Wednesday, March 5, 2014

Letting Qantas go bankrupt would be good for Australia

[For non-Austrlaians: Qantas is a former Government owned airline in Australia - and still seemingly our "national carrier". Its parlous financial position is a political issue in Australia this week.]

When I was in my twenties I worked for the Government of Australia and I watched the privatisation of Qantas fairly closely.

In those days the Finance Department swallowed the Qantas lobbying totally. What was good for Qantas was good for Australia.

In all seriousness bureaucrats who should have Australia's interest at heart were all for restricting competition on the Kangaroo route [Sydney-London] to keep Qantas's profits sweet. After all more profits meant a higher sales price.

Tourism those days was a huge industry - driven in part by the then low Australian dollar. Londoners came over by the plane load and tourism operators up and down the coast of Queensland were making hay.

What Qantas was arguing for was restricting their customer numbers.

If the average middle-income coastal town knew about and understood the issues they would have rioted. But Qantas obscured their self-interested bile by wrapping themselves in the Australian flag.

Little has changed except now the issue is the solvency of Qantas, not the sale price. Qantas has been so mismanaged it is almost the only airline in the world in financial trouble now. The rise in Chinese demand (including Chinese demand on say Shanghai-Sydney flights) has meant that fuel efficient aircraft are in short supply and any airline who has managed their fleet well is making excess profits. [Just look at the stock charts for US airlines.]

Qantas however has mismanaged its fleet to a degree that is now ludicrous. This week I will by flying Sydney to LA on a 777 - a two-engine jet. Qantas does the route on old 747s (four engine jets). These are tens of tonnes of fuel less efficient and Qantas is higher cost because of fleet mismanagement as much as anything else.

But the fleet mismanagement goes further. Decades of incompetence has left them with the most amazingly heterogeneous fleet in the world. This airline deserves to go bust.

But like the Qantas of old it goes to government who seem to think for some ungodly reason that the business is even important.

There will be other airlines after Qantas. They will be cheaper, have better service and use more fuel efficient planes.

And they won't believe that what is good for them is good for Australia.

It is time to let Qantas fail.


And just for the record: we are not short Qantas. But two decades later I retain my anger about their false patriotism.


Robert in Chicago said...

I will give you two alternative responses:

(1) Oh good grief, John, you are far too old not to have developed cynicism sufficient to accept that this is how it always was and always will be for businesses and governments that have close ties.

(2) Thank goodness that at least a few smart and respected and widely-read people out there are willing to express outrage when something is, on its merits, outrageous.

Anonymous said...

Qantas also has an A380 on the LAX-SYD route. I purposefully avoid the older 747's when I'm on the route.

John Hempton said...

And even the A380 is not anywhere near as fuel efficient for that route as a 777.

The LA route is full of islands - and hence allows a corporate jet.

Qantas does two 777 unfriendly routes - Santiago and Johburg.

Both require 4 engines. But beyond that the 747 should be retired.

Robert said...

As an aside, look how the gas (petrol?) guzzling 747s are killing another company - Air Cargo lessor Atlas Air (NASDAQ: AAWW). The company sunk a lot of money into a converted 747 fleet, but are having a tough time keeping them leased, now that cargo carriers are moving to 777s.

Anonymous said...

I too was working in the Australian Parliament in my 20s. I was at work late at night on September 12, 2001 - not just The Day After, but also of historical interest because it was the day Qantas's main domestic competitor, Ansett, went bankrupt. About 1130 that night I was leaving and saw Qantas's lobbyist walk out of a senior Cabinet Minister's office - whistling.

When you cannot make profits, you seek rents.

Anonymous said...

Qantas does two 777 unfriendly routes - Santiago and Johburg.

LOL--two countries whose currencies are likely going to collapse in the upcoming months.


Anonymous said...

John, the first time I flew Qantas was on the Joburg - Sydney route. The plane was an old 747 and it was a really unpleasant experience; they even confiscated my bottled water at the gate, after main security confiscated my water at the security screen and I bought another at a shop. However, hasn't your PM stepped back and left them to their fate?

Anonymous said...

On a somewhat related note, Qantas wants to charge $3,500 to fly my family of four (2 adults, 1 child, 1 infant) from Melbourne (6 hrs) to Bali over the July school holidays.

It is (significantly) cheaper for me to fly Air Asia from Melbourne to Kuala Lumpur (8 hrs) then wait 3 hours, then fly 3 hours back the way I've just come from KL to Bali. Similar price to fly Jetstar MEL to SYD, SCOOT from SYD to Singapore, then Air Asia to Bali. Return.

Almost double the flying time (plus the fact that take-offs and landings use more fuel) but half the price.

Something isn't right with this picture.

john b said...

A full A380 can be more efficient than the same number of passengers on 777s. This is why BA are swapping out 747s for A380s on some of their (non-ETOPS-restricted) routes, despite having the world's largest 777 fleet.

The same is probably true for Qantas on its current A380 routes - the problem is that none of its remaining 747 routes can support a full A380 of passengers.

john b said...

Incidentally, Atlas Air isn't suffering primarily at the hands of cargo 777s (and its new generation 747-8Fs, like A380s on the passenger market, are just as efficient as a 777F if they are full).

It's suffering because there is 100% overcapacity in the air cargo market, and so dedicated freighters are becoming obsolete in most markets (with the exception of a few routes such as military supply, where there is high freight demand and little passenger demand).

Martin Barry said...

Just echoing what johnb said, the A380 is great if you can keep the load factor up, especially so if it's into an airport with limited landing slots that would prevent running extra flights.

Emirates seems to have nailed the fleet and route management over the last decade. They kick off flights to a particular destination with a 777 (or sometimes one of it's remaining A332/A343/A345 Airbuses). When demand is there they either start multiple flights per day for booking flexibility or they start using an A380. They are also constantly churning their fleet into newer models and have a relatively homogeneous fleet.

Other airlines fit somewhere on the spectrum between Emirates and Qantas but it's safe to say you can ignore all the bleating about government backing (or lack thereof) having a major influence on airline competition. Operational nous (or lack thereof) explains most, if not all, of who ends up the winners and losers.

PSC said...

And the cargo price-fixing around air-cargo. I *think* they were fined more than any other passenger airline and had some senior managers in jail.

Anonymous said...

John I'm from Italy and as a taxpayer having spent billions on Alitalia I perfectly understand when you say "false patriotism"... Last time Berlusconi saved Alitalia it costed us 3 more billions and counting... Now the company needs to raise money again . Taxpayer also own shares directly through Poste Italiane (State company). I wish someone could burn all their planes, it would be the best deal Italian taxpayers have seen in decades.

Unfortunately company is not public anymore and I can't even short the share, it would have helped recovering some of my taxes...

Frozen in the North said...

OK I get that you guys hate Qantas, its all right. For what its worth a did lots of very "sexy" financing for Qantas back in the days -- and they were very aggressive on terms (Qantas did triple dip leases) with huge termination values. So Qantas had to keep the aircraft to the end of the lease (full 12 years). More importantly, the fact that the inside of the cabin is less pretty on a 747 vs a new 777 is really irrelevant. Cabin interiors can be refurbished... ask Air Canada.

Also, personally I like the 747, first off its faster -- still is the faster commercial jet around with a cruise speed of .88 m so faster than the 777 or 380. If I fly from Oz to Merica I want a fast aircraft.

The problem is rarely the brand new aircraft, yes a 777 is more economical, but were we are not talking 30% more economical here.

That's not what killed Qantas. What killed them were these deals that I did, where Qantas would get a substantial upfront payment on its new aircraft delivery from the lessors -- big numbers that made Qantas complacent with their cost structure.

Its all about cash flow -- the fact that during its aircraft replacement cycle in the late 90's early 00 they were getting lots of free cash for buying brand new aircraft that required no maintenance.

That's what killed Qantas -- as it killed Air Canada it the late 90s (for the exact same reason) they confused non-core cash income for long term profits!

Anonymous said...

A bit revisionist with your fleet planning argument John. Qantas made a big bet on the "fuel efficient" 787 back in 2005; they were the launch customer for the 787-9 and had a decent role in design specification for that variant; QANTAS had planned to have 28 in service by 2011 (Boeing managed to have delivered 3 planes to all airplanes by that year). The 787-9 was supposed to enter into service in 2011. EIS is now planned for 10/2014. A link to the orginal order:

Not that Qantas doesn't have many issues, and planning for risk is all on their shoulders. I can understand your irritation with their corruption, just pointing out that they were the beneficiary of truly massive engineering management incompetence on Boeing's part as well as what can only now be viewed as cynical marketing and sales.

Martin Barry said...

@Frozen top cruising speed is a pretty uni-dimensional way of looking at an aircraft. The reality is it's just one of many factors that play into fleet management and route planning. It's not really useful to have a higher cruising speed if you then don't have the range to avoid a refuelling stop (e.g. DFW -> SYD). Interior refits can also put lipstick on the pig but the reality is that a decade old airframe feels and sounds it's age no matter how new the seats are.

Anonymous said...

Mismanagement and eclectic fleet aside, isn't the current profit slide directly due to the rather MAD capacity war in the Australian domestic market?

Couldn't an argument be raised instead that Borghetti can't count (or understand a P&L), and Joyce (65% of the market doesn't make sense when there is too much capacity) is a really bad network planner?

Doesn't it really seem like the foreign carriers are happy to sustain a few losses to stop Qantas invading their turf?

ermen said...

I think this op-ed (that's what i will call it) does ignore these things
1/ How a change in the Qantas sale act will affect the playing field
2/ Cost base viz a viz competitors (Mid East, Asian)

What is true though is that not getting 777 when all its other major competitors were doing so was a bad mistake.

Also, LAX-SYD load factors have always been pretty high and I don't think they are at a material disadvantage on the A380 / 747ER planes. If anything, I think they are quite happy with the performance of the Ausstralia / US routes (competition also has similar cost bases)

Anonymous said...

Interesting to think about what Qantas might look like now had the Airline Partners Australia - remember them! - bid got through in 2006. Close thing too. Perhaps it would have sped up the creative destruction process. Plenty destructive.


Anonymous said...

All true John. But not a fan of two engine jets for long hauls. Just hearing reports now about a Malysia 777 going missing enroute from KL to Beijing. Not enough margin for error with two engine jets.

o. nate said...

Article about Ackman's extensive lobbying campaign against Herbalife in the NY Times today:

Anonymous said...

We shouldn't forget the big investor presentation that Qantas did at the Westin. Apparently cost $500k - not a good use of capital.

Anonymous said...

BA wrap themselves in the patriotic flag while lobbying for 10m Londoners to have their sleep destroyed courtesy of a new runway at Heathrow - means almost all of London will be over-flown - just so that BA can have a hub airport.

Anonymous said...

Off topic but curious what you think about this John.

Not every day you see a company taken out by a PE group that looks to IPO 9 months later.

Anonymous said...

Totally agree! It is disgusting and disappointing the way Qantas has mismanaged their fleet. What's perturbing is that they did not order any 777's back in 2000. That I believe is a huge mistake. I know they were relying on 747 for long haul routes like SYD-LHR and SYD-LAX but right now there 747's are being used less but is it's A380 a little bigger aircraft. However it is not as economic friendly as a 777 which they lack. If you compare this airline to others if not all most of them have 777 in their fleet. Not only is it shocking that a major carrier doesn't operate 777, but it is also embarrassing. Some Australians would have been really angry at the way these people were mismanaging it. I would feel the same way if I was living in Australia. Instead of investing so much on 380's, Qantas should have invested on 777's. I'm not saying don't buy 380's but they could have kept it to a minimum to cut down on costs. Then once things start to improve then they could order more 380's. Then later on in the decade they could have at least leased a 777 or sold a 767 to another carrier to purchase some 777's. Having 777's would have given them a competitive edge. United Airlines and Qantas's national rival, Virgin Australia operate 777 for LAX-SYD route and is teaching a lesson to Qantas that they made a mistake by not buying 777's. I don't believe it's too late. Just recently they retired their 767's. If they sell their 767's to other carriers like Virgin Australia or jetstar, that could put them in a position to afford 777's or the more fuel efficient 787. However they have their a330's which is a fuel efficient. Hopefully that will improve operations while they await the 787's. And please purchase some 777's. They are quite valuable.

somerset said...

My wife and I flew from DAL-SYD two weeks ago. 17 hrs A380-800. Nicest crew, but worst food EVER. We flew upgraded economy, $4,400 each. Folks in front of us were at full recline for entire flight leaving us scant space.
Gate procedures were wanting. Zero personnel to answer questions.

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