Address by Qantas CEO Alan Joyce to National Press Club 9 October 2012 We are living in complex times. By we I mean every Australian individual, company and institution. The times are marked by uncertainty in everything from the value of the Australian dollar, to fuel and iron ore prices, to equity and property markets. That is challenge enough. But we are also dealing with permanent structural change. Demand for minerals and energy has transformed Australia to a high currency economy, just as technology and globalisation have heightened competition from offshore providers of shopping, tourism, manufacturing and services. We have great assets and capabilities in this country. We should have high expectations of our ability to prosper. But if we are to compete in this new environment if we are to preserve and create jobs for young Australians and build sustained economic success for Australia the reality is we need to respond comprehensively to this permanent transition. At an enterprise level we need to become more productive, using our abundant skills to make the most of new technologies and smarter processes. At a local, state and national level we need to become more competitive, ensuring that Australia remains a preferred place to invest and do business. Adapting to change is never easy. It requires wisdom not to over react to the short term volatility. It demands courage to accept that there can be no return to the good old days. And it takes an effort of will to effect the transformation that is required. It s not just about change, it is also about the pace of change. As a nation we do not have unlimited time to adjust to the new realities. The world is speeding up, while here in Australia we still take too long to do almost everything. Take one example from the aviation world. As part of their revised five year plan, the Chinese are now in the process of building 82 new airports. That s a new airport every 23 days. Here in Australia we ve been talking about a second airport for Sydney for more than 23 years. NO BUSINESS CAN SUCCEED ALONE Today I want to talk about the mandate for change from the perspective of the Qantas Group. We all know that no business can succeed alone. Certainly not the Qantas Group. 1
When we decide to change the way we do business at Qantas, we need the cooperation and support of many players. As part of the highly regulated aviation industry, we are dependent on the quality and timeliness of decision making by governments, legislators, and regulators here in Australia, and in many jurisdictions around the world. Then there are our key stakeholders. Our shareholders, who provide the capital to sustain our business. Our customers, who choose us over the competition. And our employees, who commit their time, skill and passion to make the Qantas Group a success. And Qantas is not just any company. We are part of Australia s heritage, a lifeline for regional and rural communities, a great sponsor and supporter of good causes, a major champion of tourism, and a promoter of Australian excellence in food, wine and design. Of course, and most importantly, we will always be a strategic resource for this nation in times of need. Through wars, emergencies and more recently, supporting troop deployments to various parts of the globe, Qantas is proud to support the men and women of the Australian Defence Force. We recently signed a Memorandum of Understanding with Defence the first of its kind for the private sector which recognises that many of our employees contribute to national defence through the Defence Reserves, and this MOU now makes it simpler for them to do so. So we will always take our decisions in the context of the broader community and Australia s national interests. That is in no way separate from, or in addition to, our shareholder responsibilities. They are interlinked. Our shareholders know that the strength of our brand relies upon being there for Australia and representing the best of Australia in the world. That will never change. But almost everything else will. QANTAS AT THE CHANGE FRONTLINE At the Qantas Group we are right in the frontline of these broader forces of change both positive and negative. We have capitalised wherever possible on the many positive opportunities. Our domestic business has benefitted from the relative strength of the Australian economy. We are the airline making the most of the demand for aviation services from the minerals and energy sector. Jetstar is positioning itself very successfully in Asia, the fastest growing aviation market in the world. 2
In the text of her speech to the Asia Society a few weeks ago, the Prime Minister noted that, to prosper in this new Asia, we ll need to stay smart and innovative, productive and capable. Australia, she said, must be a country that makes and sells ideas. That s a pretty accurate description of Jetstar. A great idea, sold into Asia, now a great brand in Asian markets, with significant long term potential. Our Frequent Flyer program too is going from strength to strength as a powerful brand in its own right, reflecting the tastes and preferences of Australian consumers. We now have 8.6 million members over a third of the Australia population and over 500 program partners, including Woolworths, David Jones, Optus and all the major banks. But our Qantas International operations, like Australian manufacturing, retail, and tourism, has been hit by the post GFC triple whammy: high fuel prices, the high Australian dollar and the economic downturn in major markets like Britain, Europe and the United States. I took over as CEO in 2008. Between 2002 and 2008, the Aussie currency averaged 73 cents but since 2009 it has averaged 93 cents. Today it is above $1. Jet fuel before the GFC averaged $87 per barrel, but since then it has averaged more than $100 per barrel (and that s in Australian dollars, so even our high currency has not fully mitigated the fuel price impact). And this triple whammy has compounded the effect of the structural challenge faced by Qantas International. Our main competitors have four attributes in their favour their geographic location which allows them to aggregate passengers from multiple sources and disperse them efficiently; government backed infrastructure, especially 24/7 hub airports; low or no tax regimes for airlines and their employees; and a lower cost of labour. For more than a decade, Australia s liberalised aviation market has brought a flood of capacity and competition. It s a trend that s intensified in recent years, in line with a strengthening Aussie dollar. Since 2008, overall international capacity in Australia, excluding Qantas and Jetstar, has grown by just over 30%. Middle Eastern capacity has grown by 50% and Chinese capacity by 117%, a huge number off a lower base. Competitor airlines have added nearly seven million seats into the Australian market: that s the same as the total number of migrants who have come to Australia since 1945! The net impact of this ongoing shift is that 82 out of every 100 people flying out of Australia are flying with an airline other than Qantas, not including Jetstar. 3
QANTAS INTERNATIONAL CHECK AGAINST DELIVERY I came to the Press Club last year and emphasised that Qantas International was a great airline, but a poor business. I outlined the scale of the challenge, and our commitment to do what was necessary to ensure that Qantas made the necessary changes to secure a great Australian story for future generations. I set out the four pillars that would shape our transformation plan for Qantas International: partnerships and gateways; being best for global travellers; growing with Asia; and building a strong and viable business. Since that speech we have been hard at work. We have taken the hard but necessary steps to make our business more efficient and to determine our own destiny. We have put together the right plan. We are now at an inflection point, and I hope and believe the curve is set to turn upwards. Last month I announced a ground breaking ten year partnership with Emirates Airways, which is now under consideration by the regulators. Emirates is a true peer airline for Qantas. It is one of the world s biggest carriers, with an all wide body fleet, and excellent and product and service standards. If it is approved, this partnership will allow us to deliver customers a seamless Australian and international network, extensive frequent flyer benefits and consistently excellent travel experiences. It will deliver significant benefits against all four strategic pillars of our transformation plan. 1) Gateways and partnerships First of course, this partnership will extend our airline s reach, while restraining our costs. Dubai will become a one stop gateway to 33 destinations in Europe and 28 in the Middle East or North Africa. Dubai will complement Los Angeles and Dallas, the gateways to North America; Santiago for South America; Johannesburg for Southern Africa; and Singapore and Hong Kong for Asia. Emirates will complement our relationships with American Airlines, LAN, South African Airways and China Eastern, along with oneworld. What this means is that we will be able to offer our customers all over Australia an exciting global network, providing benefits to all of them. The alternative would be decline. 4
As the figures I quoted earlier show, Qantas International has been contracting for some time. Further contraction would have a very serious domino effect on the rest of the business. 2) Best for Global Travellers The most exciting thing about this partnership is what it brings to our customers. It will mean a seamless end to end customer experience and the world s best loyalty proposition for Australian travellers. Qantas and Emirates have agreed to treat each other s customers as our own, and this means that customers will really get the best of both airlines. Front of mind, of course, is the appeal of just one stop to over 30 European destinations (including seven serviced all the way by A380s) and only two stops to Europe for regional Australians. We will see savings in travel time. Total travel time from Sydney to European ports for example, will be reduced on average by about three hours. Qantas passengers travelling to destinations in the United Kingdom beyond London, such as Glasgow, will save hours in travel and transit time. We will see savings in price. There will be fare reductions as Qantas and Emirates provide more discounted fares over longer travel periods; offer fare savings into a range of ports as we re zone routes; and pass on lower airport charges. Our Qantas Frequent Flyers all 8.6 million members will be far better off. There will be massively increased opportunities for them to earn and redeem frequent flyer points and outstanding recognition and rewards on both airlines. There will be benefits in terms of earning status credits, lounge access, baggage allowance, preferential seat availability, priority check in and so on. And if we get the go ahead, Emirates and Qantas have agreed to work together in more areas, so it s a case of watch this space. So far, the response from customers has been outstanding. Our initial research shows that 82 per cent of our premium customers think the partnership is a good idea, and 87 per cent of the people we surveyed were able to spontaneously identify specific benefits that they expected to result from the partnerships. That is a great endorsement as we begin the planning process. 5
3) Growing with Asia Our third priority is growing with Asia. Part of the great good fortune of this era is that Australia is nearer than ever before to our closest trading partners, and the most dynamic economies in the world. To be part of Asia is to be part of the future of this planet. China is a diverse nation of great regions, food and cultures. Its arts and culture, both ancient and modern, have much to offer the world. Japan, Vietnam, Indonesia and more offer some of the world s most exciting travel and cultural opportunities. Since August last year the Qantas Group has taken steps to establish two Asia based airlines: Jetstar Japan and Jetstar Hong Kong. We are working with Asian partners and building our knowledge of Asian cultures. We are proud of what we have done so far, but there is so much more we can do. We know that it is important to have the right network and the right offering for Qantas passengers in Asia. It is something we need to fix in order to turn Qantas International around. The prevailing view has always been that our hub for both European and Asian flying needed to be the same place. And we have explored that option at length. But the Emirates partnership means we can separate those two hubs, putting Dubai at the heart of the Kangaroo Route while enabling us to strengthen our position in Asia through Singapore and Hong Kong. With European flights now operating via Dubai, we will re time flights to Singapore and Hong Kong to focus on travel to, within, and from Asia. We will offer 40 per cent more dedicated capacity to Singapore, our primary Asian hub, and 25 per cent more same day connections onward across the region through partners such as China Eastern and Jet plus, of course, Jetstar Asia. We will also be working with Emirates on their services between Australia and Asia. This means that we will be able to offer a second daily Melbourne Singapore service, a second daily Brisbane Singapore service, and direct services between Melbourne and Kuala Lumpur. We will also refine our product offerings in the air and on the ground to better meet the needs of our Asian business and leisure travellers. We want to be there, supporting Australia s deepening friendships and business relationships in Asia. 6
With this Emirates partnership we can establish the right framework for that vital long term project, which will be good for us, our customers, and Australia. 4) Building a strong, viable business Finally, a key objective for us is to make Qantas International strong and viable, and bring it back to profitability. If this partnership is approved, it will help us do that, while building on our strengths in Qantas Domestic, Qantas Frequent Flyer and Jetstar. As we all know, in these complex times, a number of companies have sought or received Government funds to help them make the transition in the new economic order. At Qantas we are not taking that path. We are making bold decisions which will allow us to retain control of our destiny. There is no doubt this new partnership is a step change for us in terms of the viability of Qantas International, and therefore Qantas itself. When we announced the partnership with Emirates last month cheers and applause were heard right across our Mascot campus. Our people have been incredibly loyal and hardworking during a pretty tough period. There is great enthusiasm among our people for this partnership because it will help us do more for our customers, and thereby secure good Qantas jobs and a great future for our business. My belief is that, once we have bedded down the new arrangements, we will have a platform for growth. That is a really exciting prospect. BROADER OPPORTUNITIES I said at the outset that Qantas always made decisions mindful of our responsibilities to our stakeholders and the broader Australian community. This partnership is, in my view, a great opportunity for Australia. We are excited about the prospects for Australian tourism. Qantas and Emirates will have a global network that links back to all the Australian cities and rural and regional centres where Qantas has a presence. We will undertake joint marketing campaigns to remind Europeans of the wonders of this country, both its cities and its regions, and to let them know that it is just two stops from Northern Europe to the heart of the Australian outback. 7
Qantas has for many years been the biggest private sector supporter of tourism, and Emirates will have every incentive to invest still further in Australia as a great destination. Then there s the competitive effect. Tim Clark, President of Emirates, calls this partnership a seismic one and that s because it will trigger a wave of competitive responses that will no doubt be good for customers. I went on a travel web site the other day and found 31 different carriers offering services through to London from Australian cities. There s no shortage of vigorous competition now, and it will get more intense. We will see intensified competition both on price and product so customers will benefit. At a national level the United Arab Emirates is a valuable partner for Australia in the Middle East and has offered important support to our Australian Defence Force as it has undertaken missions around the region. We see the creation of a hub in Dubai as an opportunity to strengthen our bilateral ties, and promote business, trade and goodwill for Australia in the region. Qantas is part of Australian life, and we know from our research that Australians want Qantas to be a strong and viable business. In turn we have a corporate responsibility to ensure that we can continue to deliver benefits to Australia as we evolve. NEXT STEPS Before I conclude I want to talk about next steps. We take nothing for granted and we await the regulator s decision. However we are confident we have a sound case, and that this partnership is good for consumers and good for competition in this country. We will have a great deal of work to do to be ready by April next year. We need to negotiate route scheduling and airport slots. We will have to create bridges for our IT management systems to work together. We ll need to develop joint systems and protocols for inventory, ticketing, pricing and revenue management. We will want to prepare and commission joint marketing campaigns. And we will need to establish a new office in Dubai and be working effectively with our partner Emirates and with local authorities to cater for the needs of the many more Australians who will be passing through Dubai. 8
CONCLUSION Let me conclude. This is a complex era for us, as for many Australian companies, and it affects all Australians. But Qantas has succeeded for 92 years because as a company we have always adapted successfully to change. But what has never changed is our special place in Australian life. We value it. We honour it. And we will continue to do what is right by all our many stakeholders across this nation. We also know that we can t succeed alone. The understanding and support of many players is essential if we are to succeed. This partnership is going to be good for us, and it will be good for Australia. We look forward to getting on with the job, and making a better future. 9