Qantas Group is a corporate group with the parent company of Qantas Airways Ltd; Australia’s flag carrying airline. The group consists of subsidiary companies of Jetstar, Jetconnect, Qantaslink, Qantas Freight, Express Freighters Australia, Network Aviation, Q-catering, Express Ground Handling and Qantas Holidays, all of which are strong diversified liberal customer-focused interlinked brands to deliver a strategic objective of sustainable returns to shareholders, safety, strong domestic business, transforming Qantas International and growing Jetstar in Asia (Qantas Annual Report QFAP 2013, p77 2014)
Qantas Group operates bulk market share domestic passenger services within Australia, operated under Qantas, Qantaslink, Jetstar and Network Aviation. Its objectives for 2013 in the domestic market (The Qantas Group ‐ A Strong, Sustainable Future, 2013) is profit WITH dual brand 65% ASK market share (QF/JQ), Frequent flyer points business, growing portfolio associated business (Qantas Group) and FIFO operations (Network Aviation). The predominant competition to the domestic operator’s products under Qantas Group, are Virgin Australia Holdings Limited’s Virgin Australia (including Skywest) and 60%-owned Tiger Airways Australia, carriers focused on “re-positioning on a strengthened domestic market to drive future earnings growth” (VA2013 Annual General Meeting, 2014).
Whether the objective purpose of Qantas Group and their competition has been undertaken will be observed at a wholesome industry perspective with context, which will include consumer demand, marketing, cost base, network and fleet management, yield, subsidiary performance and other factors.
Total Qantas Group Domestic yields (and competitor’s yields) dropped, a contributing factor being weak demand in intra-Australian segments (PRELIMINARY TRAFFIC AND CAPACITY STATISTICS, 2013)&( Virgin Australia ASX, Jun2013). Consumer demand is a crucial aspect in operational feasibility, and determinants for Qantas Group’s stimulated result includes:
- Price: Price savings conducted to customers inducing little profit due to competition. Fall in yield due to Jetstar and lowered reservation prices for customers. Post-GFC price drops still under recovery. This is shown by (Qantas Annual Report QFAP 2013, p55 2014), where Qantas Domestic suffered a 20% segment performance drop from 2012, as opposed to Jetstar Group with 32% (greater elastic customer base). Same story with Virgin and Tiger (VA Holdings annual report 2013, p99 2014) & (Tigerair Annual Report 2013, 2014)& (Bitre.gov.au, 2014)
- Non-aviation competition: higher costs of travel resulted in spillage onto other modes such as rail and road (ATRF, 2014)& (Doganis 1991(BITRE) p220).
- Income growth and demographics: higher demand for LCC services by volume. (Bureau of Transport and Regional Economics Paper 54, 2014).
- Safety: well demonstrated in the entire domestic industry. (Minister.infrastructure.gov.au, 2013)
- Company goodwill utility: Qantas utilizing goodwill induced from non-aviation services to inject capital for airline operations, while Virgin Australia holds onto codeshare with partners, equity holders and consolidated services. (Aspire Aviation, 2011). Goodwill dominant in performance of frequent flyer programs and domestic operations, with 13% boost in revenue for Qantas (Qantas Annual Report QFAP 2013, p55 2014), while growth in Velocity Rewards business (VA Holdings annual report 2013, p20 2014)
- Market segmentation: Formation of groups with new domestic aviation entities forming within to diversify and accommodate full service and budget travelers along maximized Australian catchments at widely-discriminated fares (QF/VA groups). This is also reflected in booking structure (GDS/website booking), scheduling (frequency, timings, aircraft type and configuration) and service (amenities/frequent flyers). (DTRS 1999-2000, 2014).
“Unit Cost remains an area of focus across the business” (Qantas Annual Report QFAP 2013, p85 2014). Cost efficiency and management of dependant and independent expenditure is fundamental in keeping Qantas Group stable. Total expenses is shown below, while operating statistics below (Qantas Annual Report QFAP 2013, p54/55 2014):
Breakdown of costs is as follows:
- Manpower: Expenditure over manpower increased from 2012 with inclusion of CPI (((3774m/36815)x(2.7/2.5))-(3825m/35231)=2144). (Rba.gov.au, 2014) & (Qantas; MY report 2013, 2014) & (Dobbie, 2014)
- Aircraft variable operating costs have increased. According to Ian Louis (SVP QF), this is largely due to Qantas’ competition (Aspire Aviation, 2014). This is also thanks to higher aircraft operating variable, capacity/utility-increase accommodation, property costs, capacity hire, economies of scale (traffic-density) and staff related expenditure, while costs of marketing and inefficiencies have held or dropped. (Qantas; MY report 2013, 2014) and (Qantas; MY report 2012, 2014)
- Aviation fuel prices has lost price value between 2012 and 2013. This has been rather advantageous, considering for FY13, fuel accounted for 26% of Qantas’ expenditure, 1% less than 2012 (thanks to inefficiency in fleet and efficiencies in other expenditures). (Qantas; MY report 2013, 2014) and (Iata.org, 2014)
- Capacity hire/lease demonstrates standard deviation and seasonality of customers. Selling and marketing expenditure includes advertising, GDS contracts, outlets (under property), and systems. Other may include related costs of subsidiaries, while airport security charges are mostly offset to customers.
- Hikes in other expenses is thanks to high costs, little competition/substitutes on offer, low bargaining powers, and monopolistic prices of inelastic products premium carriers are dependent on.(Qantas; MY report 2013, 2014)
According to (IATA Profitability and the air transport value chain, 2014), market forces in the Air transport value chain for Qantas as a result of:
- Manufacturing and leasing of high-capacity/capability aviation equipment requiring very high capital-investment. This is seen in Qantas Group, with cancellations/delays of 787 orders and slowed retirement of 747-400s, 737-400s and 767-300s.
- MRO, catering, engineering and ground handling services owned by Qantas Group an economies-of-scale advantage over Virgin Holdings VA and Tigerair in cost-reduction power (Qantas Annual Report QFAP 2013, p109 2014)
- Geographical monopolies of airport catchments and traffic management services (ANSPs) resulting in high fees, curfews and price discrimination of arrival/departure timing.
Some resultant calculations of Groups are as follows. Information utilized are made-instruments, “(Qantas Annual Report QFAP 2013, 2014), (VAH Annual Report 2013, 2014; which includes Tigerair) and (VAH annual report 2013, 2014):
- Manpower/ASK: Efficiency of manpower in delivering ASK. Both carriers improved their manpower productivity in delivering required ASKs. VAH was more tolerant over change in CPI.
- Manpower expenditure/ employees: cost efficiency per employee. VAH maintains lower manpower expenditure required while maintaining even lower employee figures.
- Aircraft Operating Costs/RPK: Operating expenses distributed per RPK. Both carriers have increased operating cost distribution per RPK, but Qantas maintains overall lower operating costs thanks to owned subsidiary services, larger aircraft by size.
- Fuel/RPK: Fuel efficiency in delivering capacity utilized. Qantas’ fleet, despite operating larger aircraft, suffers high fuel/RPK ratio thanks to older equipment, overcapacity of routes and lack of fuel management (despite drop in fuel prices). VAH suffered from overcapacity.
- Depreciation/RPK: Distribution of depreciation costs per revenue passenger kilometer. Qantas suffers significantly higher depreciation costs due to aircraft equipment at peak of devaluation. (Avolon.aero, 2014)
- Property/RPK: Efficiency and utilization of property assets. Property is well managed at Qantas, where fewer costs are generating greater productivity than VAH.
- Capacity hire + Aircraft Operating lease rentals: Standard-deviation and binge-purge in capacity. VAH utilizes leasing and capacity share more in respect to ASKs.
- Other costs/ RPK: Efficiency of cost control. Qantas has reduced its miscellaneous unpredicted costs rapidly with diverse product offerings, segmentation and greater revenue-management. VAH, although significantly better.
- Break Even Seat Factor / Seat factor: Ability for airline profitability over change in seat factor. Greater than 1 means losing money, and the less, the better. Qantas has maintained consistency in returns by revenue customers. VAH susceptible to increased cost-conduction.
- Unit cost: cost per available seat (independent calculation of total cost of Group / ASK). Qantas has lowered its unit cost across the group, yet still suffers higher unit costs that VAH.
- (Total Costs/RPK): distribution of total costs to revenue passengers. Qantas Holdings has controlled and reduced its cost distributed as per RPK, yet VAH offering lower cost burden in pricing its fares.
NETWORK AND FLEET MANAGEMENT
Managing the Qantas Group Network logistics and capacity from origin to destination is a crucial strategy to revenue maximization, efficiency and success in the Qantas brand (Qantas Annual Report QFAP 2013, 2014). A mix of fleet choice, geographical location of hubs and node catchments, along with ability to cater for revenue loads to resume their travels onto their final destinations, is pivotal for Qantas Group as an aviation transport provider.
From this, its notable that Qantas-Group:
- ASKs have increased (ASK(13)-ASK(12)=483m)
- RPKs have decreased (RPK(13)-RPK(12)=-787m)
- Seat Factor dropped (SF(13)-SF(12)=RPK-0.8%)
- More passengers carried (PAX(13)-PAX(12)=1568000)
- Flights shorter( (RPK/PAX(13)-RPK/PAX(12)= 2297.311-2391.282=-92.97)
Major announcements for Qantas Group included in FY13 was (Airlineroute.net, 2014):
- Emirates Qantas partnership and codeshare. Shift of hub from Singapore to Dubai and Frankfurt cancellation. Alteration of Trans-Tasman and some Asian services, including cancellations of international flights from Australian secondary-focus cities.
- Expansion of JQ on leisure routes cannibalizing QF-Domestic. Cancelling ADL-AKL, SIN-AKL and other domestic secondary-focus connections, while opening OOL/CNS-NRT and BNE-HNL.
- Expansion of China-Eastern codeshare from PVG and NKG. QF-International PVG reductions.
- 4th-weekly QF-international SYD-SCL, LAN-codeshare expansion.
- PER-AKL seasonal QF-services
- Daily BNE-LAX and increase BNE-LAX, SYD-NRT and SYD-LAX.
Qantas Group with its brands hope to transfer from its inefficient linear network to a directional multi-hub network on Domestic and International feeder-trunk segments, while expanding market coverage. This utilizes loyalty, spill-minimization and independence of the carrier for outreach in the domestic/regional market. Mixed methodologies for Jetstar (O/D)/hub operations. According to (QF-timertable-13, 2014)&(VA-Timetable, 2014)& (AFFOC VA, 2013):
- Timetable largely around morning trunk arrivals to network hubs with regional/subsidiary flow-on offset-connections to other members of Qantas Group. Inverse for outbound traffic. This usually affects aircraft utilization and hub-disutility. Hub operations may be affected by curfews and lack of demand.
- High frequency hub-hub operations (economies-of-traffic-density utilization, with time-based capacity increases utilizing economies of traffic density) – (767 SYD-MEL/BNE)
- Focus predominantly on Domestic/regional operations, with complementing international operations.
On the other hand, Virgin Australia Group posted (VAH annual report 2013, 2014):
- ASK increased (ASK(13)-ASK(12)=2000m=+5%
- Seat factor dropped (SF(13)-SF(12)=-2.5%
- RPKs have increased (ASKxSF(13)-ASKxSF(12)=316008m-310838m=5170m
- Less passengers carried (PAX(13)-PAX(12)=-0.1m
- Flights slightly longer ((RPK/PAX(13)-RPK/PAX(12)=1637.3-1602.3=35.04
Tigerair-Australia undertakes point-point linear O-D ops (Worldairlinenews.com, 2014).
- The Qantas Group’s assignment fleet consists as follows, aspiring to fleet and product commonality. Average age is 7.9 years with much of its widebody fleet amidst higher depreciation rates (Qantas Annual Report QFAP 2013, 2014)
- Virgin Australia Holdings operates the following fleet as VA as of 2013, along with Tigerair operating 7 Airbus A320. Hence average age of fleet is a younger 6.8 years (VA2013 Annual General Meeting, 2014)&(Tigerair Annual Report 2013, 2014).
It is hence evident that both carriers compete through installing capacity while requiring high commonality and utilization of equipment to destinations, and consolidating and off-shooting capacity to partner airlines to reduce risk and costs. Higher focus on utility, homogenous fleet and economies of scale while enabling risk-migratory product differentiation. The difference is network operations between Qantas Group and VAH is that Qantas-Group pushes for independent group network building/feeding, while Virgin Australia builds on international airline equity-based carrier alliances for feed-traffic.
YEILD & REVENUE MANAGEMENT
Demand induced pricing, yield and revenue management/maximization is crucial for Qantas Group’s operations. This consists of marketing, price-allocating and distribution. Qantas Group has the following (Qantas Annual Report QFAP 2013, 2014):
- Qantas’ passenger revenue flat lined for 2013, while net freight and other revenue increased since 2012. Revenues follow:
- Qantas-International =$5476m (-5%)
- Qantas-Domestic=$6128m (+3%)
- Jetstar=$3288m (+7%)
Qantas Domestic resembled strong operation within its network with revenue growth from $6063m in 2012 (Qantas Annual Report QFAP 2013, 2014). Qantas Domestic resembled clear profits thanks to a strengthening domestic market share, passengers increase, shorter segments, superior on-time performance thanks to economies of traffic density network recovery capabilities, high Skytrax rating and customer service, and ability of access and utilization group based interline to regional and international aviation services and non-aviation services. Carbon tax hurt its final result, -$98m EBIT from 2012.
Qantas invested $598M in 2013 on channel-marketing, $37M less than 2012 (Qantas Annual Report QFAP 2013, 2014), a part of expenditure efficiency. Qantas Group generated bulk of its sales from online (exclusive source for Jetstar non-interline), telephone, industry, corporate/government, business, group and Qantas affiliated travel centers. GDS/CRS reservations and ticketing with IATA pooled software was also a large revenue source (Qantas Fact File 2013, 2014). Catalyzing sales was thanks to liberalized ticket structures, simpler fare rules and interline capability on domestic/regional networks.
Qantas adopted new yield management strategies of its perishables products for maximum efficiency on all its businesses. Such involves (Tretheway and Oum, 1992) prediction or reservation prices and timings on a route without inducing spillage. Qantas Group has focused its product diversification with domestic operations, introducing Jetstar LCC-induced price discrimination for filling maximum ASKs for diverse customers. This involves allocating premium full fare passengers, discount fare, advanced bookings, frequent flyer business incorporation rewarding loyalty and restrictions; including advanced/supplementary purchases, minimum stay/round trip O/D, refund penalty/rebooking-privilege/fees, reduced services, limited time of day and Interline. (Qantas Fact File 2013, 2014).
Following instruments of yield/revenue comparison instruments used on passenger group operations as follows (Qantas Annual Report QFAP 2013, 2014)&(VAH annual report 2013, 2014)& )&(Tigerair Annual Report 2013, 2014):
- yield (Total-Revenue/RPK): Average earnings made by transporting revenue passengers every kilometer. Yield falls are a common trend worldwide as aircraft become bigger, lower reservation prices for air transport, and greater aircraft utilization. Qantas-Group lowered its yield significantly in need to fill aircraft, along with game-elimination of VAH’s capacity. VAH still held steady on yields despite 60% stake in Tigerair LCC.
- Passenger-revenue/ASK: Average earnings made by every seat kilometer filled/unfilled. Qantas has managed to fill surplus capacity, keeping the ration constant. VAH dropped in its earnings/ASK sharply, suggesting inability to fill surplus capacity after settling the 60% acquisition of Tigerair-Australia.
- Marketing/RPK: Dependency of marketing on obtaining revenue-passengers. Virgin Australia has been highly dependent on post-transformation of Virgin-Australia from budget carrier to full-service carrier. Marketing investment and requirement subsequently dropped from both carriers.
- Expenditure/Revenue: Ability of cost recovery and profitability. Qantas has reduced its expenditure and increased revenue to neutral rates in 2013. Virgin-Australia, despite so, has significantly lower costs and higher revenues, hence stronger in cost-recovery and profitability.
- Other-revenue/Total-revenue: Dependency of Group on non-aviation services in inducing revenue. Qantas-Group is largely and growingly dependant on its non-aviation services such as frequent-flyers in inducing revenue, as oppose to Virgin-Australia, which consolidated its revenues more exclusively to aviation services. Loyalty-revenue was 13% of other revenues, and grew to 19%, suggesting Qantas-Group’s dependency on loyalty business.
- LCC-revenue/Total-revenue: Group’s dependency on LCC. Revenues from LCC offshoot Jetstar, jumped to more than 20% or total cash flow, suggesting growth and greater demand for LCCs. This is also seen in VAH, where dependency of LCC model, following Tigerair-Australia’s 60% equity stake, grew exponentially.
Hence we deduce that both airline groups of Qantas Group and Virgin-Australia Holdings have different motifs and approaches in the duopoly domestic market as represented in the Qantas-Group-FY13 report analysis and comparisons. The year represented partnerships, foreign expansion, expenditure control and product-diversification. Despite the nature of the Australian market with lacking transport infrastructure, slowed demand, regulations, high costs, congestions and shortages, barriers of entry and globalization with the flooding of competitive-capacity from global-foreign carriers, both Qantas-Group and VAH had its pros/cons in managing costs, consumer demand, revenue, yield management and airline logistical route systems.
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