s Friends of Tourism group.

The coalition is open to repealing the Qantas Sale Act, but the opposition Labor and Green parties are opposed and can block proposed changes in parliament. Labor says it would prefer the government to buy a stake in Qantas. This seems unlikely. Instead, Qantas is lobbying Canberra for a government debt guarantee that would lower its cost of raising funds.

The airline is also considering raising cash via disposals. It is mulling a float of its frequent flyer unit, which could be worth A$2bn. A partial sale of its low-cost subsidiary Jetstar and the sale of airport terminal assets are also possible. But many analysts question whether disposals alone can fix Qantas.

Cameron McDonald, analyst at Deutsche Bank, says: “Selling assets doesn’t solve the cost issue. It would need to be a catalyst to addressing the cost base of the company.”

Any further cost-cutting, however, will put Qantas on a collision course with trade unions, further complicating the options for turning round the airline.

Patrick Low, director of communications at the Transport Workers Union, says: “We won’t support further cost-cutting, and neither will the Australian public.

“Turning Qantas into Aeroflot with a kangaroo on its tail is not the answer.”

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