Tuesday, 23 August 2011

Qantas -The Kangaroo's bounce gets dampened, but it's in the DNA.

News that Qantas International's bounce was to be curbed so as to switch immediate future investment to regional operations and a new full service airline venture in Asia has been greeted with less than wild enthusiasm by most Australians. In fact it has gone down like a lead kangaroo. To the national psyche Qantas has been the Australian flag bearer across the world, spanning all of Asia and Europe on the way to primarily the UK and the Pacific to West Coast USA and on to New York. The proud red tail has been an expression of Australia and all good things Australian and a vital statement that the country is part of the world and a significant player in it. Many Australian heads are hanging in a sense of despondency and gloom. The unions are characteristically making a meal out of it.It is very hard to take.

Australians should not though be too surprised or even upset at this turn of events. It was part of Qantas' DNA from the very outset and bound to creep up on them over the years as technology developed ever bigger and longer range aircraft. At the same time the people in the middle of the route emerged as major players in the global aviation scene and demand for travel to and from Australia with its relatively affluent 22.6 million population ,many with strong historic family connections in Europe and Asia, mushroomed. The notion that Australian and other end carriers could protect all this traffic for themselves even if they could afford to invest in all the fleets needed to carry it was and remains unrealistic and unsustainable. They can not be blamed though for trying to hang onto it for as long as possible. Why would any business be voluntarily enthusiastic about losing even one passenger to upstart competition?

So where did this slide away from monopoly begin? Not long after day one is the answer and at some point it was bound to become overwhelming. Fingers in the dyke would have to be replaced by arms, legs, full bodies, sandbags, concrete, until eventually it would break whatever anyone did to reinforce it.

The story of what was built into the DNA goes like this.............

The "Kangaroo Route" to Britain has been a keystone of Qantas activity since the 1930s. For most of the time it has been flown in a series of differing and developing partnerships, both loose and close, with BA and its predecessor BOAC. During these and in between there have periods of intense disagreement including until the 1970s constant pressure to buy often unsatisfactory British aircraft. To its credit Qantas never yielded to this arm twisting and occasionally serious unpleasantness. It was also capable of some acid responses.

Pre 1939 the Qantas/British Airways (Mark 1 pre BOAC) was tentative at best and very low volume. Shipping companies rather than other airlines carried the bulk of the largely migrant passengers. From early days though, the always fleet of foot KLM was pushing on the European door and Pan Am and later the the largely opportunistic Canadian Pacific on the trans-Pacific to the Americas.

After 1945 the arrival of new, faster and pressurised airliners soon gave the airlines the upper hand and Qantas, with the elegant Constellation set the pace. BOAC, short of dollars, struggled on with flying boats for a year or two before a small batch of Constellation 049s became available from Aer Lingus/Aer Rianta whose Atlantic operation had failed and these could be paid for in sterling. From that point it was game on and the two partners from each end of the route presumed that the business was almost exclusively theirs. They saw it as their entitlement and resented any attempts by others to take any of it. Hence early efforts to fight off the enterprising Dutch in the form of KLM already well established just to the north in Indonesia.

The first Asian incursions into the business were on a small scale by Philippine Airlines in the 1950s with DC6 flights Manila-London but their effect was insignificant. Air India was the first serious entrant as it was in a tripartite revenue pooling partnership with Qantas and BOAC. Very much a high quality and rather exotic carrier, it was not slow in the 1950s in demanding a place on the Australian route. It was accomodated but both the other partners saw it as primarily a predator. The real Asian awakening though was in 1971 with the very first and very high service quality Malaysia-Singapore Airlines Boeing 707 services from Sydney to London with a change of flight number in Singapore. MSA were progressively followed by Thai,the separated Singapore Airlines and MAS,and Cathay Pacific until almost all the north east and south east Asian players entered the fray. They have gone from strength to strength and probably didn't expect to be too seriously challenged.

While Qantas and BOAC/BA sought to tightly control fares/yields through rigid enforcement of IATA fares on the one hand and capacity/frequency limitations on the other, the Asian carriers saw things differently and viewed fare reductions ("Cheating" or "non compliance" in IATA parlance)and operating as many frequencies as they could get through Air Service Agreements as key to driving traffic increases and market share. They persued this line vigorously. No sacred kangaroos for them.

The other big factor was simple geography. Most of Asia is about a third of the way to Europe which meant that it was cheaper for Asian carriers to add additional European and destinations as spokes to their hubs than it was for Qantas who were located 8 hours away down at the end of the route. The Asians therefore took more and more of the business to points not directly served by the Australian airline and it was very difficult for Qantas or BA to fight back. At the northern end of the route BA could feed European business over London but it was outplayed particularly by KLM as Amsterdam was less of a backtrack (and none from the UK provinces) and the one terminal simple and pleasant to use layout of Schipol was infinitely better than Heathrow's multi-terminal and messy transfer arrangements. For Qantas the problem of profitable direct access to a plethora of European cities became ever more difficult as the demand for two stop services grew from the mid 1970s and the initial Boeing 747 era. Intermediate stops in Europe became uncompetitve in the end to end market to the UK. The arrival in the late 1980s of the longer range 747-400 meant that the demand moved from 2 stop to one stop and Qantas' problem of how to serve continental Europe became even more acute.

In 1977/8 Australia with some support from the UK had attempted one last fling at trying to stuff fingers into the leaking dykes of ever growing totals of passengers and revenue flooding to foreign carriers. In an extraordinary move called the International Civil Aviation Policy (ICAP) they sought once and for all to restrict the ability of intermediate foreign carriers to carry UK/Europe to Australia traffic through their home airports, primarily in Asia. It was as if there were tunnels with no intermediate entrances or exits all the way between Australia and UK/Europe and within these all end to end business could be exclusively contained for the benefit of the two national carriers involved. To facilitate this it was proposed to restrict Air Services Agreements, particularly those with Malaysia, Thailand, India, Austria, Canada and France.......In the event the proposal was dropped as impractical and the big surge towards liberalisation became unstoppable.

The Asian carriers very quickly gave Australia's cities more and more links to the world than Qantas and BA who, with their joint Services Agreement in the early 1990s consolidated rather than expanded their offerings and chose not to increase their capacity in line with potential demand. The reason is simple. The very long route has huge low yielding leisure demand but relatively little high yield business traffic to help produce a viable average. Making money is therefore difficult. Add to that the problem for legacy airlines based at either end of the route of the added inefficiencies of their night jet bans as well as higher costs and lower productivity and the finances begin to look daunting. Even worse the fact is that however they schedule their services they can not avoid long layovers or long dead times at either end of the route. Maximising aircraft utilisation therfore becomes impossible. The Gulf carriers on the other hand can turn around quickly and once home find other useful work within an hour or two.

Finally came the biggest boost to capacity between Australia and anywhere north, west or south of the Gulf. The Gulf's own new airlines arrived. Gulf Air had been a minor player but Emirates, followed by Etihad and Qatar have proved to be something else. Adding spokes into Europe, Africa and the Middle East has, thanks to the shape of the world, been relatively simple and not too expensive for them. Seven or less hours will take them pretty well anywhere in all three regions. That means two man flight deck crews, quick turnarounds and high utilisation through their 24 hour a day airports . As noted above, when the aircraft return home at any time of day there are plenty of 2/3 hour regional sectors that can be flown to top up utilisation. There is no enforced overnight grounding in Asia or the Middle East. UK/Europe and Australia want quiet nights but they have to buy them at a high price in the competitive world of aviation. That's their choice, along with the costs of generous state welfare schemes, restricted working weeks, moves towards inefficient green power generation, high travel taxes (UK) and the rest. They can't complain if more business orientated parts of the world choose to behave differently in the interests of producing more at lower costs and gaining market share. It's not unfair.
It's called competition. The consumer benefits.

What Qantas and BA are now doing in slimming down their Kangaroo route services almost to a minimum presence is not an abdication. It is a simple acknowledgement that this was always the way it was going to be end up unless they and their base countries were going to significantly change the way they do things and their very cautious approach to investment.The world is also the shape it is, the distances, costs are what they are and on this particular route it is game over for the end of route veterans. Despite a limited hubbing operation in Singapore and an even smaller one in Bangkok, they were already on pretty much a hiding to nothing from the Asian carriers but the Gulf newcomers have become overwhelming. Short of investing potentially billions and risking losing their shirts or at best making a minimal return on expenditure ,they can not fight the tide. There is no sensible chance of persuading Australia's regulators to clip the foreigner's wings. Very restricted capacity and high fares are not in the interests of Australia and Australians . The country being where it is, both need to welcome every new flight to anywhere they can get regardles of who provides it. Protecting Australian airlines at the expense of other national interests just isn't on without wrecking the tourism and other industries. The old protectionism has simply been overrun by the legitimate demands of the market. Qantas and the European carriers can still play a part in it but the big future of the Kangaroo route is sandy. All credit to Qantas and the Australian government for having courageously having bitten the bullet rather than the Gulfies. They have read the DNA right.

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