Qantas struggling with the U-turn
Illustration: Simon Letch
Alan Joyce is a man under extreme pressure. Not only is the Qantas chief executive presiding over a company that has plunged to its first loss since joining the sharemarket 17 years ago, and whose share price dived almost 19 per cent yesterday, his options to rescue the company are as harsh and difficult as they are limited.
And to make matters worse, the plan that he outlined last year to revive the troubled international operations of the Qantas business will need to show some signs of gaining traction next year or the market will be calling for his blood.
The dilemma for Joyce is that in the commercial world, there is always an expectation of a quick fix. And when it comes to restoring the fortunes of Qantas's loss-making international operations, there is no immediate panacea.
He outlined a four-pillar strategy last year that would take several years to execute. To date - or at least on the numbers he delivered yesterday - the trouble child among the Qantas brands has become even more troublesome.
This is not Joyce's fault. The fuel price and the European meltdown are issues well outside his control.
The pressure on the better-behaving Qantas domestic and Jetstar operations are more inside his control and he will be more accountable for how these perform in the near and medium term.
Right now, Joyce has tied his right to lead the airline to how the international business performs over the next few years. And there will be an expectation that the building blocks for recovery that he has already announced will deliver some gains next year.
Ultimately, he will need to bring this troublemaker to break-even.
Whether he needs to have it return its cost of capital is another matter entirely.
He says this is the objective but it may never be achievable on a sustainable basis.
Qantas International's profit record has a history of gyrating wildly depending on external conditions.
At the earnings before interest and tax line, Qantas International will lose $450 million this year.
This raises the question of why Qantas needs to run this operation at all. Its market share is about 17 per cent and it has often been a thorn in the group's side in terms of the brand perception.
The rationale, as explained by Joyce, is that despite its stand-alone losses, Qantas International is a fundamental part of the wider network as it provides feeder traffic into the domestic operations.
But with 17 per cent of the market, why bother to keep this loss-making feeder alive? Surely it costs more than the financial benefit it gives to Qantas's domestic operations.
Joyce says the calculation is not that clean. While Qantas International has a relatively small market share overall, its share of the premium market is significantly larger. The business or premium segment is the nirvana for all operators as it is the high-yielding end of the market.
Not only do the premium domestic customers want to be able to use their frequent-flyer points on international routes, they also want to use their international points on domestic ones.
Thus, the highly profitable frequent-flyer division and the domestic premium Qantas brand need the sustenance of Qantas's international operations.
There is a bigger wrinkle, which Joyce may consider counterfactual.
If Qantas was of a mind to get rid of the international business, it has three options - sell it, sell part of it or close it down.
There is nothing stopping Qantas from forming some kind of joint venture between its international division and another airline via offering third-party equity. The recent internal splitting of Qantas's domestic and international operations has put the first block in place. This has clearly been investigated and potential partners have been mooted. Most recently, a tie-up with Emirates has been bandied about the industry.
But selling it outright is a near impossibility because the Qantas Sale Act will not allow a foreign owner.
Closing the division has more dire consequences. It is a $5 billion business with liabilities including debt and 10,000 employees that would need to be paid out.
''We have looked at every strategy under the sun,'' Joyce said.
And the only conclusion is to turn the business around.
Still, it is a tall order. International carriers continue to eat Qantas International's lunch - the latest being China Southern, which has entered what is now called the ''Canton route'' to Europe via China.
The increasing invasion of foreign and often government-owned airlines into the Australian market means the goalposts continue to shift for Joyce and Qantas.
There are many who blame the Qantas board and management (past and present), and their service and fleet strategies, for the pickle in which the company finds itself.
There is no doubt mistakes have been made.
But the reality is that Qantas is pursuing a turnaround strategy for its international business with one hand tied behind its back.