When Alan Joyce sat in his office in Sydney’s Mascot on Monday to take a phone call from his top Jetstar lieutenant Gareth Evans, the tumultuous events of 2011 would have loomed large.
On October 29 of that year he took the high-stakes decision to ground the entire Qantas domestic and international fleet in an attempt a break deadlock with unions representing pilots, engineers and ground staff. It was a circuit breaker that arguably set Qantas on a course back to profitability.
By the end of this week’s short phone call, Joyce and Evans had agreed to cancel 10 per cent of Jetstar’s flying capacity in January and go public with a proposal to sell three of the airline’s long-haul 787 Dreamliners.
“Given how far apart we are … we have to expect the current industrial action will continue for some time,” Joyce told senior executives in an email later that day.
Already Qantas has taken a hit of $20 million to $25 million from 140 flight cancellations in December and close to 900 flights it has grounded in January in anticipation strikes by pilots and ground crew will continue over pay and conditions.
It means tens of thousands of passengers have had their summer travel plans disrupted. But Joyce, mindful of the experience of 2011 and perhaps emboldened by Qantas’ renewed financial strength, is unrepentant.
“Enduring these losses is better than agreeing to conditions that would ultimately make our business unsustainable and unprofitable in the longer term,” Joyce said. “We won’t do it.”
Joyce is no stranger to playing hardball in these situations. His power move in 2011 made him a household name, subject to both disdain and praise for an act of audacious union-busting that left 70,000 passengers stranded. But crucially, it also set the once financially troubled carrier on a path back to robust health.
The group’s shares have risen 28 per cent in the past year alone and this week touched record highs of $7.40. That has pushed the airline’s market value to $11 billion, up a remarkable $9 billion from the dark days of 2012.
Yet while Qantas today is a very different and much stronger company than it was eight years ago, tensions between management and its workforce have started to resurface in a bad way.
Jetstar has been a key pillar of Joyce’s strategy to revive the Qantas group, and its chief executive Evans is considered a strong contender for the top job once Joyce departs. The recent flight cancellations were the first industrial relations related groundings for any Qantas flights sine 2011.
Meanwhile Project Sunrise – Qantas’ much-hyped plan to fly non-stop from Australia’s east coast to London and New York – is also being held up by negations over a new pay agreement with pilots, and might not happen at all unless they reach a deal early next year.
Investors and analysts are paying close attention to how much the latest dispute could cost from disruptions, or from ceding ground to workers on wages which could drive up Qantas’ carefully trimmed cost base.
Victim of its own success
The airline’s current headache is partly the product of its own success, according to Simon Brown, a portfolio manager at Qantas shareholder Tribeca Investments. Brown says when airlines boost profits, industrial disputes inevitably follow.
It’s unfortunate timing. Despite a string of stable profits over the past few years, it expects softer trading conditions ahead as the US-China trade war and slowing local and global economies hurt demand.
“Airlines are incredibly sensitive to the economic cycle and one-off events … so they’re rightly cautious in terms of how they go about managing their costs,” says Brown.
“Qantas has done a very good job over the last few years in addressing that cost base and trying to keep it as low as possible.
“[But] you’ve got union claims of wanting to share into some of the improved profitability, so it’s a bit of a challenge for management.”
Qantas has cut close to $3 billion in costs since 2015 and is targeting another $400 million in savings every year going forward. The group buoyed investor confidence last month by laying out ambitious targets to improve its margins over the next five years through more cost-cutting, efficiency and higher fares.
Brown says Qantas assumptions around what it would pay staff would be built into those targets, making it hard for the airline to budge without then cutting back costs somewhere else.
All the ingredients are there for a long-standing stoush. This does look as if it could get uglier.
Peter Harbison, executive chairman of CAPA Centre for Aviation
Qantas’ line in the sand when it comes to wage increases is 3 per cent across the group – which aviation analyst Neil Hansford says is “sacrosanct”. This means Jetstar is unlikely to give any ground to pilots or ground crew.
“[Joyce] has made so many assurances and deals with the Qantas workforce, he can’t give to this group of renegades what he wouldn’t agree to negotiate with the bulk of his workforce,” Hansford says.
The Transport Workers Union, which represents baggage handlers and ground crew, and the Australian Federation of Air Pilots (AFAP), say they only want 4 per cent and 3 per cent wage rises respectively for their Jetstar members.
However, the airline says demands for improved conditions and allowances blow this out to as high as 15 per cent. The unions dispute that cost estimate. Wages across the economy are rising at 2.2 per cent on average, according to the Australian Bureau of Statistics.
The unions have called on Jetstar to return to the negotiating table, but the airline says further talk is a waste of time unless the unions show they are willing to cap wage inflation at 3 per cent.
If the 2011 dispute set the acrimonious relations between Qantas and unions, they were only deepened by the fallout from its historic $2.8 billion loss in 2014. After that loss, many workers accepted an 18-month wage freeze to help get the company back on its feet.
They say it’s now time for that to be repaid and are quick to point out that their CEO shared in the spoils of Qantas’ recovery with his eye-popping $24.6 million 2017 pay packet (the windfall from $4 million of Qantas shares awarded as part of a three-year incentive plan, which more than tripled in value by the time Joyce received them as the company’s performance improved).
For its part, Qantas says staff have already benefited from more than $340 million in employee bonuses as its finances returned to health (however some are only paid if and when workers sign a new enterprise agreements, which unions described as a “bribe” to accept sub-par conditions, and a “slap in the face”).
The TWU has a lot riding on the Jetstar dispute too, having threatened “industrial chaos” across the aviation and transport industries in 2020 as it makes a push for better wages and conditions across more than 200 different enterprise agreements that are set to expire.
The TWU says its baggage handler and ground crew workers are on “poverty wages” and face irregular work hours, and have demanded more rest breaks, a guaranteed 12-hour break between shifts and a minimum of 30 rostered hours each week.
Peter Harbison, executive chairman of CAPA Centre for Aviation, says this makes the ground crew dispute the more difficult to resolve of the two at Jetstar because the TWU can’t start its year of disruptive action by rolling over to Australia’s biggest force in aviation.
“They’ve painted themselves into a corner with that – they can’t really afford to lose,” he says.
AFAP pilots at Virgin Australia’s budget arm Tigerair took strike action last summer and later settled on an enterprise bargaining agreement that delivered a 16 per cent pay hike.
Harbison says that with Qantas making money, the AFAP wanting to close the gap between how much Jetstar and Qantas pilots are paid, and Jetstar showing no signs of budging, the pilots dispute could drag on.
“All the ingredients are there for a long-standing stoush,” he says. “This does look as if it could get uglier.”
The unions have no protected industrial action planned after Friday but both groups have the option to resume in January, with approval for protected stop-works of up to 24 hours.
Jetstar says union disruption also prompted a review of its fleet and network, and it is now considering selling three of its 11 long-haul Boeing 787s, which operate margin or loss-making routes, such as to Hawaii.
The airline says this is to protect profits amid the strike, with the ability to invest an estimated $250 million windfall from the sale in other parts of the Qantas business or return it to shareholders.
But the implied threat would not have been lost on pilots, with reports that the jet sale would lead to 50 pilot job losses and another 50 pilots to be pushed down into more junior positions.
Sun setting on ‘Sunrise’
While tensions at Jetstar have boiled over publicly, the group is also at loggerheads with international pilots over its “Project Sunrise” plan to launch non-stop flights from Australia’s east coast to New York and London.
Having settled on a preferred aircraft (Airbus’ A350-100) and getting the safety regulator on board, Qantas says the only thing holding the project back is getting pilots to agree to “productivity improvements” essential to making the business case for the flights stack up.
The lure for pilots is the prospect of promotions, with an order of up to 12 new aircraft creating hundreds of fresh positions. These include captain vacancies to be filled by more junior pilots who would get a significant pay rise.
But the Australian and International Pilots Association, which represents the pilot group, says Qantas’ productivity improvement demands are difficult to meet so soon after they agreed to a 30 per cent improvement in 2015, which was conditional on the delivery of new Boeing 787 Dreamliners.
Pilots say they won’t accept some of the conditions in a proposed wage package – including that new pilots work on a lower pay scale – and dispute that relatively small changes to their pay and conditions are significant enough to make-or-break the Sunrise business case.
Some observers, including S&P’s director of corporate ratings Graeme Ferguson, argue the project is doomed to fail anyway and that Qantas is setting up its pilots to be the fall guys.
With neither side of the Jetstar dispute giving ground and the peak travel season fast approaching, the question for travellers and shareholders remains: could another grounding be on the cards?
“We hope that it doesn’t get to that,” Evans told a press conference last week. Millions of Australians will be hoping he’s right.
Business reporter at The Age and Sydney Morning Herald.