National Aviation Issues: White Paper by Dominic George

U57274 : Tourism Synthesis & Futures

Coursework 1: Governmental Report

Semesters 2, 2011/12 Submission Date

23 February 2012

Module Leader: Dr David Bowen Dominic George (08061629)

National Aviation Issues: White Paper

Faculty of Business

National Aviation Issues: White Paper

An analytical comparison between Australian and British flag-carriers

Presented to Australian Government by the Minister for Infrastructure, Transport, Regional Development and Local Government

Presented to UK Parliament by the Secretary of State for Transport by Command of Her Majesty

February 2012

National Aviation Issues: White Paper

Can airlines rely on increased premium class travel to revive their fortunes, and respond effectively to environmental adversities?

Contents Executive Summary

Report Introduction

Section One

Analysis of Theoretical Context

Part 1.1

Sectional Introduction

Part 1.2

Identification of Environmental Challenges APD Rising cost in air transportation Move towards other methods of transportation World Financial Crisis Aiding the Australian Economy

1 1 1 2 2 2

Section Two

Analysis of Practical Context

Part 2.1

Sectional Introduction

Part 2.2

Market Commentary

Part 2.3

Qantas’ Response to Environmental Challenges

Part 2.4

British Airways’ Response to Environmental Challenges

Part 2.5

Joint Airline Responses to Environmental Challenges

Part 2.6

Premium Passenger Traffic Yields and Trends

Section Three

Overall Reflective Synthesis

Part 3.1

Sectional Introduction

Part 3.2

Reflective Synthesis of Issues Raised

Part 3.3

Conclusions

Appendices and Glossary Appendix A

APD’s influence on the ticket price

Appendix B

Qantas’ Promotional / Sales Periods

Appendix C

Example of Qantas Marketing Campaign

Appendix D

“Building a Stronger Qantas”

Appendix E

Qantas Announces Profit Result, Response to Conditions

Appendix F

British Airways’ Promotional / Sales Periods

Appendix G

‘Lean’: Continuous Improvement at British Airways

Appendix H

Passengers Numbers on Qantas and BA (Nov 08 – Jan 10)

National Aviation Issues: White Paper

iii

Appendix I

Revenue Passenger Kilometres vs. Available Seat Kilometres

Glossary of Terms

Acronyms and Abbreviations

Executive Summary There are numerous issues that currently face the global commercial air transportation industry. These emanate from a wide range of different situations and affect both the industry as a whole, but also the countries in which airlines operate in. Therefore, this proves a challenge for both Qantas and British Airways (BA). Current key issues that have been highlighted in this report, include the increase by the UK Government, of Air Passenger Duty (APD), which is developed on a sliding scale based upon the distance that the destination is from the capital city of that country to the London. A further issue highlighted was the rising cost of air transportation. This stems not only from the increase in APD, but also the increase in fuel. This not only adds further fuel surcharges onto the cost of the air ticket, but also means that, because these surcharges are mandatory, they show of the commercial airline industry as being in a chronic dis-equilibrium, where passengers only book during sales or promotional periods. This, therefore, highlights the issue of price-elasticity. Subsequently, due to the rising cost of air travel, this report also highlights what other transportation methods are being utilised by business travellers to access destinations within Europe. In addition, other current developments are being completed in order to make Europe more accessible to business travellers, by alternative forms of transport, other than air. These include the Deutsche Bahn’s expansion into the UK through the Channel Tunnel, and the construction of the second high-speed rail network, named HS2. Furthermore, the impact that the global economic crisis has had a massive impact upon the aviation industry as a whole. International Air Transport Association (IATA) has described it as having ‘lasting effects’ and still continuing. The aviation industry continues to have on the Australian economy. It clearly demonstrates the part in which it plays a major role in strengthening the economy, to the tune of nearly AU$6.3 billion. It continues to connect family, friends, and communities within Australia and around the world, contributing to the social cohesion of the nation. The UK Government has forecast that air passenger numbers will increase to 335 million by 2030. With new developments being discussed, such as a new airport in the Thames Estuary, it is hardly surprising that there are forecasts for increased passenger numbers, as the three main London airports (Heathrow, Gatwick, and City) are all at capacity. Both Qantas and BA have invested heavily in new aircraft and product and service improvements. These are aimed at responding to price-elasticity and help generate additional revenues. However, there have also been large strategic strategies set out to make the airlines more ‘lean’. These include Joint Business Agreements (JBAs), annual synergy savings, and expenditure and operational reviews. From the data analysis taken from RPKs (Revenue Passenger Kilometres) as compared to ASKs (Available Seat Kilometres), it can be seen now that both airlines are more closely matching RPKs to ASKs. Qantas has also demonstrated a growing trend in passenger numbers, whereas BA fluctuates according to seasonality and other events. It is recommended that more effective sales is implemented; along with closer agreements and co-ordination under the JBA held between both airlines.

National Aviation Issues: White Paper

Report Introduction This report is designed to outline the issue of whether airlines can rely on premium class travel to revive their fortunes, and respond effectively to environmental adversities. The findings have been drawn up into three key sections: the theoretical context, the practical context, and an overall reflective synthesis of the situation. The first section identifies the environmental challenges that are facing the global commercial aviation industry. These include the increase in the United Kingdomâ&#x20AC;&#x2122;s Air Passenger Duty (APD), the rising cost of air transportation and what is causing it, the identification of the movement towards other methods of transportation, an analysis of the world financial crisis and its impacts upon the aviation industry, and how the aviation industry aids the Australian economy through its services. The second section discusses what both Qantas and British Airways are doing to combat the issues, raised in Section 1. It provides a brief overview of the current market situation, before discussing how the airlines are coping and what they are trying to do to reduce the impact of these environmental difficulties. It will sum up with in-depth analysis of passenger numbers, otherwise known in the industry as traffic statistics, and draw a direct comparison between these values and the financial performance of the airline. The report will then conclude with an overall reflective synthesis of the situation, further examining the efforts made by both airlines, and recommending further changes that could be implemented to improve both the efficiencies of joint business (otherwise known as JBAs), and individual improvements that may have not already been considered.

vii

1.1

Sectional Introduction

This section highlights the theoretical context of the issue. What challenges currently face the commercial aviation industry and the airlines individually? Additional analysis into how the airlines have responded to economic challenges and what they perceived these challenges to be has also been conducted.

1.2

Identification of Environmental Challenges

APD Air Passenger Duty (APD), which is applied to almost every ticket on a flight originating in the UK, has risen sharply since it was introduced in 19941. Furthermore, because APD is developed on a sliding scale, passengers currently pay between £24 and £170 onto the cost of the ticket1. As these charges do not contribute to airline revenues, they are compulsory for the passenger and have an effect on demand through medium of price-elasticity2. Table 1.1 clearly demonstrates the effect APD has on the total fare. The remainder of the taxes is made up of government, authority and airport charges, and fuel surcharges. From / To

Fare

Taxes

APD

% of taxes

London to Edinburgh London to Geneva London to New York

£ 10.00 £ 480.00 £1,061.00

£ 92.57 £ 106.25 £ 480.16

£ 26.00 £ 26.00 £ 130.00

28.1% 24.5% 27.1%

Table 1.1 APD’s influence on the ticket price (Source: British Airways, 2012; see Appendix A)

Rising cost in air transportation To an economist, price is a mechanism for bringing supply and demand into balance at a particular level of output3. This demonstrates that the commercial aviation industry is an oligopolistic market structure unable to arrive at stable equilibrium prices4; appearing to be in chronic dis-equilibrium5. Prices influence both traffic generated and the yield earner from that traffic6. By an airline offering a tiered fare structure in response to the price-elasticities of people willing to travel only on discounted fares, and airline is not just striving to maximise its own revenues but also increasing the density of traffic in the markets concerned7.

BBC (2011) Airlines call for Air Passenger Duty to be scrapped Holloway, S. (2008) Non-mandatory surcharges. In: Straight and Level: practical airline economics (3rd edition). Aldershot: Ashgate 3 Holloway, S. (2008) Different perspectives on the role of price. In: Straight and Level: practical airline economics (3rd edition). Aldershot: Ashgate 4 Button, K. J. (1996) Liberalising European Aviation: is there an ‘empty core’ problem? In: Holloway, S. (2008) Straight and Level: practical airline economics (3rd edition). Aldershot: Ashgate 5 Doganis, R. (2010) Future prospects: an unstable industry. In: Flying Off Course: airline economics and marketing (6th edition). Abingdon: Routledge 6 Holloway, S. (2008) Influence on demand. In: Straight and Level: practical airline economics (3rd edition). Aldershot: Ashgate 7 Holloway, S. (2008) Influence on supply and costs. In: Straight and Level: practical airline economics (3rd edition). Aldershot: Ashgate 1 2

National Aviation Issues: White Paper

Section One Analysis of Theoretical Context

Move towards other methods of transportation Business travel by tunnel increased by more than 3%, making it the only mode to experience growth from 2005-2010. And in the period 2009-2010, business travel by tunnel increased by almost 10% year on year – a 12 month period in which all trips abroad fell to 20% below their 2007 peak8. For business travellers, there are a number of factors that greatly influence their decision on international travel by rail. The first, and probably most obvious one, is the cost of travel by air. Here, trains benefit from being less exposed to raising oil prices and environmental tax levies. The second is the fact of the cross-EU booking process to be simplified, requiring rail operators to standardise their reservation details and processes. And thirdly, are the developments in the UK, most notably the advent of competition from Deutsche Bahn with its launch of services through the Channel Tunnel to continental Europe, and the creation of the UK’s second high-speed rail network, HS28. World Financial Crisis Few anticipated the extent or rapidity with which these concerns would be overtaken by those generated by the financial crisis. Or the extent to which the crisis would spread beyond the financial sector to other industries, none more so than the aviation industry. The world financial crisis has meant that all of these negative events are happening to the aviation industry world-wide9. The International Air Transport Association (IATA) described the lasting effects of global recession on the industry in late September 2009: “the global economic storm may be abating, but airlines have not yet found safe harbour… the crisis continues”10. Aiding Australian Economy Australia’s economy has continued to grow is no coincidence. The Rudd Government’s Economic Stimulus Plan has helped keep the Australian economy growing, with jobs still being created and people continuing to fly for business and leisure9. Australia is a vast continent with geographically dispersed cities and towns. Air services are vitally important in connecting population centres. Just as importantly, aviation services link Australia to the rest of the world. Air services, both domestically and internationally, are an essential facilitator of business activity and underpin the country’s tourism and trade industries. In short, aviation plays a major role in ensuring the strength of the Australian economy. Beyond this, air services connect family, friends, and communities within Australia and around the world, contributing to the social cohesion of the nation. The annual gross value added by the air and space industry to the Australian economy is nearly AU$6.3 billion11.

Mintel (2011) Issues in the Market, Airlines – UK, September 2011 National Aviation Policy, December 2009 [White Paper] (INFRA-09124]. Canberra: Department of Infrastructure, Transport, Regional Development, and Local Government 10 IATA (2009) Deeper Losses Forecast - Falling Yields, Rising Fuel Costs [Press Release], 15 September 2009 11 ABS, Australian National Accounts: National Income, Expenditure, and Product (ABS cat. no. 5206.0, June 2009, Table 33) 8 9

Section Two Analysis of Practical Context

2.1

National Aviation Issues: White Paper

Sectional Introduction

This section is designed to be supplementary analysis of secondary data from airlines to see if there has been a direct increase or decrease in premium passengers over that period. This historical data will be taken from airline shareholder websites and critically compared against revenue generated for both Qantas and British Airways (BA). The data extracted from these reports are then evaluated in their past, present, and future (predicted) states. This section also includes: route analysis, details of product and service improvements, and current marketing campaign critique. Furthermore, this data is then briefly correlated against the financial reports and traffic statistics produced by both airlines.

2.2

Market Commentary

The UK Government has forecast that air passenger numbers will increase to 335 million by 203012. This predicted growth is based upon the assumption that London’s main airports (Heathrow, Gatwick, and London City) have reached capacity – seized on by supporters of a new Thames Estuary airport plan – and the growth will be further driven by an 80% increase in business travel13. Business travel by air, as a whole, has decreased by 30% since 2005 – more than holidays, VFR trips, or travel for other purposes – as companies reduce expenditure and look to alternative transportation modes, and increased their use of non-travel alternatives13.

2.3

Qantas’ Response to Environmental Challenges

Qantas has had twelve sales periods over the past 12 months14 (see Appendices B and C). This demonstrates an attempt to attract new passengers, as well as respond to price-elasticity. This is echoed by the 22.5 million passengers that travelled with the airline from July 2009 to June 201015. However, currently, 82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas16 (see Appendix D), not including JetStar (a Qantas subsidiary airline). Competitors are piling in, many with substantial foreign government backing, meaning Australia has some of the fastest capacity growth of any market in the world. Qantas outlined measures that respond to global economic conditions and the structural challenges facing the airline. These steps will position the Group for a strong, sustainable future and build long-term shareholder value17 (see Appendix E). They include: a reduction in capital expenditure of AU$700 million over 2011/12 and 2012/1318; a review of Qantas’ heavy maintenance footprint in Australia16; and changes to the airline’s catering and engineering operations19. It has also made capacity cuts, grounded some Department for Transport (2011) UK Aviation Forecasts, August 2011 Mintel (2011) Competitive Context, Airlines – UK, September 2011 14 Based on research conducted by the author (March 2011 to February 2012) 15 Qantas (2010) Fact File 16 Qantas (2010) Building A Stronger Qantas 17 Qantas (2012) Qantas Announces Profit Result, Response to Economic Conditions [Press Release], 16 February 2012 18 O’Sullivan, M. (2012) Qantas: Asia Plans Face Bumpy Ride, Sydney Morning Herald, 17 February 2012 19 Qantas (2011) Annual Review 2011 12 13

aircraft, deferred aircraft orders, and frozen capital expenditure. Job losses were also announced as profit levels have fallen. Despite this, Qantas has remained one of the few airlines in the world to record a profit for the 2008-2009 financial year9.

2.4

British Airways’ Response to Environmental Challenges

BA, in September 2011, launched a new marketing campaign, meant to signify who BA are and what the airline stands for as a business. It’s a demonstration of the innovation throughout the decades of BA’s history and a projection of who they are going to be20. The airline continues to make sure all their customers enjoy a unique premium service at every point they come into contact with them; something, they hope, their customers will recognise that we are worth paying that little bit more for. Furthermore, BA has had a total of 12 promotional sales periods over the past 12 months14 (see Appendix F), aimed at not only increasing revenue generated, but potentially trying to combat the industry’s price-elasticity and also attract new customers. In February 2010, BA launched their new First product21. The airline spent £100 million on its flagship brand at a time when demand for first and business class seating was weak. But the response from the airline was that it has been delighted with the number of travellers prepared to pay nearly ten-times the price of a seat in economy22. This was spurred on by an unexpectedly strong surge in the sales of business and first class tickets helped push the carrier to a £158 million profit in the first half of the 2010/2011 financial year23. BA has built a business plan to both advance their Global Premium Airline strategy24, and to ensure British Airways fulfils its role within IAG. Despite achieving structural change in their cost-base, the airline faces significant cost pressures over the life of the plan, with a projected rise in fuel costs25, aboveinflation increases in many airport and over-flight charges26, as well as inflationary pressures on wages and supplier costs22. They continue to work with employees and suppliers to manage costs wherever possible. The airline has adopted a ‘lean’ approach to their way of conducting business27 (see Appendix G). Their key aims were to get to know their customer, understand what they perceive as value and how that value is delivered, and have set up a mechanism for continually improving (embed improvement principles).

2.5

Joint Airline Responses to Environmental Challenges

Qantas and oneworld partner British Airways (BA) commenced a Joint Services Agreement (JSA) in 1995, giving customers a wider range of routing and fare options between Australia and UK/Europe, reciprocal frequent flyer programs, and lounge access including joint lounges. The authorisation gives Qantas and BA the ability to coordinate schedules and pricing on their services between Australia, Asia and Europe13. From 25 March 2012, Qantas will drop their Hong Kong to London (Heathrow) and Bangkok to London (Heathrow) services; for which these flights transfer onto British Airways, who increased its services on the London (Heathrow) to Hong Kong sector from 14 to 17 flights per week28. British Airways, in return,

British Airways (2011) British Airways – a truly British airline [Video] British Airways (2010) Introducing the New British Airways First Cabin 22 Walker, I. (2010) Downturn? Demand for our new £4,500 first class seats is flying high, says BA, Evening Standard, 15 October 2010 23 Prynn, J. (2010) Business class pushes British Airways back into profit, Evening Standard, 29 October 2010 24 British Airways (2010) Report and Account to December 2010 25 Milmo, D. (2011) British Airways: 'high oil price may mean higher fares', The Guardian, 25 February 2012 26 Milmo, D. (2011) Inflation-busting rise in airport charges gets go-ahead, The Guardian, 11 March 2008 27 Coby, P. (2010) Lean has its heyday again. Interviewed by: IQPC 28 British Airways (2011) Flying To and From Australia 20 21

will cancel one London (Heathrow) to Sydney via Singapore service, and ‘upgrade’ its aircraft from a Boeing 777-200ER to a Boeing 747-400, on the flight which will continue to operate this service29.

Premium Passenger Traffic Yields and Trends

Appendix H demonstrates the number of passengers carried between January 2008 and November 2010. Based on the information available, it can be clearly seen that BA’s key operational period is during the British summer months. This, however, is not echoed so much by Qantas, whose passenger numbers continue in a steady increase over this period of time. As demonstrated in Appendix I, RSK (Revenue Passenger Kilometres, shown in the graph by solid lines), which for this purpose has been compared against the measurement of ASK (Available Seat Kilometres, shown in the graph by dotted lines), clearly shows that Qantas is following relatively closely the pattern of availability, whereas BA has only just seen RSK following availability from August 2009 onwards. It can also been seen that due to extensive and prolonged sales periods (usually across the entirety of both of their networks), both airlines maintain relatively high availability for the first half of each year.

Airline Route (2011) Qantas Group New 5-Year Plan: Route/Network Changes Summary, 15 August 2011

National Aviation Issues: White Paper

2.6

Section Three Overall Reflective Synthesis 3.1

Sectional Introduction

This section will provide an overall synthesis of the issues currently facing both airlines. It will critically analyse their attempts to improve premium passenger numbers against their expenditure on product and service improvements, and marketing campaigns. Furthermore, it will offer a conclusion into each airline’s strategy effectiveness, and whether there could potentially be any further improvements.

3.2

Reflective Synthesis of Issues Raised

It can be seen that both airlines are continually striving to improve passenger numbers by doing a number of things to improve it: 1.

3.3

By better provide seat availability by closely correlating demand with availability with actual passenger numbers, based on historical data, both airlines can continue to save money by not operating half-full aircraft. Provide promotional sales periods throughout the year, not just at the start of the year (January Sales) and during April. This will mean that by providing more sales opportunities, both airlines will continue to battle the price-elasticity situation of passengers who only book during sales periods. As both carriers are ‘legacy’ carriers, sometimes their services are perceived to be more expensive. Offer more one-off or limited availability sales periods to select destinations. BA have begun to do this in their 3-2-1 limited availability, short sales period sales, however, most of these are targeted at leisure travellers (see Appendix #). Better target your market towards those of which they are intending to attract. BA, again, has begun to target specific classes. However, these sales periods are, again, only for a limited period time.

Conclusions

Apart from offering better seat availability and more extensive and targeted marketing and promotion periods, both airlines are working together to develop both as individuals and as an alliance. The use of JBAs enables a greater availability of flights to key longhaul destinations within the Far East and Australia. However, it is believed that British Airways should either (a) continued to offer twice daily services to Sydney via Singapore, or (b) commence services to Melbourne via Singapore or another Far Eastern gateway. This would provide accessibility to passengers, but ensuring that they do not have to fly on a once daily service to Sydney and then transfer onto a Qantas codeshare flight. Mirroring each other’s services is advisable, but a greater range of flight times should be maintained, so that both airlines are not arriving at the same destination at roughly the same time. On the sales and marketing side, it is advised that Qantas should start more effective marketing, not just internally within Australia, and BA should (a) extend their sales periods, to be brought relatively in-line with other sales periods, and (b) offer their 3-2-1 promotional sales to all premium passengers, not just premium leisure passengers going away for the weekend.

Appendix A

National Aviation Issues: White Paper

APDâ&#x20AC;&#x2122;s influence on the ticket price

National Aviation Issues: White Paper

Appendix B Qantasâ&#x20AC;&#x2122; Promotional / Sales Periods Sale Come Walkabout in Australia Spirit of the Season Two Week Walkabout with Qantas Experience International Business Dreaming of Far Away Places Experience More of Australia 90 Hour Sale Share the Spirit of the Season Celebrate Australia Day Discover Your Australia Travel in Style with Qantas Go! Go! Go! Sale Discover Your Australia Your Aussie Adventure Starts Here Travel in Style with Qantas Hop To Australia (Walkabout Pass Sale) Hop To Australia (Sale Extension) Qantas International Business Sale New Yearâ&#x20AC;&#x2122;s Resolution Trip Happy Australia Day Fly to Australia

Date Started 01 Nov 2009 22 Dec 2009 11 Mar 2010 15 Jun 2010 21 Jul 2010 24 Aug 2010 20 Nov 2010 23 Dec 2010 26 Jan 2011 14 Mar 2011 02 Jun 2011 30 Jun 2011 25 Aug 2011 24 Sep 2011 20 Oct 2011 09 Nov 2011 22 Nov 2011 12 Dec 2011 28 Dec 2011 26 Jan 2011 14 Feb 2012

Date Ended 08 Dec 2009 02 Feb 2010 06 Apr 2010 06 Jul 2010 07 Aug 2010 30 Sep 2010 23 Nov 2010 31 Jan 2011 31 Jan 2011 13 Apr 2011 25 Jun 2011 12 Jul 2011 20 Sep 2011 28 Sep 2011 08 Nov 2011 21 Nov 2011 29 Nov 2011 20 Dec 2011 19 Jan 2012 05 Feb 2012 21 Feb 2012

Destination(s) Australia Australia Australia Australia Australia & NZ Australia Australia & NZ Australia & NZ Australia Australia Australia & NZ Australia & NZ Australia Australia Australia & NZ Australia Australia Australia & NZ Australia Australia Australia

Appendix C

Experience International Business

Qantas Walkabout Pass

Experience International Business Whether you are flying for business or pleasure Qantas International Business gives you the freedom to decide when to work, sleep, relax or be entertained.

Business Essentials

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London Heathrow to

Return Business from

Bangkok

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Singapore

£1,999*

Perth

£2,785*

Melbourne

£2,787*

Sydney

£2,799*

Brisbane

£2,799*

Auckland

£3,014*

Valid for travel 15 July to 31 August 2010. Offer ends 6 July 2010. Availability is limited. Travel in style and comfort onboard the Qantas A380, now flying selected services from London Heathrow to Sydney and Melbourne via Singapore. With fantastic offers also available in First, now is a great time to upgrade.

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National Aviation Issues: White Paper

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National Aviation Issues: White Paper

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Appendix D â&#x20AC;&#x153;Building a Stronger Qantasâ&#x20AC;? 16 August 2011

Earlier this year I laid out the grave challenges faced by our Qantas International operations and announced that we were undertaking a wholesale review. Qantas International is an important part of the Qantas Group. It is part of our national Australian story. And it represents a core element of our appeal to valuable corporate clients, leisure customers and Frequent Flyers. So the economic sustainability of Qantas International matters to the whole Qantas Group. But it is a steadily fading business, suffering big financial losses and a substantial decline in market share. The issues are neither cyclical nor temporary. Qantas International faces serious structural challenges, to do with the progressive deregulation of our market at home, the influx of competition here and abroad, and our high cost base. Right now 82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas, not including Jetstar. Competitors are piling in, many with substantial foreign government backing, meaning we have some of the fastest capacity growth of any market in the world. Foremost among them are Middle Eastern and Asian carriers with well-positioned hubs. Today a large numbers of our routes, primarily to Asia and Europe, are lossmaking, with no improvement in sight. Our share of the Asian international market has collapsed to 14%. Our profitable international routes are not sufficient to make up the shortfall. And our cost base is around 20% higher than our key competitors. Today Qantas International absorbs large amounts of capital that could arguably be better invested in profitable, growing parts of our business. We don't have the option of pretending that things will change if we stay the same. They won't. To do nothing, or tinker around the edges, would only guarantee the end of Qantas International in our home Australian market. That would be a tragedy. So we must change. We have a five year plan and it starts today. This is a big task but we start from a position of strength.

The Qantas Group is a large, stable and profitable enterprise. Our core domestic operations are performing very strongly and generating good profits.

The Qantas brand is at the heart of our powerful domestic business. The Qantas Frequent Flyer program is the world's best and most profitable loyalty program, with high potential. And Jetstar is one of the world's fastest growing and most profitable low-fares airlines, set for significant future growth. This morning I want to set the scene by laying out our plan for the transformation of Qantas International. And I want to make several announcements, the first in a series over the coming months as we complete the negotiations that we have currently underway. Our five year plan has the objective, first, of returning Qantas International to profitability in the short term. In five years the Qantas flying businesses, both domestic and international combined, will exceed the cost of capital on a sustainable basis. A new spirit I also want to emphasise the confidence I have in the path we are taking. For more than 90 years Qantas has been the Spirit of Australia, connecting Australians to the world. Now more Australians are making more journeys, to more destinations, than ever before. Even in the midst of the current economic volatility, Australians are still going to be very well-off in global terms, with a strong currency, ready to do business around the world, and to enjoy all that global travel has to offer. So it's time for a new Spirit of Australia, one that reflects how we live, work and travel today. Our plan has four elements:    

Opening gateways to the world Growing with Asia Being best for global travellers Building a strong, viable business to create shareholder value.

Today I announce our new 'gateway' strategy, based on an expanded network of alliance relationships. We are choosing the world's leading airlines to help us take our customers to their favourite places around the world and to their key business destinations. 

In May, we established Dallas/Fort Worth in place of San Francisco, opening a gateway to 52 destinations in north and central America with our partner American Airlines.

National Aviation Issues: White Paper

We have a bedrock of 65% market share in the domestic market, driven by the combination of our two-brand flying model and Australia's favourite loyalty program.



      

 



Together we are now working on joint commercial planning, joint sales and marketing, and more Frequent Flyer benefits. We're also looking at new opportunities to work with oneworld member elect, Malaysia Airlines particularly given its services to continental Europe including Istanbul, Rome and Amsterdam. This will be ideal for price-sensitive premium leisure passengers looking to come home to Qantas and start building up their Frequent Flyer points again. Santiago is the exciting hub city for booming South America, as well as an important destination for Australian business. Commencing in April next year, we will replace Buenos Aires with Santiago on our network, starting with three non-stop services per week. We will be working with LAN, Latin America's most dynamic airline, to provide great connections for customers and benefits to both companies. From April 2012, we will expand our partnership with British Airways. This will see the consolidation of our Qantas flights to London through Singapore on our A380s. We will also partner with British Airways to fly onwards from Bangkok and Hong Kong to London. This is part of our strategy to reduce loss-making, asset intensive flying, while continuing to provide great connections and Frequent Flyer points for travellers to the UK, and other destinations in Europe. Valuable Heathrow slots will be preserved for future access requirements. The Kangaroo Route and the Pacific Route are our iconic, flagship routes. We will have more of our award winning A380s on daily services to Los Angeles from Sydney and Melbourne, and on our daily service to London via Singapore from Sydney and Melbourne. Johannesburg will remain our gateway into the great game parks, beaches and business opportunities of Africa, and we will continue our strong relationship with South African Airways.

We are negotiating further opportunities to advance our 'gateway' strategy. This is all about being the best premium airline for the diverse, modern era of Australian international business and leisure travel. We cannot fly our own aircraft to every port, but we will get our passengers wherever they want to go across the globe, in comfort, style and ease, with the best frequencies and connections, and with more opportunities to earn and redeem Frequent Flyer points than ever before. Growing with Asia Now let me turn specifically to the most important region in the world for Australia and for Qantas: Asia. As a nation we used to fly over or via Asia, on our way to Europe. Now we fly to Asia, both for business and relaxation. And as Asian economies grow, the future will be about travel both to and within Asia.

Our customers want to do business in Asia and so do we. Whatever happens in financial markets over the coming weeks and months, one thing we know.

It is already the world's largest, fastest growing and most profitable aviation market. There is nowhere like it. It has massive untapped potential. We have an historic opportunity to position Australia's two great airline brands, Qantas and Jetstar, in Asia and create a platform for the future of our business. We need to act now because our competitors are circling the opportunities. There is probably only a brief window to establish a leading aviation position in the market. We want to be growing with Asia. We have already started with Jetstar. Our outstanding performance so far shows we have what it takes to succeed. Today I am delighted to confirm that the Qantas Group will be establishing a new low cost carrier in Japan in partnership with Japan Airlines and Mitsubishi. This is a major opportunity in a major market. It is, we think, the first joint venture partnership of its kind between an Australian company and two iconic Japanese brands. Jetstar Japan will launch domestic Japanese services by the end of next year, growing to a fleet of 24 aircraft over the first few years. International operations will commence within the first year, targeting key destinations in China and South East Asia. Here in Australia the Qantas Group has proven its ability to manage a premium airline and a low fares airlines within the same market, maintaining strong growth and profitability, and growing both brands simultaneously. This unique capability will now be maximised in Japan. Today Qantas and Jetstar fly to Tokyo and Osaka. Now, with Jetstar Japan, we will have a feeder network across the whole country, encouraging a boost to Japanese tourism to Australia and particularly Queensland. But it is absolutely clear that the future of Asia is not just about low-fares airline travel. I asked the Lowy Institute to take a look at the future shape of Asia. Within 20 years 16% of the world's middle class will be in East Asia. China may already have the world's fourth largest population of millionaires; and India the twelfth largest. Leisure tourism is ranked highly as a consumer experience by Asia's emerging middle classes.

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Asia will continue to play a larger part in the global economy and a bigger role in the world.

These are many, many millions of premium travellers in-waiting.

And we know that Chinese travellers rate prestige brands and safety as among their top travel priorities. Today I can confirm that Qantas intends to invest in a new premium airline based in Asia. This joint venture airline will have a new name, a new brand, new aircraft and an exciting new look and feel. The airline will not be called Qantas but it will leverage all our Qantas know-how, making the most of our excellence in brand management, aviation safety, customer experience, finance, marketing, and our valuable corporate customer relationships. We have narrowed down our location options and an announcement will be made when we have completed negotiations. I can also confirm that 11 A320 aircraft will initially provide the operating fleet for the new airline. We know from our research and from global experience that this popular aircraft type will enable more frequencies while offering a 21st century premium experience. For the first time in our history Qantas intends to fully participate in the benefits of an Asian aviation hub. We will be offering same day services to and within Asia, and overall frequencies to Asia from Australia will grow. We will be able to feed traffic into the new hub from Europe and Australia, and Asian ports. We see tremendous potential for our Qantas domestic and regional businesses, and for the Australian tourism sector, as we bring more premium Asian business and leisure visitors to our shores. Until now Qantas has been a 'home and away' business. Now we are making the transition to a regional and global business. This is how we will find new sources of revenue and profit and protect our interests at home, including many thousands of jobs. Best for global travellers We live in a world of more aviation choice than ever before for Australian travellers. For Qantas to succeed, we need to keep investing in what delights our customers and brings them back to us. We need to be the best airline for global travellers. That's why we are spending nearly $400 million on benefits for our Qantas International customers. By the end of this calendar year we will have 12 of our award-winning A380s in service.

Our people in Avalon are hard at work right now refitting nine Boeing 747s with the same A380 seats and interiors, including new Panasonic inflight entertainment systems.

By October next year 21 of our biggest aircraft will be the latest in style and comfort, with fully flat Skybeds, and 23 will be flying by the end of June 2014. Today I announce that we will be establishing Marc Newson First lounges in Los Angeles, Singapore and Hong Kong. We think they are the best First lounges in the world. And the combined size of our First and Business lounges in Los Angeles will be three times bigger than today. We are also rolling out our new Boeing 737 aircraft on our trans-Tasman services to offer better premium product, even as the competition retreats. Stage one of our international roll out of smarter faster check-in will soon be available for passengers travelling to New Zealand. We will keep improving our loyalty program. We've upped the benefits for the most valuable customers because we want to encourage them not to split their international travel between us and other airlines. Gold and Silver Frequent Flyers are being given more bonuses. Our deepening alliance relationships create more opportunities for all Frequent Flyers to earn and redeem points: Any Seat Redemptions with no less than 43 airlines and Classic Seat Redemptions with 26. From Alaska to Africa, from Istanbul to Hong Kong - our extended global network means that no matter how far you roam, you'll always find a Frequent Flyer Partner with which to earn and redeem Qantas points. That's a truly global proposition for premium globetrotters. A strong viable business All the plans I announce today are predicated on the need to create a strong and viable business and build long-term shareholder value. The right fleet plan is fundamental. Over the coming decade, our fleet strategy will deliver a simplified, highly flexible fleet of next generation aircraft capable of meeting our needs while driving down operating costs. Today I announce that Qantas has placed an order with Airbus for up to 110 new aircraft from the A320 family. This is a major investment in our future. Of this order, between 28 and 32 will be current generation A320s.

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The first of the upgraded 747s will be ready and flying within three months.

And we are delighted to announce that 78 will be next-generation A320neos, the most sought after aircraft on the planet, with about an 8% unit cost advantage over current A320s, with up to 15% lower fuel burn, up to 20% lower engine maintenance costs, and improved payload range capability. Over the period to 2020, this order will:     

Provide us with early access to the most popular aircraft in the world, with secure delivery slots on market-leading financial terms Provide 24 aircraft for the Jetstar Japan franchise, which means they will be funded off our balance sheet Of the 78 A320neos, approximately half will be for lease replacements, replacing older aircraft with more efficient, next-generation models The other half will support base growth in the existing Jetstar businesses, and provide flexibility for the later part of this decade. Provide eight aircraft to deploy in our planned new investment in a premium carrier in Asia, with up to three additional aircraft to come from the Group's existing fleet orders.

While the order is large in number, it is actually low on risk. It is a very prudent investment in the right fleet for the next decade. This order will give us a high degree of flexibility based on our lease/buy arrangements so that we can respond quickly to evolving markets and emerging opportunities. We have negotiated with Airbus to defer delivery of six of our 20 A380s by five to six years, so that numbers 15 through 20 will be delivered between 2018 and 2021, to line up with the retirement of the last B744ER aircraft in our fleet. This will significantly reduce the capital invested in the Qantas International business, as the deferred aircraft will replace our B744 aircraft to match our long-term fleet requirements at the end of the decade. This involves capital of $2.3 billion at list prices and by 2021 we will have completed the transition to a 21st century flagship fleet of our magnificent A380s. By working with our partners on our 'gateway' strategy we will be extending our reach on behalf of customers, while considerably improving the profitability of these routes. Four out of our fleet of 26 B744s will be retired this financial year. During this period Qantas will continue its tradition of prudent capital management. We are very well positioned to manage the current economic turbulence, to fund our program and to manage any future shocks. We will continue to review our portfolio and release capital from non-core assets and operations where appropriate. Our people Now to the impact of these changes on our people.

As a result of aircraft retirements, network changes and more efficient practices, approximately 1000 jobs will become redundant. The areas affected include management positions, pilots, cabin crew and engineering.

There's no doubt this is tough. But consistent with past practices, we expect the majority of these redundancies will be voluntary. We will certainly be looking to minimise the number of compulsory redundancies, and also to preserve links with skilled personnel. For example, some pilots will be offered leave without pay to take up a range of opportunities across the Group and in other companies.

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We will be providing full information on these matters to all our people and of course, we will be supporting all employees affected by these changes.

Appendix E Qantas Announces Profit Result, Response to Economic Conditions SYDNEY, 16 February 2012 Highlights: - Strong portfolio performance: - Continuing record results for Jetstar and Qantas Frequent Flyer. - Revenue growth of 6 per cent. - Yield and unit cost improvements. - Offset by industrial action and record high fuel costs. - Improvement in net operating cash flow of 5 per cent. - Strategic initiatives to transform Qantas International and grow Jetstar in Asia. The Qantas Group today announced underlying profit before tax of $202 million for the half-year ended 31 December 2011, a decrease of $215 million compared with the prior corresponding period. Statutory profit before tax was $58 million. The result reflects the $194 million financial impact of industrial action during the first half, as well as increased fuel costs compared with the prior corresponding period. Total fuel costs in the half were $2.2 billion, up $444 million (or 26 per cent). The Group also today outlined measures that respond to global economic conditions and the structural challenges facing Qantas, including the European finance crisis, the changing Australian economy and the need to increase efficiency and competitiveness. These steps will position the Group for a strong, sustainable future and build long-term shareholder value. They include a reduction in capital expenditure of $700 million over 2011/12 and 2012/13; a review of Qantas’ heavy maintenance footprint in Australia; and changes to Qantas’ catering and engineering operations. Qantas Chief Executive Officer Alan Joyce said the first-half result was a good performance in challenging circumstances. “The termination of industrial action on 31 October 2011 brought operational certainty for the Qantas Group, our customers and our shareholders,” Mr Joyce said. “While the impact of the dispute was severe, our portfolio of businesses once again demonstrated its resilience in difficult conditions. Improvements in operating cash flow, revenue, yield and unit costs, and record results for Jetstar and Qantas Frequent Flyer, helped offset the financial effect on the Group.” Qantas Chief Executive Officer Alan Joyce said the Group was taking decisive action to meet the challenges of the changing global economy and aviation industry. “We have a clear strategy for the future based on our strong domestic airline businesses, transforming Qantas International and other business areas, the continued growth of Qantas Frequent Flyer and growing Jetstar in Asia.

“With a volatile world economy, disciplined financial management remains vital. Today we have set out a package of initiatives appropriate both to the current conditions and our long-term goals.

Segment financial performance Qantas’ underlying EBIT in the first half was $66 million, compared with $165 million in the prior corresponding period. “Qantas was hit hard by industrial action,” Mr Joyce said. “However, by late November bookings had recovered well – particularly in the domestic market. Qantas’ on-time performance was the best of any major domestic airline in December and we have retained and grown major corporate accounts as well as winning important new business. Our brand and customer satisfaction ratings have improved significantly since the fleet grounding. “After the grounding we prioritised the timely compensation of affected passengers and a series of initiatives to restore customer confidence in the airline. These included free air fares for affected Australian residents, travel vouchers for affected international residents and a range of special offers for Qantas Frequent Flyer members and premium customers. “With QantasLink recently being named the world’s best regional airline by Air Transport World and Network Aviation increasing our presence in mining regions, Qantas is very well-positioned domestically. “We continue to work towards returning Qantas’ international performance to profitability in the short term. Our long-term goal is to ensure that the Qantas business - domestic and international combined - exceeds the cost of capital on a sustainable basis.” Jetstar achieved record underlying EBIT of $147 million, up $4 million on last year’s first-half earnings. “Jetstar continues to increase capacity both domestically and internationally,” Mr Joyce said. “As well as the ongoing growth of Singapore-based Jetstar Asia, Jetstar Japan passed a number of milestones as it moves towards commencing operations in July 2012. “This joint investment with Japan Airlines and Mitsubishi will deliver true lowcost air travel across the Japanese market and further expand the Jetstar franchise in the world’s fastest-growing region.” Qantas Frequent Flyer delivered normalised EBIT of $119 million (up from $107 million), continuing its strong contribution to Group earnings. “Qantas Frequent Flyer now has 8.3 million members and continues to add new ways of earning points through strong partner relationships,” Mr Joyce said. “The program is an outstanding asset for the Group and is fundamental to our customer relationships. External billings have grown 16 per cent to $600 million.”

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“At Qantas we know we must continue to adapt to the complex economic and competitive environment. That means taking hard decisions today to ensure that we can secure jobs and success for the future.”

Underlying EBIT for Qantas Freight was $38 million, down $3 million compared with the prior corresponding period. “Qantas Freight has been affected by high fuel costs and weaker demand across the cargo sector, resulting in loads declining,” Mr Joyce said. “However, a good performance in the domestic express freight market and increased contract revenue helped minimise the overall drop in earnings.” Response to global economic volatility and operational changes The European debt crisis and weaker global growth forecasts have resulted in a significant deterioration in the aviation operating environment. Fuel prices remain high and the Qantas Group faces pressure from strong competitor growth and cost disparity with competitors, in addition to the uncertain economic environment. While the Group’s financial position remains strong, with significant cash reserves and an investment-grade credit rating, this outlook requires disciplined financial management and a continued focus on maximising productivity. Capital expenditure in 2011/12 will be reduced from $2.5 billion to $2.3 billion and capital expenditure in 2012/13 will be reduced from $2.8 billion to $2.3 billion with further cuts to be identified in 2012/13. These savings will come from a range of initiatives including reductions in nonaircraft capital expenditure, the deferral of Boeing 787-800 deliveries because of manufacturer delays, a reduction in planned domestic capacity growth in line with long-term estimates and a capital-light model for any premium airline investment in Asia. Any further capital expenditure savings will come from appropriate changes to the Qantas Group fleet plan. The Group will continue to actively manage capital spend to support measured growth, manage the business in uncertain times and maintain an investment grade credit rating, and will review the potential for capital returns in the future in that context. The following network changes will be made in order to adjust capacity to market conditions and route performance: - Withdrawal from the Singapore-Mumbai and Auckland-Los Angeles routes, effective 6 May 2012. This is in addition to previously-announced withdrawals from the Hong Kong-London and Bangkok-London routes, effective March 2012. - Aircraft changes on the following international and domestic routes: SydneyBangkok (Boeing 747 replaced with Airbus A330 from 10 June), Sydney-Perth (Boeing 747 replaced with Airbus A330 on certain services from 6 May) and Melbourne-Perth (additional A330 services added from 6 May). - Capacity increases on the Los Angeles-New York route from 6 May (Airbus A330 replaced with Boeing 747) and Sydney-Tokyo route from 10 June (one Airbus A330 service per week replaced with a Boeing 747 service, resulting in daily Boeing 747 services). - Early retirement of two further Boeing 747 aircraft (in addition to the four early B747 retirements announced in August 2011). In addition, changes will be made in Qantas’ engineering and catering businesses to ensure that they meet the needs of the Group’s long-term strategy.

- 60-day pre-decision consultation process on Qantas’ Australian heavy maintenance footprint, to address declining work volumes resulting from new aircraft technology and work processes. - Changes to line maintenance processes with the introduction of a more tailored system for next-generation aircraft operating domestically. - Consolidation of a range of engineering functions for greater efficiency. Qantas’ catering business will consolidate to focus on four core facilities in Sydney, Melbourne, Brisbane and Perth, through the following actions. - Qantas will not invest in a new catering centre for Adelaide when the current facility’s lease expires in March 2013. Consultation will take place with employees and other stakeholders about future catering options in Adelaide. - Discussions on the potential sale of one of Qantas’ two Sydney catering centres (Riverside) and its Cairns catering centre. - Changes to work processes in Q Catering Brisbane ahead of the move to a new centre. The workforce planning team in Qantas’ airports department, currently dispersed around individual airports, will also largely be consolidated (in Sydney). Job reductions are expected as a result of aircraft retirements and operational changes. Qantas will provide maximum support to affected employees, including opportunities for redeployment, voluntary redundancy and external employment. Outlook The operating environment and economic outlook for the second half of 2011/12 remains challenging and volatile. Seasonal factors typically drive stronger revenue in the first half of the financial year compared with the second half of the year (ending 30 June). Following fare increases and fuel surcharges announced in February 2012, Group forward bookings continue to indicate higher yields in the second half of 2011/12 compared with the second half of 2010/11. The Group expects to increase capacity by 7 per cent in the second half of 2011/12 compared with the second half of 2010/11, while maintaining flexibility (equivalent to approximately 5 per cent after adjusting for the impact of natural disasters and the A380 grounding in second half of 2010/11). Underlying fuel costs are expected to increase by approximately $250 million from $1.95 billion in the second half of 2010/11 to approximately $2.2 billion in the second half of 2011/12, due to higher forward market jet fuel prices and increased flying. No Group profit guidance is provided at this time due to the high degree of volatility and uncertainty in global economic conditions, fuel prices and exchange rates, as well as the major transformational change agenda underway. Issued by Qantas Corporate Communication (5367) Email: qantasmedia@qantas.com.au

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A number of steps will be taken to help build a more competitive engineering operation and close the cost gap between Qantas and its competitors.

Appendix F British Airwaysâ&#x20AC;&#x2122; Promotional / Sales Periods Sale Club World and Club Europe Sale Business Class Flight Sale Business Class Flight Sale First and Club World Sale Worldwide Sale Luxury Flights and Holidays Sale The Late Escape The Great Big Sale 3-2-1 Europe Sale The Very Very Big Sale The Luxury Sale 3-2-1 Europe Sale 3-2-1 Beach Holidays Sale Big Sale. Small Crowds. 3-2-1 USA Holidays Sale Big Sale. Small Crowds. Holidays Going Going Gone 3-2-1 Autumn Break 3-2-1 USA City Break The Winter Blues Sale Goodbye Winter Sale Luxury Seat Sale

Date Started 21 Aug 2008 27 Feb 2009 05 Jun 2009 29 Oct 2009 27 Jan 2010 10 Jun 2010 01 Jul 2010 24 Aug 2010 28 Oct 2010 29 Dec 2010 10 Mar 2011 30 Mar 2011 31 May 2011 30 Jun 2011 02 Jul 2011 30 Jun 2011 25 Aug 2011 30 Aug 2011 13 Sep 2011 20 Oct 2011 22 Dec 2011 23 Feb 2012

Date Ended 24 Sep 2008 24 Mar 2009 30 Jun 2009 24 Nov 2009 09 Feb 2010 06 Jul 2010 20 Jul 2010 14 Sep 2010 31 Oct 2010 25 Jan 2011 22 Mar 2011 01 Apr 2011 02 Jun 2011 12 Jul 2011 04 Jun 2011 12 Jul 2011 20 Sep 2011 01 Sep 2011 15 Sep 2011 08 Nov 2011 19 Jan 2012 13 Mar 2012

Destination(s) Worldwide Worldwide Worldwide Worldwide Worldwide Worldwide Worldwide Worldwide Europe Worldwide Worldwide Europe Worldwide Worldwide USA Worldwide Worldwide Europe USA Worldwide Worldwide Worldwide

Appendix G

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‘Lean’: Continuous Improvement at British Airways

        

Appendix H Passengers Numbers on Qantas and BA (Nov 08 â&#x20AC;&#x201C; Jan 10)

Passengers Carried 4,500 4,000 3,500

'000s

3,000 2,500 2,000 1,500

Qantas

British Airways

Appendix I

Revenue Passenger Kilometres vs. Available Seat Kilometres 14,000 13,000

AU$m / ÂŁm

12,000 11,000 10,000 9,000 8,000 7,000

Qantas

British Airways

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Revenue Passenger Kilometres (RSKs) vs. Available Seat Kilometres (ASKs)

Glossary of Terms APD Air Passenger Duty (APD) is a tax imposed by the UK Government on flights departing from the UK.

ASK Available Seat Kilometres (ASK) measures an airline's passenger carrying capacity.

EBIT Earnings before Interest and Tax (EBIT) are considered a reasonable representation of the adjusted earnings of a business available to a business owner after all costs and operation expenses as well as reasonable commercial wages for the owners contribution to the business.

JBA Joint Business Agreement (JBA) is an agreement to share revenue and reduce costs, co-ordinate networks and schedules, and co-operate commercially on a specific sector or route, which allows the airlines to expand their global cooperation.

RSK Revenue Passenger Kilometres (RPK) is a measure of the volume of passengers carried by an airline.

APD

Air Passenger Duty

ASK

Available Seat Kilometres

Australia

AU$

Australian Dollars

British Airways

EBIT

Earnings Before Interest and Tax

European Union

GBP

British Pounds

HS2

High-Speed Rail Link 2

IATA

International Air Transport Association

JBA

Joint Business Agreement

QBN

Qantas Business [Account] Number

RSK

Revenue Seat Kilometres

United Kingdom

USA

United States of America

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Acronyms and Abbreviations