“We need to bring as many people as we can through this”, says Flight Centre Travel Group CEO
Airlines don’t make money at the best of times and these are the worst of times. Watching the opening couple of hours of Wednesday’s CAPA Australia Pacific Aviation Summit on the screen was a bit like watching a disaster movie on television where the survivors (to date) are struggling to make it out alive, but with their hands tied behind their backs.
Because unless governments open borders, even within their own countries and between countries, there is not much airlines can do except fiddle around the edges, cut cash burn to the lowest possible and raise funds.
Qantas CEO Alan Joyce (pictured above left with CAPA’s Peter Harbison) said it has managed to lower cash burn to A$40 million, a week and his is one of the lowest burn rates in the industry.
Even at the worst of times, in 2009, post the global financial crisis, Peter Harbison, chairman emeritus of CAPA, said there was a 0.4% drop in passenger numbers. This year, there will be a 60% drop. “In the industry’s (very few) good years, the profit was about US$35 billion, with half of that coming from US airlines. Estimated losses this year will be close to $100 billion,” he said.
The future, he said, will be smaller – 30% fewer airlines, lower frequencies, fewer routes, higher air fares and more government involvement. He urged governments not to miss the opportunity to restructure the industry. “It’s a one-off opportunity to build a sustainable and effective industry for the future.”
Graham Turner, CEO of Flight Centre Travel Group, however was more focused on the present, saying businesses in Australia had to be more proactive in getting governments to open up state borders.
He said the country is being run by chief medical officers who are not interested in the economy, they are not even interested in health, just Covid, and “our country is going to be ruined”.
“Business has to be very proactive, we all need to pull together on this. Closing down states and big cities, it has been proven it doesn’t work and causes unnecessary pain,” said the travel leader who’s known for not mincing his words and who cited this study by Lancet that surveyed 50 countries.
He said targeted lockdowns, testing and tracing worked better and “we have to learn to live with a lot more infections”.
On his company’s part, since March 15, it’s been about survival. Monthly costs of operating across 23 countries of $230 million had to be brought down to $60-$70 million and it’s now at 30% of original cost base, he said.
His biggest worry is not about Flight Centre’s survival but “we need to bring as many people as we can through this”.
“This is not a competitive game. It’s about how we work together to ensure as many survive and thrive, that’s the important thing. Everyone is bleeding. We will need each other on the other side to ensure we have a good product to sell when demand comes back. A lot of small businesses will die, they have no resources to raise funds.”
Which is clearly not Qantas’ problem. This week, it raised a $500 million 10-year bond issue, among the “many dramatic actions” it has taken to survive, said Joyce, who said Qantas intends to be around 100 years and more. With $4.5 billion cash in the bank, he said it has a long runway – “enough liquidity, as well as enough money to restructure the business”.
What is clear is that the recovery will be longtail with Joyce citing 2023-2024 as the timeframe and, in the meantime, it’s set aside funds to restructure the business – that means reinvesting in Project Sunrise (world’s longest flights) for the future, which it shelved in May, moving and changing its fleet and investing in tech.
He said there was a bigger business case for operating routes that avoid stopovers – which is why he still believes in Project Sunrise – and the Boeing 787 was the right aircraft for this. When the time is right, it will bring back the A380, perhaps in three years’ time.
Carriers that have a strategic advantage are those with domestic markets, can fly long distances and have strong loyalty programmes, he said.
On loyalty programmes, he said it was still a huge advantage for that to be coupled with the airline because people’s desire is still that big international trip and “it’s a relationship that you, at your peril, separate”.
He said 35% of credit card expenditures in Australia is on a Qantas credit card, and its recent partnership with BP had brought it 300,000 new customers buying fuel. Before Covid, Qantas’ most profitable businesses were one, domestic, two, Jetstar and three, loyalty.
While corporate travel and conferences have taken a massive hit and full service carriers do rely on that segment for their yields, Joyce said, “Customers will come back and there is potential to gain market share. We are in pole position to get out of this.”
For now, the focus is on cash, not revenues. When it sold $90 air fares on Jetstar, the demand was massive with 220 bookings a minute. “We know the demand is there, we need to get cash contribution, then we get back to profitability.”
Looking to China, which is leading the way in recovery, Harbison said that while passenger numbers were back, yields were not. “Getting back in the air with decent load factors and fares will be a real challenge.”
Turner noted that Flight Centre’s business in China was back to 70% of 2019 levels but was 30% of revenues.
But taking lessons from China, CAPA cited five building blocks of recovery – public health success, latent demand or revenge travel, QR codes and face masks (giving public confidence), price war and government support.
Stand up if you feel your country has got these five building blocks in place. If not, be prepared for a very rough ride ahead.