A Qantas centenary perspective: John Ward, former CEO
On 16-Nov-2020 Qantas turned 100.
During a century of monumental change Qantas has provided global aviation industry leadership in product innovation, technical excellence, operational performance and managerial acumen.
In doing so it has survived many dark moments. Periodically reinventing itself, it is a rare exemplar of a successful and resilient Australian business with global reach. Today it is confident in both its capability and in its economic and social relevance: and another reinvention is in prospect.
Queensland and Northern Territory Aerial Services
The story behind the formation of Qantas began in March 1919 just after Paul McGuiness and Hudson Fysh arrived in Hobart having sailed from Egypt, their First Word War military flying days over. It culminated when the papers formalising the establishment of the airline were signed at the Gresham Hotel in Brisbane on 16-Nov-1920. Shortly thereafter Qantas commenced domestic operations in Queensland initially carrying mail and then passengers. Its network expanded and it began international operations in 1935.
It was an active participant in many theatres during World War II and kept supply lines open between Australia and the UK by operating the 33 hour “Double Sunrise” flights between Perth and Ceylon to break the Japanese blockade of the Indian Ocean. It was acquired by the Australian Government in 1947 at which time it ceased domestic operations.
For the next forty-five years Qantas remained uniquely an international airline without a domestic network. While this had its challenges from a business perspective, it necessitated a global outlook and a focus on growing foreign markets.
In the 1990s Qantas, the Aussie icon, is privatised
By the 1970’s Qantas had become an Australian icon by being synonymous with both pioneering and with aspects of the national interest: overcoming isolation, developing technological independence and putting in place the air transport infrastructure necessary for trade, business, immigration, family reunion, tourism and cultural exchange with key foreign markets. It also provided airlift capacity for defence and in national emergencies.
By the mid 1980s Qantas was the most visible overseas manifestation of Australia. However, government ownership support was no longer a political priority. Qantas was starved for equity with AUD11.50 of debt for each dollar of equity. This had to be addressed.
The resulting privatisation which followed the acquisition of the purely domestic Australian Airlines in 1992 required a commercially sustainable balance sheet and the attainment of globally competitive operating and financial metrics.
Privatisation also meant that, unlike the situation with many of its foreign competitors, it was largely the appetite of the capital markets that would henceforth be the ultimate determinate of the size and shape of Qantas.
Realised merger synergies resulted in a substantially lower post-merger domestic cost base and its potential for high profit generation. Qantas’ initial post privatisation focus was therefore on maximising the returns from its domestic network while strengthening its international competitiveness through coordination with its domestic network.
Intrinsic to Qantas’ historical success has always been taking a long-term perspective with careful and early investment in new technology to secure competitive advantage in both product and operating costs. This remains true and is now augmented by the need for capital market support, requiring healthy cash generation and a continuing investment grade credit rating.
The art of leadership at Qantas
No retrospective on Qantas would be complete without some commentary on leadership.
At Qantas leadership has always been the art of listening to a broad range of stakeholders while determining what is best for the long-term future of the Company and then gaining the support of key constituencies by providing them the knowledge base to embrace the Company’s conclusions and accept its strategies.
While shareholders’ interests were never subordinated to those of other groups it was always accepted that stakeholder considerations were part of a strategy to promote company sustainability and maximise value over the longer term.
Indeed, this embodiment of what are now known as environmental, social and governance (ESG) principles has been a feature of leadership at Qantas throughout its 100 year history.
During this time, when making strategic decisions Qantas has often needed to balance a range of often complex and competing stakeholder interests in concluding what actions are in the best interests of the Company. At various times these different stakeholder interests have been accorded different weightings. Profitably serving the National Interest was a key criterion under government ownership, while delivering a competitive return has become key post privatisation.
Historically, regular direct, consistent and open employee and political communication has been necessary to gain trust, secure engagement and have stakeholders develop sufficient appreciation of business reality to mitigate short-sighted political and industrial agitation.
The lesson of history is that, for these audiences, spin is counterproductive. It dilutes the credibility of the real message and breeds cynicism which is neither conducive to an engaged and motivated workforce nor to government support. Hubris must be avoided.
The shifting balance between economy of scale and of scope
Until the 1990’s economies of scale were a prime source of competitive advantage. Since then the balance between economies of scale and scope has shifted. Many economies of scale have been mitigated by technology and by outsourcing. While this reduced some of Qantas’ resilience and domestic competitive advantage, from a group perspective it has had positive, albeit painfully, achieved results.
As economies of scope became the increasingly potent source of competitive advantage, these have underpinned Qantas’ recent success. Examples are its superior network alliances, its customer loyalty programme, the reach of its differentiated dual branded manifestations and the defence of its “line-in-the-sand” 65% domestic market share.
“Sunrise” over Qantas’ structural geographic disadvantage
Not since foreign hub operations began in earnest in the 1970s has Qantas been able to overcome its structural geographic disadvantage as an “end-of-the-line carrier” and have some semblance of control of its own destiny in the Europe end-to-end market. This may now be in sight.
For the Australian East Coast, finally the aircraft technology is arriving to allow a broader fight back against geography with an extended long-range variant of the Airbus' A350 selected as the aircraft best suited for viable nonstop services to the UK, Europe and New York, demand for which could become increasingly strong in the post pandemic years.
The intermediate hub-based carriers cannot offer equivalent non-stop products without securing traffic rights to operate without landing in their country of designation. This is unlikely. Moreover, the European and US competitors which could offer equivalent products do not consider Australia or ultra-long haul flying to be a strategic priority. Indeed, the introduction of such services by Qantas is simply not going to provoke a raft of airlines to follow: And that, no doubt, is just how Qantas would like it.
Facing a restructured industry – and the vital need to combat climate change
In the future Qantas will also have to compete with restructured competitors and new entrants. It will face continued volatility associated with recessions, fuel prices, currency fluctuations, industrial disruption, wars and pandemics. And then there is ever-present potential of technological disruption. There is however a serious emerging threat: That of dealing with aviation’s contribution to greenhouse gas driven global warming.
So far heavy industry and energy generation have played the most significant role in meeting emissions reduction targets. With greater ambition to further reduce emissions there will be a need for other emissions generating sectors to have a much larger role.
Qantas recognises that between now and 2050, as other sectors contract, aviation will make up an increasingly significant share of remaining positive emissions with its highly uneven distribution of emissions on a per capita basis raising equity concerns. It has announced its ambition to reduce its emissions to a net zero by that date and to contribute to the funding of research into alternative low emission fuel sources.
There are sound business reasons for this: unless low-carbon aviation technology becomes technically feasible there will be increased pressure to restrain demand. The imposition of a frequent flyer levy escalating with the distance travelled by an individual within a defined period would spare the large majority of travellers significant extra cost. This has been proposed (in the UK) along with a ban on frequent flyer programmes that are seen as incentivising excessive flying. The impact on Qantas of such globally induced moves to encourage behavioural change would be massive.
Accordingly, successfully avoiding such an outcome through the development of low carbon aviation fuel technology is becoming a key priority. While an offsets programme might be useful during a transitionary period, some carbon offsetting schemes stand up to scrutiny little better than the Catholic Church did in the Middle Ages when it sold indulgences for the forgiveness of sin.
Ultimately aviation will need to reduce its carbon footprint in ways it controls: not by relying on middlemen offering to absolve guilt over polluting if they are paid to offset carbon, often by planting trees. While this will not be easy, as the 100-year history of Qantas demonstrates overcoming new challenges never was easy.
John Ward worked with Qantas for 25 years, serving as MD and CEO from 1989-1993. He formulated and presided over the acquisition in 1992 of Australian Airlines, involving the flying kangaroo’s strategic transformation from a solely international airline. This was in preparation for the privatisation of Qantas, which began in Mar-1993, when British Airways took a 25% cornerstone stake, prior to the full public offering in 1995.