Rival airlines fly different routes
Sydney Morning Herald
Thursday March 10, 2011
I would love to have been a fly on the wall at recent meetings between Qantas' major institutional shareholder, Capital Group, and the pilots union boss, Barry Jackson.This union, and others that cover Qantas maintenance workers, are very down on Qantas. These workers take the view that the Jetstar brand is taking over the company and that the mainline Qantas operations are being left to wither on the vine.The mainline pilots are in a battle with Qantas to extract some certainty about future employment, wages and conditions - but this is the way labour markets operate.Whether Capital's decision to lighten its holding by 2 percentage points is the result of these meetings is anyone's guess. Capital certainly isn't telling. The sell-down may be nothing more than profit taking.Having said that those who watch the industry closely are well aware of the shifting sands.Qantas and Virgin both made announcements yesterday. Qantas revealed an increase in international airfares executed through a rise in the fuel surcharge, and Virgin launched a new menu, created by the celebrity chef Luke Mangan.It would be too simplistic to say that Qantas' strategy to boost profits is to increase airfares and Virgin's is to improve service.Both airlines have played with fuel surcharges to overcome the costs of higher fuel prices. Qantas has pulled this lever twice now over the past few months and Virgin, which followed suit the first time, could come at it again.The sharemarket generally appreciates an airline's move to recover costs like fuel in the same way as it warms to moves that will keep a lid on expenses such as labour.There will be a far more profound response to a fare increase than there will be to a glamorous menu. For Virgin a new menu is incremental. It won't change brand loyalty. But it is part of an overhaul of the budget carrier that aims to position itself closer to the Qantas mainline than the no frills Jetstar.Over the past few months Virgin and its international sibling, V Australia, have been picking away at Qantas, attempting to release the Flying Kangaroo's stranglehold on the business market.A number of international partnerships, like the one it recently negotiated with Etihad, are part of the strategy. A fully functioning domestic business class will be another - as will a proper frequent flyer program and attractive lounges for corporate passengers.The rewards program is a central plank for Virgin. Where Qantas received a significant boost to its loyalty strategy by adding Woolworths as a partner, Virgin will also need a large cohort.Cracking the business market is a tall order for Virgin because Qantas already has a sticky business customer base thanks to frequent flyers and its well-pitched brand.The Qantas boss, Alan Joyce, has made it abundantly clear that the company's international mainline operations are losing money and that the fuel price surcharges are not recouping the increased fuel costs.Domestic Jetstar and Qantas operations are compensating for the losses in Qantas' overseas operations but this is not sustainable. Middle Eastern airlines like Emirates and Etihad are increasing capacity and eating into Qantas' international market share.The new surcharges by Qantas won't help capture any of this lost business.Instead Qantas is focusing on enhancing its services to Asia - a new international growth market. The more immediate focus will be the success or failure of Virgin's push into the corporate market. This is the industry sleeper.Years of trying has got Virgin almost no traction in this market. But the renewed push under former Qantas mainline boss John Borghetti has captured some attention.The surcharge and the improved profit this year can placate the shareholders for a time but at some stage Qantas will need to demonstrate that it has secured its domestic and international market shares.Longer term it is not enough to ride the economic cycle. There are too many potential external shocks to the industry for this strategy to be a winner. Equally there are too many hungry and well-funded airlines waiting in the wings to snatch Qantas customers.