Qantas Case Study

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Qantas Case Study

Qantas is an Australian icon. Australia’s national airline has enjoyed a long history as a profitable business, a respected brand name and has a deserved reputation for safe and reliable travel. For a small country of 22 million people, the Australian domestic airline industry is significant. The high level of urbanization of Australia’s population, the long distances between major urban centres, the lack of high speed trains and the importance of Australia’s tourism industry all spurred growth in air travel in Australia. Qantas has always been the dominant player in the industry.

In recent years, however, the company has encountered turbulent times. The airline industry in Australia has become significantly more competitive, and the international airline industry has seen the fall of a number of well-known airlines and the rise of a number of new carriers. The vision of the Qantas group is to be one of Australia’s great businesses and among the world’s great airline groups. However, in the 2011/12 environment, Qantas faced a number of setbacks to this vision.

In 2011 the airline struggled on two fronts. The first front was the declining profitability of international operations. This problem culminated with Qantas reporting a $257 million dollar loss for the year ending on 30th June, 2012. This was the first loss for the airline since it was fully privatized in 1995. The airline is, however, profitable in the domestic market, holding a 65% market share and having a commanding lead in the key domestic business market. However Qantas was losing money in the international market and in 2012 it only carried 18.7% of passengers travelling to and from Australia.

The most profitable activity for Qantas is travelling business class passengers. Flying economy between Sydney and Melbourne, for example, can often be less than $100 return. A business class, return flight on this route costs more than $1300 on Qantas. Domestic business class travel thus has very high profit margins, and these premium travelers generally don’t pay for their tickets (this being a perk of senior managerial jobs in many organisations). Qantas has been keen to develop loyalty among this group, investing extensively in lounges and loyalty programs to keep this key customer group content. In an ominous way, John Borghetti (the Virgin Australia CEO, and former Qantas executive) signaled a strong intention to pursue Qantas’ customers in this key segment in 2012 and launched a full-service, business class offering at a 25% discount to Qantas on key routes.

Qantas explained the 2011/12 loss in the context of record high fuel costs of $4.3 billion for the 2011/12 financial year. The airline’s fuel bill was $645 million greater than the previous financial year. In the annual report, the airline also announced a one-off cost of $398 million for a turnaround plan for the airline’s international network. The high Australian dollar and global economic uncertainty also played a role in the airlines woes.

Qantas had been a key purchaser of new aircraft from the major manufacturers, Boeing and Airbus, being one of the first customers for Airbus’ A380 and Boeing’s 787 Dreamliner. As one of the few profitable airlines post September 11, 2001, Qantas was able to build its fleet while negotiating strong discounts on new planes. These purchases had improved Qantas’ fleet efficiency and image in the marketplace, but had also driven an escalation in the company’s fixed costs.

The second front where Qantas was struggling was continuing industrial action that culminated in the airline locking out some employees and then grounding the entire Qantas fleet on 29 October 2011. Qantas has traditionally been highly unionized – especially in comparison to its new competitors like Virgin Australia and Tiger Airways. Qantas locked out engineers, pilots and baggage handlers from their place of employment. Aircraft were immediately grounded when the...
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