QAN - Qantas Airways

[Boggo]

Warning - Off Topic. As I recall, it was basically that a price regulated natural monopoly such as an electricity supplier has little incentive to minimise its costs, especially where the regulator sets price on a cost basis (cost plus margin) especially when management's remuneration is also based or justified by the turnover of the business. Management is more likely to feather their own nests, be more amenable to union demands and generally inflate their cost base.

This is also the case of pricing based on a return on investment model as is the case in NSW. The blatant "gold plating" of the electricity distribution infrastructure in NSW in recent years is a classic response to a poorly framed regulatory regime. Electricity distributors have been pouring money into inefficient infrastructure spending, relatively risk free (given that electricity demand is relatively inelastic and distribution is a natural monopoly), knowing that the regulator has to set a price that will guarantee a minimum rate of return on that investment.

Apologies - continuing off topic momentarily.
I remember being told by someone in the know that the cost of water in SA would be the cost of running the "business" + $1million per day when asked what the cost of supplying water was.

SA Water has a glamorous multistory admin building right in the centre of the CBD and that has all floors illuminated 24/7, they should be out in an industrial area same as private businesses can only afford to be.

Guess how much profit SA Water made last year, yep, $362 million.
http://www.adelaidenow.com.au/news/...-keep-increasing/story-fni6uo1m-1226770870802

Part of the problem that Qantas has is the Govt inverted pyramid management structure approach which they are reluctant to change. Has anyone seen the current massive expansion of their offices on Bourke Rd, Mascot, it's as if they were a thriving profitable business.

That mentality could and did survive in aviation years ago but since the advent of EasyJet and RyanAir in Europe and Southwest in the States all aviation companies have to be run competitively, a concept that is still foreign to QF.

 

[Smurf1976]

The blatant "gold plating" of the electricity distribution infrastructure in NSW in recent years is a classic response to a poorly framed regulatory regime. Electricity distributors have been pouring money into inefficient infrastructure spending, relatively risk free (given that electricity demand is relatively inelastic and distribution is a natural monopoly), knowing that the regulator has to set a price that will guarantee a minimum rate of return on that investment.

It's off the topic of Qantas (maybe we should have a generic "how to spot a viable / dud industry thread"? but with electricity distribution it's essentially the same everywhere.

There's one distributor who is also the monopoly retailer for small customers (households etc) in that area and they basically structured their pricing to intentionally drive peak demand as high as possible in order to justify further network investment, fully aware that they'd get a guaranteed rate of return on that investment. In short, with their "time of use" customers they set the rates such that prices went down during the peak demand periods and up at off-peak times, thus encouraging consumers to shift load into the peaks. And for non-time of use (conventional electricity metering) customers they introduced daily fees for off-peak tariffs and set the off-peak rates not far below the standard rate, thus removing the incentive to use off-peak. Consumption on the off-peak rate subsequently dropped 60% over a few years with virtually all of that load transferred onto 24 hour supply rates. They also structured their network pricing similarly with regard to off-peak, thus preventing any other retailer from offering sensible rates.

Needless to say, this all resulted in a lot of investment upgrading the network to cope with the surge in peak demand. They managed to spend a fortune and also roughly doubled their staff numbers too.

And as if that wasn't enough, for some strange reason they became a bit upset that the generator (operator of power stations) needed to charge a price that covered the cost of supplying this increasingly peaky load and was charging the retailer roughly double what they charge direct connect (not via a retailer) baseload customers (which is basically large factories running 24/7/365). And so they went looking for a new generating company and found someone willing to build a brand new plant to supply them. And so they signed up, at a price even higher than what they were paying previously.

What happened? Well the generating company almost went bust due to external factors relating to the GFC. And so the retailer ended up owning the power station. And yep, it practically sent them broke too once they realised that their production costs were higher than the market price for power.

So where's it at now? Well the generating company that used to supply this retailer has aquired their power station and is now operating it more sensibly with respect to the cost of supply from other sources leading to a 5% drop in household power bills - not huge but it's a start. Government is in the process of ending the retail monopoly. And the transmission company, a separate entity to either the generator or the retailer, is taking over the distribution network. Oh, and they've sacked hundreds of workers too.

The generation side of the industry is highly competitive and cost focused, it pretty much always has been to be honest even back in the old days. Even if the generator has a monopoly (eg Tasmania), there's nothing to prevent a southerly flow of power across Bass Strait and/or someone else building power stations if the generator gets greedy. That plus having 50% of your sales to industries which could easily relocate offshore drives home the cost message pretty sharply. Bulk power was worth around $40 / MWh 25 years ago and if you exclude the carbon tax then it's actually worth a bit less than that today - in real terms the price has massively declined. Networks, on the other hand, are virtually a license to print money. You have a guaranteed rate of return that is itself rather profitable, and can invest basically as much as you like all with a guaranteed return.

So far as Qantas is concerned, they need to face reality that their business is akin to that of the power generators, not the distributors. They're in a competitive market that's actually quite similar to electricity generation with it's high fixed costs, varying demand levels and fluctuating fuel costs - similar in a lot of ways. Either they produce a premium product and sell that into the limited market which exists for it, or they compete in the commodity market. That's exactly what the power generators are doing, maximising production of anything sold at a premium (high demand days, green power, large scale renewable generation certificates) and selling the rest as a bulk commodity. Qantas is in a very similar business whether they realise it or not.

 

[Smurf1976]

SA Water has a glamorous multistory admin building right in the centre of the CBD and that has all floors illuminated 24/7, they should be out in an industrial area same as private businesses can only afford to be.

Guess how much profit SA Water made last year, yep, $362 million.

What happened to the other $3 million in potential profit? Better not tell them or they'll put the prices up.....

Whilst I don't live in Adelaide, I've noticed that building whilst there on holidays and it certainly does stand out. It's not your run of the mill generic office building at least externally. Not that I mind fancy architecture, but I'd expect that it's a fairly expensive location, being right in the CBD, for a company that doesn't really need to be located there. Maybe that's where the $3 million goes?

 

[Boggo]

What happened to the other $3 million in potential profit? Better not tell them or they'll put the prices up.....

There are a few successful establishments in the vicinity where long lunches are the norm, same establishments seem to have high temperatures all year round too but the female staff seem to be able to keep cool

Whilst I don't live in Adelaide, I've noticed that building whilst there on holidays and it certainly does stand out. It's not your run of the mill generic office building at least externally. Not that I mind fancy architecture, but I'd expect that it's a fairly expensive location, being right in the CBD, for a company that doesn't really need to be located there. Maybe that's where the $3 million goes?

Their spokesperson has no problems complaining in the media about the cost of running the business - I wonder why they have such overheads

 

[matty77]

Comparing buying a new car and checking its safety ratings and flying on an airline and checking its safety is really clutching at straws. With the cheap flights now days safety is not the first priority of a passenger, you can fly a low cost airline and still get good safety. If QAN honestly believe their safety record is even a selling point then they must be kidding themselves (and I know they dont think that anyway)

What killed QAN?

When QAN was profitable they were charging 10 x as much for flights so could afford not to be efficient and provide above and beyond services. Fact is they just haven't changed quick enough with the times, low cost airlines are now the go. Honestly though QAN dont need to change, they never could change anyway even if they wanted to as the Unions all kick up a fuss etc. So the only option out was to form a new airline (insert Jetstar here) and then run QAN into the ground over the next 10 years.. I would expect Jetstar to get some great infrastructure once QAN finally dies without the Union and staff baggage that QAN has created over its lifetime.

Why do you think Holden is closing down? Nothing to do with people not buying their cars, its supply and demand which is dictated by PRICE. Holden are paying the AVERAGE guy on the factory floor OVER $100K PER YEAR. Seriously do you think any manufacturing company can survive with those sorts of wages? Lets not forget all the other perks these guys get that work there as well. Basically the Unions have increased cost of production so much now not even the government can cover the short fall.

Will you pay $110,000 for your new next Holden or just go buy a Toyota or Mazda that is just as good for half the price? I want to be loyal to Australian brands, but I aint that loyal to make stupid purchases.

Same thing happened to Mitsubishi in Adelaide..

QAN is a dead horse, competition from low cost airlines and the unions made sure of that.

 

[Garpal Gumnut]

Comparing buying a new car and checking its safety ratings and flying on an airline and checking its safety is really clutching at straws. With the cheap flights now days safety is not the first priority of a passenger, you can fly a low cost airline and still get good safety. If QAN honestly believe their safety record is even a selling point then they must be kidding themselves (and I know they dont think that anyway)

What killed QAN?

When QAN was profitable they were charging 10 x as much for flights so could afford not to be efficient and provide above and beyond services. Fact is they just haven't changed quick enough with the times, low cost airlines are now the go. Honestly though QAN dont need to change, they never could change anyway even if they wanted to as the Unions all kick up a fuss etc. So the only option out was to form a new airline (insert Jetstar here) and then run QAN into the ground over the next 10 years.. I would expect Jetstar to get some great infrastructure once QAN finally dies without the Union and staff baggage that QAN has created over its lifetime.

Why do you think Holden is closing down? Nothing to do with people not buying their cars, its supply and demand which is dictated by PRICE. Holden are paying the AVERAGE guy on the factory floor OVER $100K PER YEAR. Seriously do you think any manufacturing company can survive with those sorts of wages? Lets not forget all the other perks these guys get that work there as well. Basically the Unions have increased cost of production so much now not even the government can cover the short fall.

Will you pay $110,000 for your new next Holden or just go buy a Toyota or Mazda that is just as good for half the price? I want to be loyal to Australian brands, but I aint that loyal to make stupid purchases.

Same thing happened to Mitsubishi in Adelaide..

QAN is a dead horse, competition from low cost airlines and the unions made sure of that.

+1

Makes sense.

gg

 

[Bill M]

What killed QAN?

When QAN was profitable they were charging 10 x as much for flights so could afford not to be efficient and provide above and beyond services. Fact is they just haven't changed quick enough with the times, low cost airlines are now the go. Honestly though QAN dont need to change, they never could change anyway even if they wanted to as the Unions all kick up a fuss etc. So the only option out was to form a new airline (insert Jetstar here) and then run QAN into the ground over the next 10 years.. I would expect Jetstar to get some great infrastructure once QAN finally dies without the Union and staff baggage that QAN has created over its lifetime.

Hi matty I agree with you mate. I have been flying O/S since the late 70's and I can vouch that in my opinion QF services have degraded over the years. Over the last few years I started flying BA and Emirates and both of those Airlines are better than QAN, Emirates being the standout.

Things have changed a bit lately as far as price is concerned, these days QAN can offer better prices than others but I prefer to choose QAN last. My reason for that is their lousy service and menus on board in economy. Also since the start of Flight code sharing with Emirates they have changed their own QF flight schedules and they really don't suit me. The only positive about the airline in my opinion is the Frequent Flyer Program which is pretty good. My way of preference now is booking with Emirates and picking up half the points with QFF.

It is unfortunate, at the end of the day it comes down to basics, service, schedules, meals on board. QAN doesn't cut it for me anymore, nor would I buy their shares as an investment.

 

[matty77]

you or anyone else would be crazy to buy shares in QAN.

And they are (or have?) sold the Frequent Flyer portion of the business?

 

[Boggo]

...

And they are (or have?) sold the Frequent Flyer portion of the business?

I have the new QF frequent flyer card where you can also load it up with money in any currency if travelling OS.

Have heard a horror story where someone did that, went OS but because of the points gained on that flight over their status was changed and the card that they held couldn't be used and consequently their money wasn't accessible.
Another well thought out plan if true !

 

[Bill M]

They haven't done it yet but they are thinking about flogging off the QFF program as well as a partial sale of Jetstar.

---
QANTAS will keep a controlling stake in its Frequent Flyer program if the cash-strapped airline spins off the lucrative division, industry experts believe.

Another analysts, who asked not to be named, said selling a minority stake in the program was an "obvious" place to find money.

Other options to raise cash for Qantas include a partial sale of Jetstar, the sale of airport terminal assets or even the bulk sale of frequent flyer points.

http://www.heraldsun.com.au/business/qantas-frequent-flyer-selloff-the-cards/story-fni0dcne-1226802713785
---

 

[Smurf1976]

They haven't done it yet but they are thinking about flogging off the QFF program as well as a partial sale of Jetstar.

If Jetstar is supposedly the future of Qantas, on the basis that Qantas mainline operations aren't competitive due to structural issues that are difficult if not impossible to overcome, then selling Jetstar sounds like an act of outright desperation to raise cash.

If a business sells something that doesn't "fit" with their overall operations then I can understand that. Eg if Qantas owned a chain of restaurants then that's a very different business and I could see the logic in selling it in order to concentrate time, effort and financial resources on running the main activity which is the airline. Likewise if they owned a railway company, pubs, retail stores or anything else that isn't relating to aviation I could see why they might want to sell it.

But selling Jetstar? Either they've decided that Jetstar was a mistake and want to be rid of it or they're getting desperate. My bet is on the latter.

I can't help but notice that Virgin are taking essentially the opposite approach to Qantas. Eg they've upgraded their services both in terms of professionalism and adding Business Class seats to their planes in order to attract higher paying customers. Meanwhile Qantas service is getting worse it would seem. Virgin bought into Tiger meanwhile Qantas are apparently considering selling Jetstar. The two are taking the opposite approach.

Given that Virgin as a group, not just the Australian airline but their overall operations in all sorts of things both aviation and other, have been pretty successful I'd expect that they have a long term strategy and also a lot of patience. Slowly but surely, they're putting it into place as opportunities arise.

I don't invest in airlines, one of my criteria for buying stocks on fundamentals is that the underlying industry is profitable (and airlines are notoriously good at losing money) but if I was going to buy either Qantas or Virgin then it would definitely be the latter since at least they seem to have some sort of plan for where the business is going which doesn't depend on asking government or anyone else for a handout.

 

[Garpal Gumnut]

I have cashed out all my QAN Frequent Flyer points for Shopping Vouchers.

If QAN go belly up, it will be quick and brutal.

Very brutal.

gg

 

[matty77]

Selling the only 2 parts of the business that is making a profit sounds like the government selling utilities...

But seriously they must be desperate to want to sell any of Jetstar, unless to a competitor that then gives QAN a stronger position in the market somehow... (highly unlikely)

 

[DJG]

As mentioned in one of the previous posts regarding how much Qantas pads up Jetstar's financials through paying for legal fee's and everything else. How well could Jetstar honestly go anyway if Qantas was to spin them off and they were by themselves?

Would they just end up following the same fate as Qantas, only slower. There Jetstar Asia hasn't exactly been a hit.

 

[McLovin]

What a shocker. 5,000 jobs gone. Routes axed including Perth-Singapore (which is pretty ridiculous for a so called national carrier). 50 aircraft to be sold or deferred delivery. The board and Joyce need to be sacked.

 

[Knobby22]

What a shocker. 5,000 jobs gone. Routes axed including Perth-Singapore (which is pretty ridiculous for a so called national carrier). 50 aircraft to be sold or deferred delivery. The board and Joyce need to be sacked.

True. They have made some very average decisions, especially the deal with that gulf country airline.

 

[McLovin]

True. They have made some very average decisions, especially the deal with that gulf country airline.

I've got an international flight on Qantas in a couple of weeks. I'm wondering what the chances of strikes are.

 

[craggles123]

I have cashed out all my QAN Frequent Flyer points for Shopping Vouchers.

If QAN go belly up, it will be quick and brutal.

Very brutal.

gg

I've considered doing this as well, I've got about 200,000 points sititng their though, would have preffered using it to take the family somewhere but that wont be happeing anytime soon and who knows whats going to happen to qantas...

 

[Knobby22]

I've got an international flight on Qantas in a couple of weeks. I'm wondering what the chances of strikes are.

I have a feeling this is where the deal with the government comes in. They want to set the precedent of a wage freeze but the unions may decide to push against this.
Good luck!

 

[skc]

What a shocker. 5,000 jobs gone. Routes axed including Perth-Singapore (which is pretty ridiculous for a so called national carrier). 50 aircraft to be sold or deferred delivery. The board and Joyce need to be sacked.

No.

The performance of the airline is unacceptable and unsustainable. The performance of the Board and Mr Joyce have been awesome. Sack everyone except the Board. That way it will reduce losses to ~$10m a year - a significant turnaround. It will also continue to invest in new air hostess attires to show their committment to better customer service.