Qantas restructures, outlines Asia plan. But no word on its Pacific services

A regional aviation analyst says the restructure announced by Australia’s national carrier, Qantas, could lead to the airline selling its shares in Air Pacific.

Qantas last month announced it was getting rid of about 1,000 jobs in Australia as part of a controversial revamp of its international arm.

The airline says the move is a bid to return its international operations to profit. It plans to launch two Asia-based airlines and buy 110 new Airbus planes.

While the Qantas announcement spoke of expanding in Asia, it made no mention of changing its services in the Pacific.

Qantas has a significant shareholding in Fiji’s national carrier Air Pacific and regional aviation analyst Jim Bradfield (a former chief executive of Solomon Airlines, Royal Tongan Airlines and Palau Micronesia Air) told Radio Australia’s Pacific Beat the changes made by the Australian airline could lead to it selling its investment.

“This may mean that they would be more keen to have that shareholding either purchased by the Fiji Government, or perhaps another player,” he said.

An article by the Centre of Asia Pacific Aviation on July 19 titled ‘Air Pacific ‘will not fail’ as restructuring continues; ownership questions remain’ quoted Dow Jones as saying Qantas wants the government of Fiji to pay F$70 million (US$40 million) to acquire out its stake in the carrier, although the Fiji government only appears to be willing to pay a fraction of this figure.

According to the report, the Fiji Government is wanting to pay Qantas around F$1 per share for the Air Pacific stake, compared with the price Qantas is asking of close to F$5.50 per share.

Concerns have also reportedly been raised about the codeshare element of the agreement. As part of its written proposal, Qantas said it would continue to codeshare on Air Pacific-operated services to Australia, New Zealand and the US (the carrier also has codeshare agreements in place with Alaska Airlines, Air New Zealand and Cathay Pacific and a FFP partnership with American Airlines).

Qantas also offered to step down from Air Pacific’s board and be “pleased to provide” two Qantas executives, Simon Hickey and Paul Edwards, as “advisers” to Air Pacific.

 

Qantas, according to the Dow Jones report which cited a copy of the proposal from Qantas to the Fijian government last year, had recommended the carrier either cancel new aircraft orders; sell and lease back aircraft; refinance a hangar; and sell the Sofitel Hotel on Fiji’s Denarau Island to fund the acquisition of the 46.3% of Air Pacific owned by Qantas. Fiji’s government is the largest shareholder in Air Pacific with a 51% stake.

While still the largest carrier in the market, Air Pacific has struggled to compete since the arrival in 2009 of Virgin Australia and Qantas LCC subsidiary, Jetstar, and has seen a 51% erosion of its market share.

“LCCs now hold an 18% capacity share of the Fiji market, although the figure is higher on international routes to/from Fiji. Air Pacific has also been affected by the global financial crisis, flooding in Fiji and losses on fuel hedging,” the CAPA article says.

Air Pacific CEO Dave Pflieger, who has held the position for the past 12 months, stated he would not let the airline fail and has introduced a downsizing and restructuring programme to improve the carrier’s competiveness.

In an interview with The Fiji Times on July 16, 2011, Pflieger stated his aims for Air Pacific include returning it to profitability, ensuring an enjoyable flying experience for customers and making the airline a good company for employees. The restructure, he said, was deemed necessary to sustain the longevity and sustainability of the airline and to ensure it can effectively compete on a global scale.

As part of restructuring programme, Air Pacific is implementing a three-pronged approach: having the right skills and expertise; improving the basics such as safety, OTP and customer service; and improving infrastructure, fleet, schedule, network and bringing costs under control. This also involves staff rationalisation and is necessary as Air Pacific is one of the largest foreign income earners in the country.

While various shareholders have come and gone over the years, Air Pacific is now owned by the Fiji Government (51%), Qantas (46.32%), with minor stakes held by Air New Zealand (1.94%) and the governments of Kiribati (0.27%), Tonga (0.27%), Nauru (0.08%) and Samoa (0.12%).

Asian expansion

Asia is seen as the world’s fastest-growing aviation market and Australian carrier Qantas’s decision to seek a bigger slice of it is a smart, and long overdue, decision, analysts say.

 

“It’s the growth market,” CAPA executive chairman Peter Harbison said of Asia. “The domestic market is mature with increasing competition, so this is pretty much a no-brainer.

“It will create a lot of positives in the medium to long term.”

The airline has said its international operations are expected to post a pre-tax loss of $AU200 million ($US210 million) in 2010/11, hit by high fuel costs, natural disasters and an expansion by Middle East and Asian carriers into Australia.

Robert Bruce, a Hong Kong-based analyst at investment bank CLSA, said Qantas’s problems had been compounded by neglecting Asian routes.

“They’ve concentrated on flying to Europe over the top of Asia and now those routes are under increasing pressure from existing carriers plus the Middle Eastern carriers coming in,” he told Dow Jones Newswires.

CAPA said the move to Asia should help stem the losses.

“The consolidation will immediately reduce losses and could in the long term see yield increase unless competitors pick up on the lost traffic,” it said in a research note.

Growth region

According to the International Air Transport Association, the Asia-Pacific region will account for 30 percent of global traffic by 2014, up from 26 percent currently, and Qantas plans to cash in.

To help achieve its goals, its budget offshoot Jetstar will partner with Japan Airlines and Mitsubishi to create a new subsidiary in Japan to capitalise on a market that is growing fast at the low-cost end.

But it also has plans for the corporate sector and will set up a premium joint-venture carrier most likely based in either Singapore or Kuala Lumpur.

As part of the shake-up, Qantas will no longer fly out of Bangkok and Hong Kong into London, with partner British Airways taking up the slack.

In explaining his rationale, chief executive Alan Joyce said within 20 years, 16 percent of the world’s middle-class will be in East Asia.

“China may already have the world’s fourth largest population of millionaires, and India the 12th. There are many, many millions of premium travellers in waiting,” he said.

Qantas is also keenly aware of the opportunities presented by a Southeast Asian open skies initiative scheduled for 2015, under which national airlines of the 10 ASEAN nations will be free to fly between regional capital cities.

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