Qantas in Recent Months, Australian

Qantas

In recent months, Australian national airline Qantas has been beset with mechanical problems. At one time famous for its safety record, the airline faced five in-flight mechanical problems this year alone. The incidents have ranged from a torn fuselage as a result of an exploding oxygen tank to a dramatic loss of altitude resulting in several injuries. These incidents are damaging the airline's once stellar reputation for safety. Such is the concern over these incidents that Australia's Civil Aviation Safety Authority directed Qantas to improve its maintenance program, specifically with regard to its Boeing aircraft (Robbins, 2008).

For its part, the airline's public stance is that the incidents represented bad luck rather than poor maintenance practices. The altitude loss, for example, was deemed by the Australian Transport Safety Bureau to have been likely the result of a glitch in the Airbus-installed computer system (Foley, 2008). However, the airline's union does not agree, claiming that the airline's cost-cutting measures are to blame for the incidents. This statement appears to be more politically-motivated than factual in nature, since the cost-cutting referred to has not yet taken place. Qantas plans to move some of its maintenance work overseas, a move that will cost the union jobs.

This situation illustrates a rift between Qantas and the union responsible for maintenance, the Australian Manufacturing Workers Union. In June, the airline had a dispute over pay that resulted in workers refusing to work overtime. Now the dispute is centered around outsourcing maintenance work. It is unclear the degree to which the acrimonious relationship that has developed between Qantas and its unionized workforce is to blame for the safety incidents, but clearly this relationship represents one of Qantas' most significant problem. In 2007, a similar rift opened up with their engineers (Creedy, 2007). The airline needs to decide how to proceed with maintenance outsourcing and they must also decide how to manage their relationship with the union.

Industry and External Environment

Qantas is one of the few airlines in the world that is consistently profitable, a status even more rare among legacy carriers. The airline business is characterized by intense competition, a perishable product, high fixed costs and high regulation. As such, it is a difficult environment in which to operate. A PEST analysis can be used to examine the external forces that affect both the industry as a whole and Qantas in particular.

The political environment is stable, but challenging due to a high degree of regulation. The current maintenance troubles have already brought additional scrutiny from two different agencies. However, the government also helps Qantas, because of the airline's strategic importance to the transportation network. Competition is somewhat limited, for example. Also, the Australian government has an impact in the current situation because of their distinct anti-union stance. The Australian government recently introduced their new version of the "Work Choices" legislation package. The new version contains several anti-labor provisions that weaken the power of unions in Australia, under the auspices of "national economic competitiveness." (Head, 2008).

The economic environment is difficult at present. While the global economic slowdown has not yet hit Australia as hard as it has the United States, the airline industry is especially sensitive to economic slowdown for three reasons. Most airlines are highly-leveraged; they have a perishable product; and most flights operate only one or two passengers above profitability. Qantas in particular is affected by the current economic situation because a significant portion of their profits are derived from flights between Australia and the western United States.

The social and technological environments have less impact on Qantas. There are no particular adverse social conditions facing Qantas at present. Technology in the airline industry relates more to advances in customer service and information technology. Qantas, for example, has been slow to develop its Internet marketing techniques, allowing more technologically sophisticated competitor Virgin Blue to gain competitive advantage by undertaking a number of technology initiatives (Travelmole, 2006).

Internal Environment

Internally, Qantas is a well-run company, current issues notwithstanding. The company has several strengths from which they derive competitive advantage. They have flexible leases that allow them to reduce capacity when demand falls; they have a lucrative reward miles program; they have control over the Australia-U.S. routes; a strong travel agency unit and limited domestic competition. Among Qantas' weaknesses is its Internet strategy, which lags Virgin Blue. This results in high sales costs, which are compounded by the high rates that they pay to travel agents. The relationship with their unions is sour at present, with two major disputes this year. Another weakness is their poor position on European routes. These long-haul routes are potentially lucrative but aside from the London run Qantas has failed to break into them.

The difficult economic environment is likely to require Qantas to cut costs in order to maintain profitability. However, there are several ways for Qantas to do this. The first is to cut maintenance costs by outsourcing overseas. An estimated 80% of the company's maintenance capacity is in Australia and subject to expensive union labor. Another cost-cutting opportunity is in sales, where Qantas pays out significant commissions to travel agents. The model for most discount airlines, including rival Virgin Blue, is to sell tickets primarily online. The latter sells 90% of its tickets online, compared with 30% for Qantas.

There are also several threats. These include competition. When Qantas started its discount Jetstar subsidiary it was felt that the move was mainly to keep other potential competitors from entering the market, which would have a strong detrimental effect on profitability. Another threat is the economy. The perishability of airplane seats means that revenue lost due to slumping demand cannot be made up for later. The union also represents a serious threat to Qantas. They have limited legal recourse under Australian law but they drive labor costs higher and their poor attitude is a potential cause of the recent mechanical issues. Qantas has even hired a consultant to help make changes in the company's culture to deal with the lousy attitudes of the workforce (Robbins, 2008) and the negative impact the extant culture is having on organizational effectiveness and the company's once-stellar reputation.

In order to move forward, Qantas can draw upon several key resources and capabilities. The firm has strong alliances within the airline industry. Those other airlines provide Qantas with options regarding maintenance outsourcing and the development of new routes. Qantas can also draw upon its strong position at Singapore's new Changi Airport to develop their Asia-Pacific business. They also have support within government for measures that would help to break down the strength of the union.

Critical Success Factors

There are a handful of critical success factors in the airline business. The handful of consistently profitable airlines in the world all have low cost structures, capacity flexibility, high load factors and a handful of well-protected highly lucrative routes. Qantas has capacity flexibility built into their leases, which has allowed them to weather economic downturns by reducing their fleet. They have solid but unspectacular load factors and these are expected to decrease as a result of the global economic environment. The cost structure at Qantas is relatively high for a profitable airline, and represents one of the biggest concerns for Qantas management. Their lucrative routes are under threat from the economic conditions in the U.S., which indicates that Qantas should develop new routes in other markets to provide an element of geographic diversification. Lastly, pricing strategy is a critical success factor for airlines (Friesen & Johnson, 1995). Most airlines have complex pricing structures designed to maximize revenue by changing the price of a given seat based on time, unsold capacity and a number of other variables (Devlin, 2008).

Recommendations

It is recommended that Qantas proceed with outsourcing its maintenance, and improving its Internet strategy. Among the airline industry's critical success factors, cost structure is Qantas' most glaring weakness. These two areas are the ones in which Qantas has the most potential for improvement. Qantas should make significant investment in its Internet capacity, and begin to reduce the availability of other channels. Consumers are willing to purchase airplane tickets online, as Virgin Blue and other discount airlines have demonstrated. Reducing the availability of tickets through other channels will help consumers to make the switch. This will reduce the payments made to travel agents and the number of call center reps required. Qantas should also undertake a feasibility study with regards to outsourcing its call center as well.