Anatomy of a grounding: Qantas seeks immediate and lasting concessions to secure future

The never calm world of Australian aviation was delivered one of its largest shocks in a decade when Qantas CEO Alan Joyce announced on 29-Oct-2011 union employees would be locked out from work without pay and the entire mainline fleet grounded immediately. Mr Joyce has placed an extraordinarily confident bet that suspending staff will very quickly see them relent, on their own or in court, on wanting unsustainable pay increases and other claims, for which they have been striking for.

The lasting implications, provided Mr Joyce’s aplomb is precise, will finally secure Qantas the long-term cost base and operational flexibility it says it needs to compete at home and abroad as carriers with lower cost bases secure market share at Qantas' expense. The move, which Mr Joyce called "unbelievable", is also aimed at ending what management sees as the controlling power the carrier's unions have exerted.

As union contentions increased in Aug-2011, Mr Joyce said Qantas for the first time was saying no to unions and would continue to not relent, forewarning: “We will defend the company for the future.”

On the day of the grounding Mr Joyce said: “This course of action has been forced upon us by the extreme and damaging course chosen by the leaders of three unions. It is now over to them. The ball is in their court.”

Mr Joyce warned the grounding would go on for as long as it took for the unions to concede, with Qantas projecting each grounded day to cost AUD20 million, but this action is an orchestrated ploy.

Grounding after government intervention failed

There is emerging discussion that implementing the grounding of 108 aircraft was a last resort after Qantas briefed the government of its plans with the false expectation of an immediate intervention from Prime Minister Julia Gillard, according to local reports.

Adding credence to this view is that the document properties for a softcopy version of the grounding announcement Mr Joyce gave describes the title of his speech as “welcome the pm intervention”, indicating Qantas possibly began writing a speech about PM Gillard intervening in union disputes – and not that Qantas would ground the airline.

The lock-out, Mr Joyce said, is the only protected form of industrial action available to Qantas as a result to union action, which over the past few weeks has included strikes; planning strikes but then cancelling them at the last minute after Qantas re-accommodated passengers during the strike period; and over-time bans, action Qantas estimates cost it AUD15 million a week. The fleet was grounded as it could not be flown, maintained or serviced without the locked-out union members.

An evolving domestic and international legacy

The grounding commenced on Saturday evening, a relatively light flight movement period, while the stock market is closed for trading and news is slow, propelling the story nationally and placing public pressure on the three unions – pilots, engineers and ground staff – Qantas is in dispute with.

Within Australia Mr Joyce’s firm stance is seen as a bellwether for emerging industrial disputes in other sectors. Internationally in aviation Mr Joyce has usurped the tough stance former British Airways CEO Willie Walsh took against BA’s Unite Union in 2010. The developing situation at Qantas will be a case study of extreme action airlines could take in the future, but only if they share Mr Joyce’s conviction the company will prevail. A miscalculation on such forceful action in other industries and sectors of aviation could cause companies to relent on demands or even go out of service.

AirAsia co-founder and CEO Tony Fernandes backed Mr Joyce’s move, saying on Twitter, “You have to salute Alan Joyce for doing what he's doing. This is not about workers vs management. It’s about survival in the modern world.”

The last major and national disruption to Australian air transport was when domestic pilots resigned en masse in 1989 after striking, a move prompted to shield themselves from retaliatory legal action. The pilots had threatened to do so, but airline management believed it to be a bluff. The huge drop in capacity had some relief from foreign and military aircraft operating domestic flights to maintain a skeletal system that was slowly restored. Likewise air traffic in the US slowly rebounded in 1989 after then-President Ronald Reagan fired air traffic controllers who refused to return to work after striking. Disruptions were much lower than expected, but the outlook in the current Qantas situation is not clear.

Qantas is betting on a quick resumption of services – it is selling tickets for travel from 1-Nov-2011 – while competitor Virgin Australia is seizing the moment and preparing for the worst case scenario by liaising with its partners to add capacity in Australia, which even if it eventuates, will not fully match the 68,000 mainline domestic and international passengers Qantas transports each day. It is guaranteed the Qantas dispute will end in the short-term, but unknown is how many passengers and key corporate clients with their high yields will switch allegiance from Qantas to Virgin Australia because of Qantas’ grounding. Qantas will secure its future but with a tradeoff to its competitor, once again re-shaping turbulent Australia and with implications for Qantas and Virgin’s international partners.

A deterioration in management-staff relationship

Qantas has the upper hand in this dispute with large cash reserves – approximately AUD3 billion – while its employees face a missing paycheck, although court action may see the grounding ended. If not, it is only a matter of time before union members will start pressuring their leaders to forgo the large pay rise and introductions of new job security they had been negotiating for.

Mr Joyce's announcement of the grounding came 26 hours after the carrier's annual general meeting on 28-Oct-2011 in which union members, bosses and employees shouted at Mr Joyce and colleagues, insulted them with profanities, called them dictators and associated them with late Libyan leader Muammar Gaddafi. Employee death threats against Mr Joyce had increased in the preceding days, causing him great personal distress. Unions and employees have even blamed Mr Joyce for decisions made before he joined Qantas as CEO in 2008.

Staff insist Qantas is on the wrong path despite posting an AUD552 million profit in FY2011 – one of the highest in the industry. Surpassing Qantas’ performance is Emirates, who posted a USD1.6 billion profit with nary a word of complaint from within the airline. The first half of the calendar year saw Qantas’ protracted discussion of restructuring its loss-making international business – drawn out to pressure unions to relent.  Qantas International faces increased competition from foreign carriers with lower costs bases, which Qantas’ employees refuse to acknowledge. The most vocal also do not fully understand the situation.

Airline CEOs are used to distraught staff and passengers, even those who take irate action. A year ago Air New Zealand CEO Rob Fyfe recounted a response he sent to a passenger who complained about a minor element of the carrier's service and used derogatory language and profanity to Mr Fyfe and his airline as well as foreign national passengers the irked passenger disliked, ultimately threatening to fly on a foreign competitor. Before the passenger apologised for his tone, which earned him budding status, Mr Fyfe wrote:

I'm in receipt of your note and wholeheartedly support your proposal. I far rather someone so offensive fly on the competition than Air New Zealand. If there's any chance you could change your citizenship at the same time, that would also be an excellent idea as it embarrasses me someone purporting to be a fellow New Zealander would engage with anyone in such an offensive and derogatory manner.

The status quo at Qantas was beyond the type of frank plea for civility Mr Fyfe issued. Mr Joyce at Qantas’ Aug-2011 annual results briefing said he would not give in to union demands, even if doing so “would stop the personal attacks on me, it would stop the attacks on the company, and the damage to the brand.”

At the AGM Mr Joyce singled out the verbal attacks unions had made on Qantas group executive government and corporate affairs Olivia Wirth. “I actually find very disappointing some of the attacks people have leveled on Oliva for doing her job,” Mr Joyce said.

Mr Joyce, however, has issued his own affronts, equating in Apr-2011 union demands as “nothing short of a kamikaze campaign” and job security as impossible to guarantee. “It is no more in my power to guarantee jobs in writing than to promise that Santa will swing by on 24-Dec.”

Distracting from tackling Virgin Australia competition

Mr Joyce at the AGM directly acknowledged for the first time the company’s focus on combating Virgin Australia, who is encroaching on Qantas’ lucrative and high-yielding corporate market. “All of this industrial action and the focus on the company has meant we’re not focusing and giving Virgin a free kick,” Mr Joyce said. “At the end of the day that’s going to cost Qantas jobs, it’s going to make Qantas weaker.”

Forward bookings down

Mr Joyce said the ongoing union action had caused a downfall in forward bookings, with some corporate travel on Qantas’ east coast trunk routes down 25% year-on-year. “That’s the most lucrative part of our flying business and it is bleeding badly,” Mr Joyce said. Qantas’ mainline domestic network – excluding Jetstar – posts the largest profits for the group, with an AUD444 million EBIT contribution in FY11, or approximately AUD1.22 million in EBIT per day. International Qantas mainline bookings were also down 10% in November year-on-year.

Settle dispute and weaken unions – now and permanently

Mr Joyce has made it his mission to position Qantas now in what management deems is a suitable position for the future. The grounding aims to quickly force unions to agree to Qantas’ terms.

“The easiest thing for me to do, the easiest thing for the board to do, the easiest thing for managers to do is to agree to those demands. But that will kick the can down the street. It will create problems for Qantas eventually,” Mr Joyce said at the AGM. Mr Joyce made his position clear when announcing the lockout and grounding: “We are locking out until the unions withdraw their extreme claims and reach an agreement with us.” 

The three unions Qantas is in dispute with – the Australian Licensed Aircraft Engineers Association (ALAEA), the Transport Workers Union (TWU) representing ramp, baggage and catering staff, and the Australian and International Pilots Association (AIPA) – are “trying to dictate how we run our business” Mr Joyce said.

The previous day at the company’s AGM, chairman Leigh Clifford, a staunch anti-unionist, remarked, “We’ve got this industrial relations debate as if somehow or another Qantas is protected from the rest of the world… a protected species that doesn’t have to compete with the world.”

The last few years have seen the Qantas Group slowly shift from unionised work forces to employing staff on individual contracts, a practice in full swing at Qantas’ budget subsidiary Jetstar, much to the disdain of union officials. A particular sore point is the lower wage level of foreign staff employed by Jetstar’s international subsidiaries: Jetstar Asia headquartered in Singapore, and Jetstar Pacific headquartered in Vietnam. Jetstar’s Australia-based flight attendants typically earn AUD50,000-69,000 while Singapore-based flight attendants typically earn AUD36,000-46,000, Jetstar Group CEO Bruce Buchanan told an Australian Senate inquiry in Mar-2011.

Mr Joyce and Mr Buchanan have repeatedly argued Jetstar must have a lower cost base in order to compete with their local competition like AirAsia and Tiger Airways. Australian salaries, some of the highest in the aviation world, would put the carriers at a competitive disadvantage. Mr Joyce and Mr Buchanan have acknowledged foreign salaries are lower than Australian ones, but “the salary levels are commensurate with the local market levels,” Mr Buchanan told the Senate.

“Our cost structure in those markets and our employment agreements in those markets are merely competitive with other operators in those markets,” Mr Buchanan told the senate. “At the end of the day, you have to be competitive in each of the local markets to recruit cabin crew and pilots.”

AIPA, the pilot’s union, has demanded the pilots of Jetstar-operated flights with a Qantas codeshare be paid Qantas’ higher salaries. “That would soon put an end to Jetstar and slash low-cost travel in Australia,” Mr Joyce said in announcing the grounding.

AIPA has also pushed Qantas to pay an Australian wage to foreign-based employees, particularly pilots. They agitate for that in an effort to boost Australian jobs, believing requiring Qantas to pay Australian wages to foreign wages will result in Qantas deciding to employ Australians instead. Contention increased earlier this year when local reports mentioned plans for Qantas to establish a foreign-based premium carrier. Qantas confirmed its intention in Aug-2011 but insisted the new carrier would not result in the losses of any jobs but rather create new jobs in Australia. Unions, however, see any foreign job creations as a loss to Australia.

QantasNew Zealand-based Jetconnect subsidiary, launched in 2002, also fell under union spotlight. Jetconnect, which operates with Qantas branding, flies 182 weekly trans-Tasman flights between Australia and New Zealand. Its 600 employees, including 100 pilots, are under New Zealand contracts, which can support lower wages than in Australia, infuriating AIPA. AIPA brought a claim against Qantas to Australia’s industrial relations body, Fair Work Australia, to place the New Zealand-based Jetconnect employees on Australian contracts. Fair Work Australia rejected the claim on 6-Sep-2011 after rejecting in 2007 AIPA’s claim to represent Jetconnect pilots.

AIPA had taken industrial action by having pilots announce during flights they support any Qantas flight having a Qantas – not Jetconnect – pilot. To protest outsourcing they also wore non-uniform neckties that proclaimed “Qantas flight, Qantas pilot”, but in a gaffe had the ties manufactured in China. Intentionally or not, AIPA benefitted from lower foreign salaries but have been unable to extrapolate the logic to aviation.

Qantas, some say, has been affected by “Ansett disease”, namely that by Qantas acquiring former staff and aircraft after Ansett’s Sep-2001 grounding Qantas, in a minor way, exposed itself to Ansett’s higher cost base of antiquated practices and over-staffing, which unions spread to other parts of Qantas. That mentality is maintained today.

“The licensed engineers want to bind Qantas maintenance to the past; to thumb their nose at world’s best-practice regulations, including those endorsed by Australia’s Civil Aviation Safety Authority; and continue with outdated work practices on new generation aircraft,” Mr Joyce said. The best-practice regulations and outdated practices involve more staff paid at higher levels.

Impact on fleet

The grounding impacted 108 Qantas mainline domestic and international aircraft in locations around Australia and every continent Qantas flies to. Aircraft and flights operated by the group’s Jetconnect (trans-Tasman), Jetstar (low-cost) and QantasLink (regional) are unaffected as they are supported with staff outside of Qantas’ three unions whose members Qantas have locked out.

At 30-Jun-2011 Qantas mainline operated 144 aircraft, including approximately seven B737s for Jetconnect. In addition, Jetstar (Australia and Singapore bases) operated 71 A320, A321 and A330 aircraft.  QantasLink operated 54 B717s and Q200/300/400s. Network Aviation operated 9 EMB120s and F100s. Freight aircraft included 4 B737s, 1 B767, and 3 B747s on wet-lease.

A short action that will be remembered and cause contention

It was almost this time last year when the world’s spotlight fell on Qantas for the uncontained failure on a Rolls-Royce Trent 900 engine on a Qantas A380 operating flight QF32 from Singapore to Sydney. The event has faded from the memory of most, and while the current lock-out and grounding will also fade, it will leave a lasting legacy and problem within Qantas. While Qantas may secure the cost base and flexibility it needs, there will be lingering resentment from employees whose morale is already rock-bottom. How Qantas plans to boost employee morale once the issue is settled remains to be seen.

There is no option for employee engagement. At the competition, Virgin Australia staff are engaged and content, which rubs off on passengers. Qantas can be expected to lose passengers to Virgin Australia from this matter. Virgin Australia hopes the number defecting is large, while Mr Joyce holds another view, as he expressed after the AGM: “I’m confident that we’ll get our customers back.”

Mr Joyce may be expecting on a similar outcome from the 2008 pilot strike when customers quickly went to Virgin Blue but reverted back almost entirely to Qantas once the industrial action was finished. But now Virgin is different, and so too is Qantas.

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