Qantas’ Dixon: Life in aviation is never dull

It is a great pleasure to be here. I cannot think of a better place than the National Aviation Press Club to reflect on recent aviation developments, and to consider what lies ahead.
One thing all of us know: life in aviation is never dull.

Take the roller coaster ride of the past 12 months. At Qantas this time last year, we were about to announce a profit before tax of $671 million - a 26 per cent drop on the previous year.

We were disappointed because the A380 had been delayed.

Jetstar was, at that stage, purely a short haul carrier. While the environment had always been a focus for us, it was certainly not a ‘barbecue stopper’ in the community. Our share price was hovering around $3.50 - and we were wondering what it would take to get the markets to rate us higher.

Today the aviation industry globally is recovering from its long slump. Passenger numbers are up, revenue has increased, costs have been reduced, and some industry consolidation is underway. Our annual results will be released on August 16 and, as previously flagged to the market, we are expecting to announce a strong profit. There is tremendous interest in the environmental performance of airlines and the value of our strong early commitment to fuel-efficient new fleet is now very clear. Jetstar has taken off as an international carrier.

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We have just unveiled an extensive range of new products.

And in the middle of it all there was the takeover bid by Airline Partners Australia. The bid lapsed, but today the Qantas share price is fluctuating around a much healthier $5.70 in fact, markets around the world appear to have reconsidered the value inherent in aviation stocks following the private equity play.

So it is a very different industry dynamic to even a year ago, and there is every reason to believe that the fast and furious pace of change will continue.

In fact, we seem to be entering a new growth paradigm.

And I mean serious growth. It is not often that a market quickly doubles in size, but air traffic globally is predicted to do this from its current 2.2 billion passengers in the next 15 years. For the first time in history, the aviation industry’s centre of gravity is shifting to Asia…. Within the next three years, the Asia Pacific will be the largest single market, focused around China and India.

This is an historic opportunity for Qantas. We have a small timeslot - just a few years I imagine - to make ourselves an indispensable part of this growth story.

So how is Qantas going to respond to the huge opportunities - and very real challenges - presented by such developments?

Well, we are certainly ready. We have two exceptional flying brands in Qantas and Jetstar. We are investing in new-generation aircraft and product. And we are working all of our assets harder and smarter than ever.

Let me start with our two brand flying strategy. With these two brands we now have an incredibly strong combination that enables us to serve customers right across the spectrum and to adapt quickly to changes in customer preferences - an important advantage as competition from new and established players heats up. No other legacy airline group has managed this as successfully as Qantas.

This view was reinforced this week when the world’s largest air passenger survey “Skytrax” named Jetstar “best low cost airline in the world for 2006/07” - a magnificent achievement for an airline just over three years old. Qantas was named # 5 airline in the world….. And is one of only two airlines to be in the top five airlines in the “Skytrax” survey for five years in a row!

Two airlines, one only three years old, one 87 years young, both up there with the world’s best.

Qantas, internationally, domestically and regionally, is performing strongly and customer satisfaction ratings are very high. With the introduction of new fleet, new interiors, new lounges and new processes to make the travel experience quicker and easier, we are upgrading the journey for our customers at every step. In fact, we are set to redefine premium.

From a standing start just three years ago, Jetstar has been an enormous success, well established domestically and now taking off on international routes. Again customer satisfaction is very high. In the recent “Skytrax” awards, Jetstar was not only named best low cost carrier in the world, ahead of major airlines such as Easy Jet, but also collected a customer service award for having the best cabin crew in our region.

So Jetstar brings together excellent customer service, new aircraft with exceptional low costs and an airline vehicle that makes favourable returns on the cost of capital invested in it…. Jetstar’s operating profit before tax is now over $100 million annually.

But let me be clear, we certainly do not underestimate the competitive challenges we face. Domestically the Qantas Group confronts Tiger and Virgin….. And here we will compete aggressively to protect our market share. We have drawn the line in the domestic sand at 65 per cent and we will defend it. Internationally we also face new levels of competition with Virgin next year coming on the Pacific, one of our most profitable routes, although I must say not as profitable as most commentators seem to think! Just for the record, the U.S./Australia route does not contribute 30 per cent of our profits, the figure is, in reality, less than 15 per cent.

Nevertheless we will aggressively defend our position on this key route. We have never been complacent about our position in the marketplace. We are about to face a new round of competitive challenges and we will be vigorous combatants.

Meanwhile we can never take our eye off the long-term opportunities. Jetstar is going to be the key vehicle for Qantas’ plans in Asia, a market where the new paradigm is most obvious and where we must find new ways to grow.

Jetstar will work closely with our Asia-based investment partners, the Singapore-based low cost intra-Asia airlines Jetstar Asia and Valuair, and Pacific Airlines in Vietnam’s fast growing aviation market of 85 million people. We are looking to take advantage of other attractive opportunities for growth in Asia - organically, via acquisitions, or through partnerships - to ensure we merit a chapter in what will undoubtedly be the biggest aviation story of the next 20 years.

And, of course, both Qantas and Jetstar will benefit from the A380s and B787s coming into service from August next year. I expect everyone here can imagine the excitement we are feeling at Qantas…... there has not been anything like this since the jumbos first came on stream in the early ‘70s.

Last week we unveiled our interiors for the A380s. We have had the best people in the world design the world’s best airline fit-out. We are going to have the finest in-flight communication and entertainment system ever created.

Outstanding first and business class travel with comfortable beds and private lounges. And a new premium economy class, with a dedicated check-in area which will also be rolled out across our Boeing 747-400 fleet from early next year.

Jetstar will be Australia’s launch airline for the B787s, with the Qantas Group set to be the world’s biggest owner of the world’s newest aircraft, with firm orders for 65 and options and purchase rights on a further 50. We were wise to get in early - demand for this plane is so high that any airline ordering now will not take delivery until 2013.

Since 2000, Qantas has spent $12.6 billion on new aircraft, with an additional $25 billion on order.

I can think of no other company in Australia that is investing to this extent - nor can I think of any other non-government airline with such an investment profile!

For the record, the Qantas Group currently has 213 aircraft and a further 126 on order to serve new destinations, cater for growth and to replace older aircraft.

We also have many other valuable assets apart from aircraft.

Our frequent flyer program has five million members, is a critical driver of customer loyalty to Qantas, and is Australia’s leading loyalty program. We plan to develop it further by:

* Broadening loyalty ‘earn and redeem’ partners;

* Offering ‘any-seat’ redemption;

* Introducing a Jetstar loyalty program;

* Strengthening consumer analysis capabilities; and

* Reviewing ownership options.

Freight is a major opportunity with average annual growth likely to be at least five per cent globally in the next few years, and higher than that here in the asia pacific. We are busy finding new ways to create an integrated freight and logistics company, which will include developing our footprint in Asia, where we recently made a small strategic acquisition; and we are evaluating intra-Asian air freight opportunities with Pacific airlines and Jetstar Asia.

We are establishing an Australia-based flight training business, to be up and running by the end of this year, and which we expect will train 3,000 pilots over ten years for all our airlines. We will also look at opportunities to cater to the needs of the broader aviation industry, allowing us to leverage the expertise - and prestige - that Qantas has in pilot training.

We are looking at creative ways to maximise the value of our fleet. This could involve alternative ownership structures, but implementation will not happen overnight. We will take our time to get it right. We are also undertaking a capital management review to enable us to better align our capital management strategies with our corporate strategies, and the legitimate expectations of our investors.

We have recognised for some time the benefits in segmenting our businesses and, indeed, first flagged our intentions in this area as far back as 2003. This has been a work in progress, albeit a process accelerated by the APA bid, and we remain confident that there is significant further value to be unlocked in Qantas over the next 18 months by continuing this process.

Underpinning all this activity is our ongoing commitment to lowering costs - an issue which is central to our continued growth. We are on track to meet our target of $3 billion of benefits under our sustainable future program by the middle of next year. This is good, but we need to keep improving.

One thing that will always be a priority for us is the Qantas commitment to Australia.

For 87 years our company has maintained a special compact with the Australian community. This has meant providing extensive financial, operational and people resources in times of crisis, such as the bali bombings and the Asian tsunami. It has meant supporting, year in and year out, large and small charitable, cultural and sporting organisations.

This commitment is backed by our people who, in a time of incredible change, have served Australian travellers with tremendous loyalty, dedication and good humour. They have made it possible for our company to develop…. It is always exciting to talk about things like new fleet and new products, but in the end I know it is our people who are central to the strength of our business.

Importantly, I believe the company has returned that loyalty.

Since 1999 we have created over 7,000 jobs, and we are one of the largest employers of apprentices in the country. Our plans for growth and initiatives such as the flight training programs I just mentioned will create more jobs, and interesting and exciting careers for young Australians.

Despite what some may think, we have made significant compromises in restructuring our various businesses to keep jobs in Australia. To further this process we need the continued understanding of our people, and the unions that represent them, to ensure we have the flexibility to adapt to whatever opportunities and challenges the world of aviation throws up at us - and there will be plenty of those in the next few years.

We are already confronting increased competition in the Australian domestic market. We will face new international airlines on some of our most important routes. And we will be challenged by massive capacity increases by the ambitious Middle Eastern carriers.

Consolidation, also, is becoming more important as airlines in Europe, the US and Asia strive for the scale and economies to compete in a growth paradigm. The recently concluded open skies agreement between the US and European Union has the potential to lead to further consolidation within those regions, which means that Qantas will be competing with stronger, larger airlines in some of our most important markets. So we are well aware that the strategic and competitive challenges will be significant for us.

I would like to mention three other major issues that confront all airlines in the world today.

Firstly, fuel.

The cost of aviation fuel is a continuing and very complex challenge for Qantas. In the past week the price of crude oil has again tested last year’s highs of around us$78 per barrel.

Refining margins also remain expensive. At current prices, and after hedging, our fuel bill for 2007/08 will be approximately $300 million higher than 2006/07, having risen by approximately $500 million between 2005/06 and 2006/07. Today we are announcing an increase in our international fuel surcharge effective 9 August, which - as you know - other carriers have already done.

Another big challenge is security, which is brought back into the spotlight again and again courtesy of terrorist activities such as last year’s plan to blow up aircraft over theAtlantic, and this year’s attack on Glasgow airport.

The goal for global aviation is to ensure that security measures are genuinely effective, that they are consistent worldwide, that they are implemented according to sensible risk assessments, and that they do not confuse the travelling public.

For example, the recent requirements regarding liquids, aerosols and gels were implemented very quickly in Europe and North America after the foiled terrorist attempt in London last year - but different timetables and varied rules country by country managed to bewilder most international travellers.

We believe in a strong and pro-active security culture. But we also believe in a pro-active review process - that is we should come back to the security measures that are in place and question them on a regular basis. As security becomes increasingly important and increasingly complex, we need to look for new ways of managing it, understanding that security and facilitation are inseparable and cannot be looked at in isolation.

The third major challenge is the environment, specifically, the effect of greenhouse gas emissions. Aviation contributes between two to three percent of CO2 emissions globally, but generates 8 per cent of global activity. Qantas has always strived to be environmentally sensitive, and we are actively looking for ways to reduce our consumption of carbon-based fuels - for us it makes essential business sense, and good social sense as well.

Our fuel conservation program has already delivered annual savings of 240,000 tonnes of CO2 and is on track to deliver savings of 340,000 tonnes by June 2008 - the equivalent of 80,000 fewer vehicles on Australian roads.

Our investments in the A380s and the B787s will be significant contributions to the environment in terms of reduced fuel-burn and noise emissions.

We will shortly launch a carbon offset program to allow passengers to offset their flight-related CO2 emissions. We will also achieve a significant milestone this week, with the Australian greenhouse office awarding Qantas “greenhouse friendly” accreditation. We are engaged in discussions about emissions trading schemes here and abroad, with a focus on finding a solution that is viable for the aviation industry.

And we are now working on a range of further greenhouse and conservation measures with a target of saving of two million tonnes of CO2 by 2011.

So let me conclude.

If the past year is anything to go by, the future at Qantas is all about managing dynamic growth and dramatic change. It is about coping with the reshaping of the parameters of the global industry. This is a very positive outlook in many respects, but it does not make life at Qantas any easier. Nor should it!
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