Thursday, August 20, 2015

The Qantas Pivot Begins

The airline industry is a difficult assumption made on future outcomes. It's difficult to see what will happen in the works ten years down the road. One thing is certain, Qantas has traveled the journey in a wide swinging effort with little to show for its effort. Back in the early day of the 787 program, Qantas was Boeing's bragging point when it ordered so many 787's with its duo fleet expansions and replacements. JetStar being its economy fleet and Qantas its premium fleet excited the Boeing community across the board. They ordered massively beyond its ability to induct new airplanes into its fleet. The great recession hit firmly into the core of Qantas plans during 2008. Qantas knew more than everybody else they were in trouble with its expansion plans using the 787.

What Happened via ATW:

"787-9. Courtesy, Boeing Citing lower international growth requirements in an “uncertain global context,” Qantas (QF) has canceled firm commitments for 35 Boeing 787-9s and posted its first full-year loss since 1995. QF will retain 50 787-9 options and purchase rights, available for delivery from 2016. The Australian carrier said there were no changes to its order for 15 787-8s, the first of which is scheduled for delivery in the second half of 2013. The 787-9 ..."

Stage one brought forward a downsize decision ordering  14 JetStar 787-8 greatly reducing its optimistic vision for a vast economy fleet of 787. They even inserted 334 seats on it's firmed up remaining -8's, it held on to as confirmed. Thirty five 787-9 gone from 2012 elimination and a book mark held for a future fifty.

Stage two required another phone call to Boeing from Qantas saying you know those 50 787-9 we confirmed at the outset, well Qantas now needs 20 of the fifty optioned and 30 more with ordering rights. Whatever that means. It asked for a reservation for thirty in the future with some price guarantees, but no production slot guarantee. Only the first 20 options will have production slot guarantees, only if they confirm orders in the option group by set dates.

Qantas had its work cut out for them by turning its airline processes into a profitable and efficient business. They needed to trim routes, and turn maintenance operations into an efficient arm of Qantas. Arrange for wages to align with the goal of becoming profitable through lower operational costs. Basically it was an "All hands on Deck" call out for its whole operation, because it was in trouble with its competition, and it was slowly losing regional market. The 787 a perceived savior for Qantas was then out of its financial reach for any hope of rescue. The airline had to turn itself around without the presences of the 787 doing the trick.

Qantas had one card up its sleeve, it was JetStar. They could buy 787's within its operational scope. They had A-330's which could move to Qantas as soon as the 787 would arrive. While Qantas was shaking up its operations towards profitability, JetStar had Qantas blind spot protected with an immediate fleet renewal plan and flexibility to insert 787-8's into its fleet. A profitable operation was awaiting execution of a plan.

The pivot comes when Alan Joyce reports the long endured plan had come together for Qantas. It was making a $Billion from efficiency changes in its organization. It was maximizing the service ages of its 747 fleet, where some would be ready for replacement starting in 2017. Alan Joyce knew he didn't need a commitment of 50 787-9 back in 2008, but with a new five year plan for Qantas it would need the 787-9 in staged groups. He had a staged group of twenty in the option bucket with production slots guaranteed for Qantas. The pivot came during the last financial reporting. Jetstar was stable with its 787-8 fleet at ten units. Qantas could steal three 787-8's of the four remaining undelivered from Jetstar's backlog. They did that little thing while calling up Boeing, and said,

"let's do a 787-9 deal using three 787-8 slots from Jetstar, and turning those old orders into new 787-9's for Qantas."

Boeing said politely "we are listening"!

Qantas said, "by the way you know those 20 we have on option? Qantas would like a commitment for five out of that pot including its respective production slots. In total we need 8 787-9's during 2017-2018 production season.

Qantas Pivot Demonstrated on chalk Board
Image result for Math scribbling on chalkboard

Qantas then goes deep with Boeing and suggest to them, you made us happy standing by our former bumbling, and we're going to say a lot of nice things about the 787-9 in our fleet. Furthermore, the eight we have just committed to through this phone call is more than an eight only order. By next year we will have a clear financial picture etched in Ayers Rock, and Qantas will clean up all its loose ends for the future. It is a hint, the remaining 15 787-9's that are in the options languishing will turn into confirmed orders, and the 30 on open reservation will fill some production slots assigned as soon they become actual intents or options. We may even restore the 35 787-9's we dropped in 2012. By now my math mind is troubled. Cogent thinking is lost and a formerly lucid Qantas hits low visibility. Good thing Boeing has a super computer to sort this out.

Boeing responds, "Okay".

Summary: Qantas "had" 35 confirmed and 50 in the optionish mode. My question to Alan Joyce of Qantas, "You had planned for about 85, 787-9's in the beginning, do you still see that number if Qantas has another year like 2015 during 2016?

So far Alan (Joyce) has not returned my phone calls, messages and texting. Who am I, chopped Liver? I've got no answer on that question either! Remember, I just may fly to Australia, keeping that in mind, considering my awesome leverage I have over the industry.