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Knowledge@Australian School of Business

The Qantas Dispute: A Long Haul with Many Rough Landings Ahead?

Published: November 07, 2011 in Knowledge@Australian School of Business
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Australia's tourism industry is already struggling due to a spate of natural disasters and the impact of the high Australian dollar increasing the allure of overseas' destinations. But when the management of national airline Qantas opted to bring an ongoing industrial dispute to a head by grounding its entire fleet, the impact went far beyond the tens of thousands of travellers who were left stranded across the globe. Battling erosion of its market share, Qantas is undoubtedly challenged in its efforts to stay competitive and is now back at the negotiating table with unions. However, management's rash action has alienated its most important stakeholders – the passengers – many of whom were forced to fly with other carriers. At the Australian School of Business, Larry Dwyer, a professor of Tourism and Travel Economics, and Nina Mistilis, a senior lecturer in Tourism, consider the likely fallout of Qantas executives' crisis strategy with Julian Lorkin of Knowledge@Australian School of Business.

An edited transcript of the interview follows.

Knowledge@Australian School of Business: Larry, let's look at the reason why an airline would decide to ground all of its fleet. How did we get here?

Larry Dwyer: A major impetus for the present situation was Qantas' wish to restructure and the CEO, Alan Joyce, gave a presentation in August which outlined the strategy for restructuring Qantas for the future. Qantas' costs are about 20% higher than its competitors. It gets about 18% of the entire aviation market into and out of Australia (and) 14% of the Asian market – that's compared to about a decade ago when Qantas was getting numbers almost nudging 50% of the aviation market. The Qantas board and the CEO felt that there was a pressing need to restructure the airline and the strategy consisted of four elements. The first was opening gateways to the world, and the second was growing in Asia – one of the strategies is to develop a low-cost carrier in Asia. Then there was being the best airline for global travellers, and building a strong, viable business. But the bottom line was that it would mean a loss of 1000 jobs and this is where the unions (the Transport Workers Union, the Australian and International Pilots Association and the Australian Licensed Aircraft Engineers Association) entered into the picture and were concerned with job security, erosion of conditions, lower wages for staff, outsourcing of its operations and so on. And so the unions responded, there was a snowball effect and this has brought about the situation today.

Knowledge@Australian School of Business: Let me bring in Nina here. Surely this move by Qantas was extremely ill-advised?

Nina Mistilis: Yes, I would say it was extremely ill-advised for two main reasons: Tourism is a service sector, delivering services to people; and it also operates as part of a global network. Qantas is part of the tourism industry so, unlike previous lockouts in mining or the wharves, the degree of containment was not there. The impact was global and on a major stakeholder: the passenger. And these are very crucial considerations in any advice to take this action. Because tourism is a global network, the impact was felt all over Australia and, indeed, globally with stranded passengers. So people could not come into Australia and, as a result, there was widespread impact on the Australian economy and the tourism industry. There's also collateral damage on the ground for the small tourism operators who have to struggle with cancellations and reaccommodating clients whose travel was disrupted. And for these businesses the question is: Who's going to absorb the associated fees?

Larry Dwyer: In tourism, the majority of firms are small-to-medium-sized enterprises. Many of them are "ma and pa" outfits that are already hurting from the natural disasters that have affected Australia, and many are also hurting from the high Australian dollar promoting outbound tourism rather than domestic tourism. And it's appalling timing, approaching Christmas and the New Year. When there's disruption of travel – when travellers are feeling that it's too chaotic and cancel their travel plans – many businesses both within and outside the tourism sector are affected at precisely the worst time for the Australian economy.

Nina Mistilis: The action of grounding the whole of Qantas alerted the federal government to the critical nature of the situation, so it convened a teleconference of the chief executives of the major state and national government organisations and the key industry organisations and they determined the risk was red alert – high! The Critical Incident Management Plan was swung into action to coordinate all the activities. That's the first time that has happened for this kind of incident. What's particularly relevant for tourism is that the court ruling included reference to the critical impact of tourism on the economy. It was a very different response to what happened after the collapse of Ansett 10 years ago where the government was really idle in any response. In my view, Qantas was very ill-advised because it impacted on passengers all over the world, on the Australian economy and on the tourism industry here.

Larry Dwyer: I would agree. I think it was a precipitous action. Not only were customers severely disadvantaged in terms of their travel plans, but Qantas management appeared to be inept as well. There are stories that the call centres were not alerted, and customers who wanted to change travel plans were waiting up to two hours or more for someone to answer the phones ... It appears that Qantas was simply not geared up to meet the crisis head-on and, of course, that further eroded customer confidence in Qantas management. Qantas had alienated both the unions – although the relationship was not strong anyway, but this made it worse – and, of course, government.

Nina Mistilis: But of course Qantas does not have a good history of managing union relations. These confrontation tactics have been building for years and seem to have culminated in this act. But while Qantas may have won whatever it was seeking in this precipitous action, in the long term it seems to have lost the war in my view because it has alienated passengers, the industry and the government, and that's not a good position to be in.

Knowledge@Australian School of Business: Traditionally, there hasn't been much local competition on the Australian domestic market, but now there are quite a few airlines snapping at the heels of Qantas.

Larry Dwyer: Yes, indeed. And the problem with the lockout is it forced many travellers to trial Virgin, among other airlines. It's one of the basic tenets of marketing that firms that have an emerging or developing product, but that are relatively unknown or are a second player in any field, must seek to have customers trial their product. Looking at things like Virgin airline lounge reviews its clear if they get satisfaction then they will repeat that purchase. With the lockout Qantas forced many customers to try Virgin and, of course, a good percentage of those will now continue on with Virgin. The big competition in the future between Qantas and Virgin will be in the area of business and government travellers. And the thing about the business and government travellers is that they are repeat customers, which is what all product suppliers want. For quite a while Virgin has been seeking to enhance its credentials – it's moving toward being a premium carrier. So Qantas has done something quite foolish in basic marketing strategy by forcing the trial.

Nina Mistilis: Reliability is an important factor in terms of branding because, when it comes to the crunch, we need to get to the destination on a certain date and we cannot afford to be stranded at home or somewhere in Australia or abroad. So when it comes to the choice, will we choose Qantas or will we choose another airline?

Knowledge@Australian School of Business: And the image of thousands of travellers queuing to get a flight home must be permanently seared into people's minds, and that's going to put them off booking again.

Larry Dwyer: One issue that Qantas may be counting on is that tourists increasingly seem to have short memories. A terrorist attack can occur somewhere, and tourists that day or the day after are determined never to go to that destination. But the next week, the numbers flow in again. The big risk for Qantas is the trial of emerging products, such as Virgin, where people then find satisfaction in the product and continue. And Virgin has been very, very smart. They have not price-gouged, they've given some discounts, they have sought business as usual and told their staff to do everything possible to give customers the best satisfaction they can. Travellers who are forced to try Virgin may well stay with the airline in the longer run, and that's the big risk that Qantas faces from this.

Nina Mistilis: As Larry said, Qantas has been building up relations with government – it needs government to be on side for many policy decisions. One of those policy decisions is deregulation, which has been gradually happening in the international market over the past five years and that's why Qantas now only has about 20% of the international market. If the industry is further deregulated there are other airlines – for example, Singapore Airlines – that are crying out for landing rights. So the government's attitude may well soften towards regulation, which really will be the death knell for Qantas because their costs are much higher. All the research shows that price is the major determining factor for people choosing their airline carrier.

Larry Dwyer: Singapore Airlines is introducing its own low-cost carrier next year called Scoot and it's reputed that Scoot will offer 40% lower fares from Australia to Singapore and return than the other carriers. So clearly there's a substantially more competitive environment [emerging] for Qantas. You could argue that that's the reason why Qantas is undergoing the restructuring – and that's correct – however, I think the timing of this particular lockout is appalling.

Knowledge@Australian School of Business: But Qantas seems to have won here, by stopping industrial action by halting flights, and then winning back the customers by giving everybody who was disrupted a free return ticket. Does this mean that Qantas is going to succeed in the long haul?

Larry Dwyer: For years Qantas has promulgated the perception that what's good for Qantas is good for Australia, so it sought protection for its product on that basis. However, in recent years deregulation has been taking place all over the globe and in the aviation sector there's been a substantial amount of liberalisation. So Qantas is competing in a much more liberal competitive environment than it ever was. And with high costs, the writing is on the wall – it simply could not survive in the future. But at the moment Qantas is making profits, and the day before the lockout the CEO of Qantas was given a pay increase of several million dollars. Regardless of whether he may or may not deserve it, in the public perception – and in the union perception – the timing is quite appalling. So we have a situation where, on the one hand, the Australian public can be sympathetic to the Qantas imperative. And there is a lot of goodwill towards Qantas and a lot of affection for the brand, so I would think that initially the public was more on side with Qantas and its need to restructure than it was with the unions. However, I think Qantas has lost a great proportion of that goodwill through what it has done, the timing of it and so on.

Knowledge@Australian School of Business: But Nina, we all need to fly – so what should the government do?

Nina Mistilis: It's really a policy dilemma for government because air transport in Australia is crucial – there's no alternative in most cases. So the question for government is: how regulated and how protected should the local carrier be or how deregulated should the market be (in which case you have less control over where they go and so on)? There are many destinations in remote areas of Australia where Qantas is the only carrier servicing that destination – some of them good tourist destinations. And if Qantas were to fail, many of these places would be isolated. So while protectionism is not in favour now, you could build a case for it. The policy dilemma facing government is how to provide for the transport needs of the people and yet have a competitive deregulated air environment. That's the way I see it.

Larry Dwyer: And one of the complaints that Qantas raises, quite appropriately, is that many of its competitors are subsidised by their governments. Qantas is pointing out that there is not a level playing field, and it's correct in that government policy – certainly in the Western countries – is now substantially in favour of much more liberalisation in markets. I think it's inevitable that Qantas, as an ongoing concern, is going to have to survive largely in terms of the strategies it adopts in its operations. That's another reason why Qantas is so peeved at the union wishing to block many of these initiatives, because Qantas is saying: "Well, we have every right to restructure to survive." So the issues are quite complex, and one of the issues is going to be how long this will drag on. The longer it drags on, the worse the image of all parties will be and the more the image and brand of Qantas will be eroded. So Qantas has a vested interest in a fairly rapid resolution of these issues.

Knowledge@Australian School of Business: Qantas used to have a really strong brand image. How much damage has this done?

Nina Mistilis: Obviously in the immediate term the brand image is badly affected. And that's a global perception, because these passengers stranded all over the world have a right to be really cheesed off with Qantas. Many are saying "never again" on airline review sites – particularly in business class, because business wants reliability above everything else. Certainly, in the immediate future, the brand is tainted and they're really behind the eight ball. I don't see how they're going to catch up easily. In the medium to long term, I think it's really hard to say. It partly depends on how events unfold. If this is a one-off incident, which seems very unlikely, then the brand will be restored. But if it continues, and if there's a perception – as the unions are saying – that service will drop due to the "asianisation" of the airline, then the brand will be completely damaged. Will that mean that less passengers book on Qantas? I don't know the answer to that. Time will tell.

Knowledge@Australian School of Business: Well the two parties – Qantas and the unions – are once again talking. Many travellers must be hoping that they finally come to some agreement. Larry and Nina, thank you very much.

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