What’s behind Qantas’ restructuring decision?
Tuesday, May 22, 2012/
Change is coming thick and fast at Qantas Airways.
A mere day after announcing 500 job cuts, the airline is in the news again with an even bigger announcement.
The company is splitting its domestic and international operations into two separate businesses from July 1. Each of the businesses will get their own CEO, and will report their financial results separately.
“This change will enable a greater focus on the priorities of turning around the Qantas International business and enhancing the strong Qantas Domestic business,” the airline said in a statement.
Lyell Strambi, formerly group executive of Qantas Airlines Operations, will become the new CEO Domestic, while Simon Hickey, formerly CEO of the frequent flyer program, will have the unenviable job of managing Qantas’ profit-haemorrhaging international business.
Qantas isn’t the only airline to split up its business. Competitor Virgin Australia is proposing a complete split, with its domestic and international businesses having a different shareholder base, in order to allow an investment from Etihad Airways.
Qantas isn’t going so far. The changes don’t go as far as listing a new entity on the ASX, with the company saying it will be business as usual for shareholders and employees.
So why is the airline doing this? Here’s what the experts say.
1. To better focus on the two very different businesses
This is Qantas’ stated reason for the split: “Qantas Domestic and Qantas International face very different situations,” the company said.
“Qantas Domestic is strong and profitable. We are seeing the most sustained levels of high customer satisfaction on domestic services since 2004, and we are the airline of choice for corporate Australia.”
The airline’s assessment of the international division was vastly different.
“Qantas International… is loss-making and does not deliver sustainable returns. However, we are committed to turning it around through the five-year strategy we announced last year, based on flying to global gateways, deeper alliances, smart investment in product and disciplined capital management.”
“Formally separating the management of Qantas International and Qantas Domestic will ensure that we can independently run each business according to its specific priorities and market conditions.”
Qantas’ domestic airline made an underlying profit before tax of $552 million in the 2010/11 financial year, while the international business lost $216 million.
2. It’s about answering their critics
Former Qantas economist Tony Webber told LeadingCompany he believed the changes were “largely cosmetic”.
“All decisions will still go through [Qantas CEO] Alan Joyce,” he said.
“In terms of management function and ability to resolve problems of international business, I can’t see how it will help.”
But another aspect of the change had Webber’s endorsement.
“Splitting up the financial reporting will be really useful for investors and unions. As long as they’re audited, then unions could see the evidence that the international part of the business isn’t performing.”
David Liu, the head of research at ATI Asset Management (a Qantas shareholder), said the move was aimed at external stakeholders.
“The split brings in added transparency and detail to the two units. It lets Qantas say this is what we have to do to fix it,” he told the Sydney Morning Herald.
3. It’s about succession planning
Another reading of the events is offered by Matt O’Sullivan at the Sydney Morning Herald.
“The most likely internal candidates for the top gig at the Flying Kangaroo – Simon Hickey, Jayne Hrdlicka and Lyell Strambi – have all been given new empires of their own to run,” he writes.
Hickey is the man seen as most likely to take over from Joyce, but in the meantime he’ll be tested with the difficult task of turning around the heavily unionised and loss-making international operations.
The Qantas release also revealed Jetstar CEO Bruce Buchanan, who was heavily involved in launching and building the low-cost carrier, is leaving the Qantas family. He’s to be replaced by Hrdlicka.