Generational change for Qantas as the airline industry enters a new era

The appointment of Alan Joyce as next CEO of Qantas is more than just a reward for Joyce's highly successful performance in establishing Jetstar as a major airline force, domestically and globally. Mr Joyce is no less than a quarter of a century younger than his soon-to-be predecessor. The timing of such a generational change, as the industry itself enters a wholly new era, should be seen as more than coincidence.

The next Qantas CEO, who takes over on 28-Nov-08, after the annual general meeting, will face an array of challenges. But then, as a former American Airlines CEO once said, "this is a nasty rotten business". Unpredictable challenges and change are the norm in a business which is so sensitive to economic, regulatory, safety, environmental and many other external influences beyond management's control.

Geoff Dixon has had no shortage of headwinds either, since taking over in 2000. His new role coincided with the end of the tech boom, which saw airline yields drop overnight, to be followed in 2001 by the September 11 terrorist attacks. The attacks coincided with the collapse the same week of Ansett and the rise of new low cost competition in the domestic market. Just as things were recovering, along came SARS, almost driving international operations to a halt.

The impact of Virgin Blue was now starting seriously to undermine Qantas' domestic business and eventually Dixon took the then-unfashionable option of establishing a low cost subsidiary to deal with the threat of a low cost competitor that was now very much eating Qantas' lunch.

This is where Alan Joyce came to the fore in 2004 and, working well in tandem with Dixon, produced one of the more remarkable airline success stories in aviation history, as CEO of Jetstar. The new domestic subsidiary was given near-total autonomy (an area where other similar projects had gone astray) and quickly progressed to becoming an international force for Qantas and a new Asian brand in its own right. The success of Jetstar was by no means assured and indeed many wrote it off before it began.

Mr Joyce headed off Qantas CFO, Peter Gregg and John Borghetti, who has main responsibility for the full service side of the Group's activities, each of whom was considered a likely contender.

The next couple of years are likely to witness changes in the airline industry that are also generational, as liberalisation, fuel prices and a rapidly slackening economy force an overhaul of a system little altered in 60 years.

For Qantas, the immediate issues include taking delivery of a brand new (next generation) fleet. The first A380 arrives in a couple of months, to be followed next year by a massive order of B787s. Alan Joyce will inevitably be associated with a low cost mentality, although so long as Qantas can maintain its high premium yield advantage over its domestic opposition, it must strive to maintain that margin.

That said, despite a solid cost reduction programme over the past five years, there are still some major outstanding "legacy" issues in Qantas that need to be addressed, with its variety of unions and constant need to avoid erosion of the large discretionary element in Australia's relatively mature market.

Australia is typified by a point to point route structure, in which low costs are critical, as Tiger (and potentially others) gnaw away at the bottom end - but while Virgin Blue increasingly attacks the corporate and premium customers. The route network will increasingly focus on Jetstar operation, especially if fuel prices remain high and demand slips. Mr Joyce will preside over these big picture issues.

But he will quickly have to get used to the idea of someone else running his LCC. Its independence - within bounds - has been a cornerstone of its success. And in some ways the new CEO of Jetstar is the model for the next generation. Mr Joyce will undoubtedly be seen as the Qantas CEO who allows Qantas to subside even as Jetstar grows. But that is a role that any leader in this environment will need to play.

Whether he can placate the unions and other legacy inertia through this process will perhaps be his biggest challenge. But one way or another, the Jetstar brand will become a much bigger brand, domestically and internationally, than Qantas during his leadership. That will be a major generational shift in its own right.