Lessons for SMEs from the Qantas turnaround: Why the work is never done

Qantas

It was bonus season for Qantas employees last week when chief executive Alan Joyce announced a record profit of $1.53 billion, up from an after-tax full-year loss of $2.8 billion in 2014. The turnaround is now well-known as an impressive feat in an industry constantly buffeted by shifting customer bases and competitors, and it’s been executed in just two short years.

So what can business owners learn from the flying kangaroo’s spectacular comeback? SmartCompany spoke to aviation experts, analysts and the airline itself, and the first tip is to not get to ahead of yourself when transforming a business. No matter how big the comeback, there’s always the future to think about.

Understand the things you cannot change

The global airline industry is approaching a crossroads, with the competition between low-cost carriers and their full-service counterparts now finding a rhythm. A 2016 IBISWorld report on the place of international airlines in Australia highlights that the industry overall is at a mature stage in its life cycle, forecast to grow at 2.4% annually over the next 10 years – a rate below global GDP growth of 2.6% a year over this time. The Qantas turnaround has occurred against this backdrop, in a world of untamed variables.

“There’s really not a lot that airlines can control,” says Michael Stapleton from the Association of Virtual CFOs.

“They’re capital hungry businesses and they’re prisoners of what happens to fuel. When it goes right, it goes right really well, when it goes badly, it goes really badly,” he told SmartCompany.

Senior lecturer in aviation at Swinburne University Dr Chrystal Zhang says that to understand a turnaround from a business the size of Qantas, you need to know which elements of the business you can’t change.

“At the moment it’s quite a rosy picture in terms of being back in the black, but in terms of where demand is coming from that is rapidly changing. Turnarounds are challenging, turnarounds in the airline space are especially so,” she says.

Look to pivot towards new demand

The 2016 financial result from Qantas comes off the back of a massive restructuring exercise that was slated in February 2014 and which included 5,000 planned redundancies that have been progressively rolled out across the business. It’s also been a good two years for oil prices, after the airline was forced towards a record $4.5 billion fuel expenditure in the 2014 financial year. Fuel hedging throughout 2015 booked an extra $644 million in the 2015 financial year.

Zhang believes that with so many uncontrollable variables, the best chance the airline has at cementing long-term growth will be through chasing changing demand. While the turnaround has been successful on paper, she believes it’s an imperative that Qantas now moves towards the growing customer numbers in China and the North Asian region over the next decade as economic development changes the types of passengers and popular business routes.

“I think they have been quite conservative in their expansion into new markets,” she says.

“It’s a heavily regulated industry and that does make it difficult for expansions, but capitalising on demand in this space is really important,” she says.

This year was the first year that Jetstar Japan’s domestic offering was included in the company’s financial result, which contributed to the $85 million revenue increase for Jetstar in the 2016 financial year.

Zhang says that while there’s no denying that part of the Qantas business is taking shape, the other segment within reach is consumer facing tech, and the airline has taken advantage of it at the right time.

“They have capitalised really well on technology for a good customer experience,” she tells SmartCompany.

“Things like the technology of smart chips for self check-in is really innovative and I think contributing to world class customer service, they’ve done a very good job there.”

Make your cuts – and assets – work for you

Stapleton believes the price of fuel has had a significant impact on the Qantas balance sheet, but he has been impressed by the way the airline’s capital-hungry asset base of planes is being used efficiently. He says many small business owners can learn from the strategy behind the Qantas fleet.

“When you have a farm, for instance, there are similar things you can’t control. You can’t control the weather. You can’t control the price you sell your goods at overseas, but you can control your equipment and what you get out of it,” he says, adding that “many small Australian businesses are like an airline”, including in the way many fall into trouble when the cost of their assets exceeds revenue.

Qantas told SmartCompany that when the airline looked for efficiencies, it went to people on the frontline of operations first.

“They were literally closest to it and could see first-hand what some of the opportunities were to improve efficiency,” a senior spokesperson said.

The “transformation” program has been rolled out gradually, with an overarching blueprint to simplify the fleet to remove complexity and improve efficiency. A330 aircraft were reconfigured during this process. This “gives us flexibility to use any of our A330s across the international and domestic network,” a senior Qantas spokesperson told SmartCompany.

Understand the ongoing process

There’s more to a turnaround than one successful result and Qantas chief executive Alan Joyce has already flagged the “more competitive revenue environment” that’s on offer in the first half of 2017.

Zhang says that while the position looks rosy for the moment, capturing demand is the aim of the airline game and the lesson is that true turnarounds don’t happen without chasing new demand.

“If you’re not expanding, it’s going to be even more challenging going forward,” she says.

While low-cost carriers promise disruption of the industry, 61.2% of the Australian airline market belongs to full-fare carriers, according to IBISWorld. Qantas has the largest slice of market share, at 30.2%.

Perhaps the biggest lesson is that there’s more to come; there is a big chunk of savings from the Qantas transformation project that won’t be realised until 2017. With that in mind, management are still on the path towards to shoring up the balance sheet, towards the “robust financial framework” needed for future plans.

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