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Losing altitude - the downing of Howard & Costello

By Jonathan J. Ariel - posted Thursday, 22 March 2007

Senator Santo Santoro couldn’t do it with his shares; and Kevin Rudd couldn’t do with his smugness and his rat cunning. So it was left to the Prime Minister and his Treasurer to do it with Qantas. Lose this year’s election for the Coalition, that is. Possibly.

When it comes to the sale of Qantas, regrettably most commentary in the media has focused on the questionable nature of private equity, or the potential job genocide that looms large for the Roo’s workforce. Scant attention has been given to real issue: the historic protection of the Monopolistic Marsupial by the government to the direct detriment of the traveling public, as well as the absence of any commitment whatsoever from the government to jimmy open the air lanes to all who wish to fly them.

The promise that VirginBlue will start flying to Los Angeles - given the few Boeing 777s and oily rags Virginblue’s CEO Brett Godfrey’s ordered to serve that route - is inconsequential. And last Wednesday’s quip by Transport Minister Mark Vaile that “the government was not protecting Qantas” is really truly laughable.


If the gnomes at UBS cave in, and the Macquarie Bank-led leveraged buy-out (LBO) goes ahead, the public rage that will follow the likely job losses, route cuts and higher fares, will certainly sweep Team Howard out of power.

And under new management, just how will Qantas change? How many routes will be severed from the mainline operation (the premium priced but low quality Qantas) and be hived off to Jetstar (its low price and low quality subsidiary)?

A good place to start contemplating the privately held Monopolistic Marsupial is with Loizos Heracleous’s account of the success of Singapore Airlines in Flying High in a Competitive Industry.

The book focuses on an airline flying the competitive skies. Where it must eek out a living by minimising cost, maximising yields and delivering stellar customer service. Such is life in the real world.

Qantas of course, sheltered for decades from the harsh winds of competition, has not had to live in such a world, cocooned as it is in the pouch of successive toady transport ministers. For instance, the book reminds us that: “government acquiescence to Qantas’ lobbying against competition on the Sydney-California route has ensured that Qantas maintains 75 per cent of that market, a service that generates 41 per cent of its international profits”.

So once they’ve got their grubby paws on Qantas, just how will the barbarians lining up at the check in counters of Qantas make their money? There are two ways: either squeeze costs and maximise yields before re-listing the monopolist or better yet, squeeze costs and maximise yields before then on-selling the airline to another carrier.


Scenario 1

Airlines make money by maximising prices of seats (this is called yield management) and minimising costs. Minimising costs along every business line.

The main determinants of airline seat prices (yields) are: customer mix; route network; and foreign and domestic government policies. The more business passengers and the less price sensitive leisure travellers Qantas can carry, then the more profitable it shall become. Also the more a government takes notice of Qantas’ lobbying efforts, the better. Better for the airline, that is.

Costs are mainly set by type and age of fleet; government policies as well as home base and route networks. The largest costs are: labour; fuel; aircraft acquisition and maintenance. According to Heracleous, in advanced economies - he cites the United States as an example - labour is by far the biggest cost, which in some cases can amount to 35-40 per cent of the total cost base. Airlines based in undeveloped economies enjoy an advantage in this respect since their wages and social costs are lower.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at

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