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It’s one of the basic facts of aviation that flagship carriers don’t do low-cost models well.
Many full-service airlines have tried, and many have failed, but Qantas’ CEO, Alan Joyce, believes that he’s found the formula for success. It starts, he says with disrupting yourself before anyone else has the chance to do it for you.
“At Qantas, a good few number of years ago, we decided to be a disruptive airline, not sit back and let it happen,” he said in his address to attendees at the CAPA Summit in Helsinki. “There’s a few things that we’ve done to be able to focus on coping with that environment and taking advantage of those opportunities. The first thing was to take advantage and fix the basics of where we had a problem. We had a problem with our cost base. Our cost base was too high, compared to our Asian peers.”
“Our cost base too high compared to our domestic competition. The transformation program that we’ve implemented has been about addressing those disadvantages and we’re making massive progress. Some of our analysts say that Qantas’ cost base will be equal to Singapore and Cathay’s by the end of the transformation. And it will be within 5% of our major domestic competitor.”
Supporting improvements at the flagship carrier is the lean low-cost airline JetStar, which Joyce says, “Has a massive cost-base advantage against peers.”
“We decided that we weren’t going to be disrupted by low-cost carriers,” he said. “We were going to create our own low-cost carrier. I remember the publicity in 2003 where people said, ‘nobody in the full service category has successfully done it.’ The American airlines had plenty of attempts at it. But we felt it wasn’t done properly. We looked at the lessons of failure on a number of different sides, and went with the bold move of creating JetStar.”
To get the project off the ground, Qantas recruited from the best of the world’s Low-Cost competitors, and wasn’t afraid to poach and copy.
“We got some of the ex-Ryanair guys..some of the guys from easyJet..we got people who worked with JetBlue,” Joyce said. “We decided to take the best of what everyone in the world was doing in the business case.”
JetStar operates independently of the flagship carrier, maintaining lean operations which fit the Low-Cost Model. Joyce explained why this separation was critical to the success of the project.
“You need to be sure that it’s a separate airline,” Joyce said. “Separate cabin crew body, separate engineering division, a separate IT system. The compromisers would say, ‘We can save money by using the same IT system.'” The false efficiencies of shared operations and systems, Joyce argues, is what has killed such projects in the past. “That’s one of the parts where a lot of the American carriers that tried this, that dissolved were all in that category. The other types..are the ones where the cure was worse than the disease, like the airline called Go, owned by British Airways, that had to be taken over eventually by easyJet. What Go was doing was putting on [flights] on routes in Spain, which were the best routes in Spain, which [conflicted] with the Iberia/BA joint venture.”
To keep routes separate, and ensure JetStar does not infringe on Qantas profitable routes, the Qantas group maintains a ‘flying committee’ which “looks at routes and makes a decision on what’s right for the group at the right time,” Joyce explained.
“The other thing that was really important was for [the] JetStar [brand] to be separate,” Joyce added. “We set up the airline with a very different name, a name that was designed, particularly at the time, to be more generic. The great thing that both Ryanair and easyJet have done is that they are pan-European names. JetStar, the link to it, was not to Australia, because we knew the opportunities around Asia and New Zealand to do what Ryanair has been doing in Europe.”
But proposing a low-cost arm of the Qantas group was not an easy sell for Joyce.
“There was a lot of criticism and a lot of worries about what the failures were,” Joyce said. “We always thought it was a little bit of a tightrope. All said, you had to be a little bit schizophrenic working for a low-cost carrier and a full-service carrier. Because what you had on one side was a failure, because you compromised too much on growth. There were a lot of people at Qantas that thought this was the worst thing we could ever do. [They felt] that it would damage the Qantas brand to be associated with this, that somehow it was going to lessen what Qantas was.”
But, Joyce said, the results of brand studies proved otherwise. “Qantas’ brand literally went up-market, because there was a comparison and a difference in branding.”
Joyce was also careful to say that the process had bumps along the way, and compromises.
“We gave JetStar access to the lounges, which I didn’t want to do at the time,” Joyce said, “There were also mistakes. I always remember Australians didn’t like some of the harsh rules we were putting in. They Ryanair guys told us 30 minute to close out—you need to focus on the efficiencies. I remember appearing for the first time on TV as CEO, and [there was] this couple who had gone on their Honeymoon to the Gold Coast, who had missed the close out, and they were on TV with me and said how her marriage was now ruined because they couldn’t go on their honeymoon. My answer was, ‘Well, obviously if that’s destroying your marriage it wasn’t destined to last.'”
Joyce says he has since learned a bit more about handling press and watching what he says on national television, but he’s confident that JetStar’s marriage to Qantas is stable.
“I have had a EU airline CEO say to me very recently, ‘You defied gravity in Australia. You had your major competitor in Australia change its strategy from being a low-cost carrier to turn itself into a full service carrier,’ because it couldn’t compete with JetStar, the low-cost carrier we set up,” Joyce said.
“We developed an unbelievable intellectual property and helped the two carriers work together using the amazing customer segmentation power that we have, the amazing network planning capabilities that we’ve developed to use those two brands effectively to such an extent that in our domestic market last year we made $600 million, and the most profitable airline operating in that domestic market was the full-service Qantas airline. JetStar saved that business by its operation. When a lot of people said long-haul low-cost carriers can’t be done, we created JetStar in 2007 flying all A330s. It’s now an all 787 operation, and JetStar has been profitable every year since its started flying long-haul international. Every year.”