Alan Joyce wins gamble on Qantas grounding but now awaits market’s lasting return

Grounding was the right option

Mr Joyce announced on 29-Oct-2011 that members of the three unions – representing pilots, engineers and some ground workers – would be locked out from 5pm on 31-Oct-2011. Because of uncertainty over how employees would respond – potentially walking off early or endangering operations – Qantas grounded its fleet immediately, reducing Australia’s domestic capacity by approximately 35% and international capacity by about 20%. (Subsidiaries Jetconnect, Jetstar and QantasLink were unaffected.)

Mr Joyce had given advanced notice to the Australian government, which was preparing to take the matter to the newly-established industrial relations body Fair Work Australia. FWA in the early hours of 31-Oct-2011 ruled in the government and Qantas’ favour for all industrial action – Qantas’ grounding and union action – be terminated. The unions hoped for a suspension of action. Qantas gradually resumed flights later on 31-Oct-2011.

Mr Joyce and Qantas have received blunt criticism from Australia and its government, including Prime Minister Julia Gillard and Minister for Transport Anthony Albanese, for taking what some deemed the nuclear option rather than alternative and less punitive actions. But Qantas took the right action.

Qantas detailed at its annual general meeting on 28-Oct-2011 that ongoing industrial action – including work stoppages and overtime ban that resulted in maintenance work falling behind, causing aircraft groundings – was costing the airline AUD15 million a week and so far reached AUD68 million. Forward bookings were down 10-25% depending on the sector.

A representative of the Australian Licenced Aircraft Engineers Association, one of the unions in dispute with Qantas, had even made remarks that passengers should not book tickets on Qantas. Other union commentary indicated the unions would continue their action over the peak Christmas period and into mid-2012 in order to “bake Qantas slowly” – indicating the dispute would not be resolved in the near future as the unions attempted to effectively control the airline.

“We had no alternative,” Mr Joyce said on 31-Oct-2011 while announcing flights would resume. “We made this decision after we saw the union leaders at the AGM talking about more stoppages, 48 hour stoppages.”

For a full explanation on what led to the grounding, see related article: Anatomy of a grounding: Qantas seeks immediate and lasting concessions to secure future

It is apparent Qantas hoped for government intervention, which was not forthcoming as the government wanted to avoid the battlefront. While Qantas could apply for intervention from FWA, the industrial relations body is limited to making decisions in cases that have a profound affect on the country’s economy. As the tribunal stated in its 31-Oct-2011 ruling, “It is unlikely that the protected industrial action taken by the three unions, even taken together, is threatening to cause significant damage to the tourism and air transport industries.”

And so Qantas needed to concoct a scenario that would cause significant damage. As Mr Joyce said on 29-Oct-2011 when announcing the grounding, “I have no option but to force the issue.” The grounding, the only legal form of retaliatory industrial action available to Qantas, put the carrier in the position it wanted, even if as a last resort. FWA agreed it could intervene given the severity. “The response industrial action of which Qantas has given notice, if taken, threatens to cause significant damage to the tourism and air transport industries,” FWA said in its ruling.

With operations resuming in the afternoon of 31-Oct-2011 (65 international and 139 domestic flights operated), and a full resumption on 1-Nov-2011, staff were never locked out, pay was never withheld and the all-important corporate market was largely disrupted only on Monday morning and afternoon. Some relief for Qantas is that 1-Nov-2011 in Victoria, the country’s second-largest state, was a public holiday, reducing corporate travel. The timing of the grounding – uncannily or not – was impeccable.

Grounding better than no grounding, also gives resilience to brand

Qantas, Mr Joyce pointed out, is now better off having endured the grounding. “We are disrupting a lot less customers by doing it this way,” Mr Joyce said on 31-Oct-2011. “We have eliminated all future industrial actions from these trade unions.”

Mr Joyce drew a comparison to Qantas’ last major industrial dispute, a 2008 disagreement with aircraft engineers. “We've gone through very significant industrial disputes before. In 2008 we had an industrial dispute that went for a longer than this, had a lot bigger impact on our reliability, had a lot of bigger impact on our customers,” Mr Joyce said.

Much commentary has focused on Qantas’ brand, an icon to Australians and routinely thrown onto front pages at the slightest disruption. But the brand has proved resilient, bouncing back from the 2008 strike, last year’s uncontained Rolls-Royce Trent 900 engine failure on Qantas flight 32 and numerous insignificant matters blown out of proportion. From this incident Qantas can expect to recover its brand within months.

“I think the brand will recover this time a lot better than it did in 2008 because we didn't allow the strike to go on and we didn't allow hundred of thousands of passengers to be disrupted by the strike,” Mr Joyce said.

Grounding also thwarts Virgin Australia’s encroachment

Qantas can be expected to keep most of its high-value customers despite the two day grounding, which largely impacted business travellers only on the last day, a Monday. The grounding and resulting termination of industrial action ensures, as Mr Joyce made clear at the end of the grounding, customers can book Qantas tickets “with confidence” as there will be no industrial action-related delays or cancellations in the short- and medium-term.

Mr Joyce also hinted at the changing market dynamics in the corporate sector: Virgin Australia is re-positioning itself and encroaching on Qantas’ near monopoly of the corporate sector. For the first time since Ansett’s Sep-2001 collapse there is a full-service competitor to Qantas – a competitor that disrupted passengers could change allegiance to. During the 2008 engineering dispute, scores of Qantas passengers flew Virgin, then under the iteration of low-cost carrier Virgin Blue, but went back to Qantas once the engineering dispute simmered. For this dispute, Qantas ran the risk of permanently losing customers to Virgin Australia.

“We ended this and did not let it go on for another year. If this was like 2008 with the engineering dispute, which lasted for three or four months, we wouldn't have gotten those customers back. This dispute is now over. We can now recover those customers and get them back on flying on Qantas,” Mr Joyce said. It is notable that between the engineering dispute of 2008 and the present day, the only significant changing market conditions have been Virgin Australia’s evolution to full-service carrier and the market being more price-sensitive, which works in Virgin’s favour as it has inherited a lower cost base from its LCC origins.

Virgin Australia tries to be country’s new spirit

Virgin Australia went into overdrive to accommodate disrupted passengers, even liaising with its international strategic partners to add capacity, either to supplement Virgin services or takeover select Virgin routes, allowing Virgin to re-deploy its capacity. Its alacrity was helped by Qantas over the past few weeks taking capacity out of the domestic market as engineering overtime bans and slowdowns forced aircraft out of service. That action caused Virgin to start exploring its options to pick up the drop in capacity. In recent weeks Virgin’s passenger numbers have increased by 5%.

At the time of the grounding Virgin had freed up a Boeing B737, adding approximately 7,000 seats into the market weekly. Its partner Etihad announced on 30-Oct-2011 it was prepared to offer Bangkok-Sydney and Sydney-Melbourne services to pick up traffic left by Qantas’ grounding. The services were cancelled when Qantas resumed services, but Etihad had already won public kudos.

Domestic revenue operations of foreign registered aircraft within Australia are permitted with government approval under section 27A of the Civil Aviation Act of 1988. During Ansett’s grounding some foreign carriers performed domestic revenue flights, and Cathay Pacific did the same in the Philippines in 1998 when staff at Philippine Airlines went on strike, shutting down the airline.

Virgin Australia disclosed Singapore Airlines was also evaluating serving domestic Australian sectors. AirAsia X CEO Azran Osman-Rani said on Twitter that adding international capacity into Australia was an option although he was “not sure [if] commercially viable unless can guarantee volume taken up”. Commercial viability for relief flights would have been challenging, but for Virgin Australia and its partners, like Etihad and Singapore Airlines, the economic benefit would have been not necessarily immediate but rather long-term in promoting themselves as being in the market when disrupted passengers needed them. Additionally, having passengers experience their service opens the door for them to switch allegiance from Qantas and oneworld to Virgin Australia and its partners.

Independent Australian carrier Strategic Airlines, which will re-brand this month to Air Australia, operated a number of domestic “relief” flights. Virgin Australia deployed its B777-300ER on a single Sydney-Melbourne service, the type’s first domestic revenue flight. Load factors were low but Virgin maximized publicity from the event.

Virgin Australia is continuing its push to capture a share of Qantas’ corporate market by offering double elite qualifying points for tickets purchased from 31-Oct-2011 until next year. Reports indicate Qantas plans to match the offer and undertake additional initiatives.

Mr Joyce is confident that disrupted passengers will return to Qantas, and he said on 31-Oct-2011 that he would personally ensure that outcome. “I’ll be ringing all of our biggest customers and apologise to them for the disruptions…and in those conversations we’ll get massive support.”

Mr Joyce also expects Qantas to fully rebound from the grounding. “I have every confidence that we will recover back to a 65% market share domestically. We will recover back to our international market share and importantly we’ll recover our share of the corporate market and get it back to where it needs to be for Qantas to continue make profits on the domestic market.”

Mr Joyce should, however, expect some natural slippage as Virgin Australia makes inroads in the sector. Any share more than that will take time to reveal, but is unlikely to be caused solely by the grounding; Virgin’s swift response enabled it to get a wedge into corporate contracts, which take time to secure.

If negotiations fail, a Qantas-leaning tribunal decides

While Qantas works to win back passengers, it must also conclude discussions with the union, who by 21-Nov-2011 must report agreements or mutual progress with a request for a 21-day extension to finalise an agreement. If no agreement is reached, FWA will consider the case and make a binding resolution. FWA has already shown a disposition to Qantas, although the carrier’s claim was bolstered with support from multiple government officials who wanted the matter resolved and not dragged on.

The government is unlikely to significantly weigh in on the nuances of the claims, which across the three unions primarily entail wage increases and job security as the carrier continues to expand internationally, including with a new premium airline to based somewhere in southeast Asia. FWA, even though nine of its 11 commissioners are former union officials or advocates, would be hard-pressed to identify a sector that offers job security and then decree Qantas must offer job security. This claim will have the largest long-term affect on Qantas.

If FWA does supports the union’s claim of a higher pay rise than what Qantas is willing to offer the unions, the decision may increase salary expenditure more than what Qantas would like, but would be re-visited in a few years. Qantas, however, will be able to make the compelling case that unions want a higher increase than what they negotiated for earlier this year at Virgin Australia, a matter that has become a talking point between Mr Joyce and his counterpart at Virgin, John Borghetti.

Mr Joyce said in Aug-2011 even with the pay increase Virgin Australia’s long-haul pilots will be paid half that of Qantas pilots. Mr Borghetti also remarked in Aug-2011, “The truth is we’re both happy. The workforce is happy. The management is happy…It is also about the work environment, not just about dollars.” FWA, however, would find difficult how to quantify work environment if it was inclined to rule in the union’s favour.

Revenue impact still being calculated

At the time of the grounding, Qantas projected each day of the grounding would cost it AUD20 million (USD21 million). That figure appears conservative to include both loss of revenue and compensation. Qantas offered disrupted passengers full refunds or the difference between their original ticket and a ticket on another carrier.

It also offered up to AUD350 (USD361) compensation to disrupted passengers per day. Passengers stranded in Europe were additionally entitled to EUR600 (USD820) under EU regulations. Qantas can be expected to say the total figure will be less than the direct and indirect cost of letting industrial action against it continue through next year.

Outlook: what next for the staff?

Qantas has a plan to win back passengers and keep them from Virgin Australia, and to secure the cost base and concessions it needs from staff, but less apparent is Qantas’ medium- and long-term plan to re-engage with its workforce and prevent relations from ever reaching this level, or anywhere near it, again. If they do, there will be a stronger Virgin Australia and other competitors, and Mr Joyce – or his successor – will be less likely to win passengers back. But more immediately is the risk passengers will leave Qantas as staff make their discontent known.