Bloomberg News

Outsider CEO Remakes Qantas Allying With Ex-Nemesis Emirates

July 15, 2013

Cleaner’s Son Ties up With Sheikh’s Airline to Rebuild Qantas

Qantas is one of just two carriers worldwide, with Southwest Airlines Co., whose debt is judged investment grade by more than one ratings company. Photographer: Ian Waldie/Bloomberg

Alan Joyce’s visit to the posh Wolgan Valley spa on a crisp day in May last year was no holiday. For the chief executive of Qantas Airways Ltd. (QAN) the exclusive resort, in a wilderness west of Sydney once explored by Charles Darwin, was hostile territory.

Wolgan Valley belongs to Emirates, a company former Qantas chairman Margaret Jackson once called aggressive and unfair. Over the past decade, the Dubai-based carrier had increased its share of traffic to and from Australia by a factor of more than 20, helping push Qantas into a A$450 million ($410 million) loss on international routes in the year ended June 2012.

Ready to call a truce, Joyce was meeting with Emirates President Tim Clark to discuss a tie-up finally implemented in March.

“We really didn’t have anybody else that was willing to engage with us,” the Irish-born executive said, of a deal homegrown predecessors had spurned.

With the Emirates link, Joyce turned his back on British Airways, Qantas’s partner since 1935, shifted its hub for European flights from Hong Kong and Singapore to Emirates’ home base in Dubai, and attracted the opposition of his predecessor in the job, Geoff Dixon.

Investors supported Joyce. Qantas shares have rallied 41 percent since June 11, 2012, when Clark revealed the carriers were discussing a “commercial arrangement.” In November, 99 percent of voting shareholders backed a pay package giving Joyce, 47, the highest salary of any airline chief executive, even as the carrier slipped to its first-ever annual loss.

‘Right Decisions’

“Do we think he’s making the right decisions? The answer is yes,” said Andrew Sisson, managing director of Franklin Resources Inc. (BEN:US)’s Balanced Equity Management Pty., the company’s third-largest shareholder. The Emirates alliance “was a better deal than would have been obtained via the alternatives,” he said by phone from Melbourne.

Three months into the pact, the Irish-born executive is steering the company nicknamed “The Flying Kangaroo” back to health. Under the deal with Emirates, set up by the uncle of Dubai’s monarch in 1985, the pair have aligned loyalty programs, booking systems, and flight codes. Emirates now operates more flights from Australia to Europe than Qantas.

The stock fell 2.1 percent to A$1.37 at the close in Sydney trading, marking a 42 percent fall since Joyce took over in November 2008. Still, the Australian carrier’s share price, at 36 times its forecast earnings for the year ended June 30, gives it the highest valuation of any airline worldwide, according to data compiled by Bloomberg. It’s one of just two carriers worldwide, with Southwest Airlines Co., whose debt is judged investment grade by more than one ratings company.

Facing Opposition

Not everyone welcomed the change. His predecessor Dixon formed an investor group “committed to unraveling Qantas’s structure and direction,” including changing the Emirates alliance, the Australian carrier said in an e-mailed statement in November. Joining Dixon was Peter Gregg, Qantas’s former chief financial officer, who announced his departure a month after Joyce was appointed to the top job.

The group sold their Qantas stake in January, the Australian Financial Review newspaper reported without saying where it got the information. Gregg declined to comment for this article. Dixon didn’t respond to an e-mail message requesting comment sent via Tourism Australia, a travel promotion body he heads.

Australian Icon

Joyce grew up far removed from the Australian icon, in a working-class family in the Dublin suburb of Tallaght. He studied mathematics at Trinity College and didn’t take a flight until he was 22, when he traveled business class from Dublin to Chicago as a graduate recruit at Aer Lingus Group Plc.

“Coming from a lot of different jobs in my career -- coming from a different background, coming from different airlines -- does help, in terms of your focus and thinking,” Joyce said in a telephone interview. “I’d never had any intention of going into the aviation industry.”

He’d picked the Aer Lingus job from a newspaper help wanted ad because it required expertise in operations research, the branch of mathematics in which he’d done a masters degree at Trinity. He came to Australia in 1996 “to experience life offshore,” he said, and by July 2003 had been picked by then-Qantas CEO Dixon to establish a budget arm, Jetstar, to compete with Virgin Australia Holdings Ltd. (VAH), then known as Virgin Blue.

Jetstar, which made its first flight in 2004, accounted for 29 percent of the Qantas group’s passenger traffic during 2012. It’s the region’s second-biggest budget airline on that measure after AirAsia Bhd. (AIRA), according to data compiled by Bloomberg.

Aggressive Rival

Airlines worldwide have struggled in the past six years, with the Bloomberg World Airlines Index down 46 percent from its 2007 October high as carriers were hit first by rising oil prices, then weak demand as consumers recovered from the 2008 financial crisis. Jet fuel costs, which never topped $50 a barrel before 2004, haven’t dipped below $100 since 2010.

Emirates has been one of Qantas’s most aggressive competitors. In 2002, it carried 0.4 percent of the 17 million passengers who flew to and from Australia; by 2012 its share had grown to 8.4 percent, government data show. That expansion was enough to drive Qantas’s international operations, already hit by high fuel costs, into losses, according to Tony Webber, a former chief economist at Qantas and managing director of Webber Quantitative Consulting.

Globally Grounded

In his five years as CEO, Joyce has also faced union opposition to his efforts to limit labor costs, which made up 28 percent of revenue in the most recent calendar year. After pilots, engineers and baggage handlers staged strikes in 2011, Joyce grounded the carrier’s entire global fleet, stranding about 80,000 passengers for two days and costing Qantas A$194 million.

“Qantas is not growing, the subsidiaries are growing,” said Richard Woodward, vice-president of the Australian International Pilots’ Association, which represents about 1,700 long-haul pilots. Jetstar was set up to serve a different market from Qantas and stimulated new demand that has strengthened the company as a whole, Qantas spokesman Andrew McGinnes said by e-mail.

Joyce’s $2.2 million salary for the fiscal year ended June 2012 was the highest for any publicly traded airline chief executive worldwide, according to data compiled by Bloomberg. His total compensation, of $5.8 million including bonuses, is the biggest pay package for any of his peers outside the U.S., trailing only the top executives of Delta Air Lines Inc., AMR Corp., United Continental Holdings Inc., and Alaska Air Group Inc. (ALK:US)

Stock Rebound

Right now, Joyce is confident about the direction Qantas is heading. Net income for the fiscal year ending June 2014 will rise to its highest level under his tenure, according to the average of eight analyst estimates compiled by Bloomberg.

Bookings to Europe were up sixfold when Qantas and Emirates started joint flights March 31. New flights into Singapore, where Qantas opened a new lounge in April, are also filling up fast.

“This is the best job I will ever have,” Joyce said. “I’m a very lucky guy.”

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net


Coke's Big Fat Problem
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Companies Mentioned

  • BEN
    (Franklin Resources Inc)
    • $54.15 USD
    • -1.92
    • -3.55%
  • ALK
    (Alaska Air Group Inc)
    • $43.97 USD
    • -0.93
    • -2.12%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus