Should Australians Feel Sorry For Qantas & Virgin Australia?

Should Australians Feel Sorry For Qantas & Virgin Australia?

For Qantas, Australia’s largest airline, the last few years have been plentiful as a Dan Bilzerian Instagram post. And we’re not just talking influencers – in terms of cash, Qantas went from reporting a record full-year profit in 2018 to record revenue (and strong profit) in 2019.

Virgin Australia, meanwhile, reported strong revenue and passenger growth in its subsidiary Tigerair and made solid steps to get Virgin Australia back to the point where it can make a profit. Virgin Australia, like Qantas, has benefited and been afforded the luxury of experimentation thanks to a steadily growing economy.

That was until 2020.

With the Coronavirus now officially classed as a pandemic, and flights being slashed both domestically and abroad, and travellers all over cancelling trips as fast as you can say “yeah nah” both Qantas and Virgin Australia are staring down some very rough times.

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Senior staff at both firms have taken temporary salary cuts, but still, many lower-level staff look like being laid off (if they haven’t already been). Both firms have also given generous frequent flyer extensions for the next year and made their flight change/cancellation policies more flexible.

This situation is playing out all over the world, with an opinion piece in the New York Times, entitled, “Don’t feel sorry for the airlines,” inspiring DMARGE to consider: should Australians feel sorry for our airlines? While ours haven’t taken the piss like American Airlines, the carrier the NYT piece uses to make its case, the suggestion made at the end of the piece, that bail outs should only be given under certain conditions (like, don’t reduce the seat pitch any further) is a tasty one.

But, in an Australian context, is it legit?

First: context. How do airlines take the piss? According to the aforementioned New York Times Op Ed: they selfishly mismanage funds in the good times. Instead of improving their product, they compete in a zero-sum game to make seats tighter and to buy back their own stock, knowing that they (like all of us) exist in a boom and bust cycle, but believing they are too important to the economy to fail (or that if they don’t spend money in the now to compete with everyone else they’ll be left behind, or lose their edge).

American epitomises this, “In 2014, having reduced competition through mergers and raised billions of dollars in new baggage-fee revenue, American began reaching stunning levels of financial success. In 2015, it posted a $7.6 billion profit — compared, for example, to profits of about $500 million in 2007 and less than $250 million in 2006. It would continue to earn billions in profit annually for the rest of the decade. ‘I don’t think we’re ever going to lose money again,’ the company’s chief executive, Doug Parker, said in 2017,” (NYT).

“There are plenty of things American could have done with all that money. It could have stored up its cash reserves for a future crisis, knowing that airlines regularly cycle through booms and busts. It might have tried to decisively settle its continuing contract disputes with pilots, flight attendants and mechanics. It might have invested heavily in better service quality to try to repair its longstanding reputation as the worst of the major carriers.”

“Instead, American blew most of its cash on a stock buyback spree. From 2014 to 2020, in an attempt to increase its earnings per share, American spent more than $15 billion buying back its own stock. It managed, despite the risk of the proverbial rainy day, to shrink its cash reserves. At the same time it was blowing cash on buybacks, American also began to borrow heavily to finance the purchase of new planes and the retrofitting of old planes to pack in more seats. As early as 2017 analysts warned of a risk of default should the economy deteriorate, but American kept borrowing. It has now accumulated a debt of nearly $30 billion, nearly five times the company’s current market value,” (NYT).

“At no time during its years of plenty did American improve how it treats its customers. Change fees went up to $200 for domestic flights and to $750 for international. Its widely despised baggage fees were hiked to $30 and $40 for first and second bags. These higher fees yielded billions of dollars, yet did not help the airline improve its on-time arrivals, reduce tarmac delays or prevent involuntary bumping. Instead, American’s main ‘innovations’ were the removal of screens from its planes, the reduction of bathroom and seat sizes and the introduction of a ‘basic economy’ class that initially included a ban on carry-on luggage,” the NYT piece continued.

So: are Qantas and Virgin Australia guilty of the same sins? Not quite. While they have both engaged in certain types of buy-back schemes (see: here and here), neither were to the same extent as American’s. Plus: both Qantas and Virgin Australia have invested in innovation that makes for a better customer experience (even if much of that went into their international flights) in both their jets and lounges.

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Also – compromises on space, which we have seen in Tigerair and Jetstar, mean cheaper seats, which study after study has shown is what most people care about most.

What about bail outs? When it comes to American, The New York Times reports: “American Airlines has not yet asked for a bailout — at least not in so many words. Yet after a recent meeting with airline leadership, Larry Kudlow, the director of the National Economic Council, said that ‘certain sectors of the economy, airlines coming to mind’ might require assistance. Treasury Secretary Steven Mnuchin said Wednesday that the airlines, including American, would be ‘on the top of the list’ for federal loan relief.”

The Australian government finds itself in a similar position, with its two dominant national carriers providing crucial infrastructure for the rest of the economy. They also know that competition is a vital part of any market, and that the two airlines keep each other on their toes, providing Australian domestic travellers with two respective premium (and budget, in the form of Jetstar and Tigerair) options.

On that note: The Federal Government announced a $715 million support package for the aviation sector last week, waiving many fees and charges for airlines during the current downturn.

How this will be divvied up has proved controversial. According to the ABC, Qantas CEO Alan Joyce told Qantas staff during a conference call they should lobby their local MPs to ensure any Commonwealth support to the airline industry was offered “across the board”, and not just to one company alone.

“It followed comments on Sky News where he said the Federal Government could not pick ‘winners and losers’ when it came to propping up airlines, and governments should not be in the business of supporting companies that had been ‘badly managed'”, (ABC).

According to the ABC, Virgin Australia boss Paul Scurrah described these comments as “very disappointing” in an email to staff.

“I am in daily discussions with Government to ensure we get the support we need to get through this and have been advocating on behalf of Virgin Australia Group and the industry as a whole,” Mr Scurrah wrote.

“I have today written a letter to Rod Sims, chairman of the ACCC, to investigate public commentary and an industry-wide campaign that is designed to ensure a lessening of competition in the aviation sector.”

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