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Rural and Regional Affairs and Transport Legislation Committee
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Rural and Regional Affairs and Transport Legislation Committee
CHAIR (Senator Sterle)
Abetz, Sen Eric
Xenophon, Sen Nick
Heffernan, Sen Bill
Gallacher, Sen Alex
Edwards, Sen Sean
Joyce, Sen Barnaby
Williams, Sen John
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Content WindowRural and Regional Affairs and Transport Legislation Committee - 06/02/2012
BUCHANAN, Mr Bruce Eaton, Chief Executive Officer, Jetstar Group
JOYCE, Mr Alan, Chief Executive Officer, Qantas Airways Limited
JOHNSON, Mr Brett Stuart, Qantas Airways Limited
Committee met at 08:33
CHAIR ( Senator Sterle ): I declare open this public hearing of the Rural Affairs and Transport Legislation Committee. The committee is hearing evidence on the committee's inquiry into the Air Navigation and Civil Aviation Amendment (Aircraft Crew) Bill 2011 and the Qantas Sale Amendment (Still Call Australia Home) Bill 2011. I welcome everyone here today. This is a public hearing and a Hansard transcript of the proceedings is being made. Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee. Such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public, but under the Senate's resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may of course also be made at any other time. I would also ask witnesses to remain behind for a few minutes at the conclusion of their evidence in case the Hansard staff need to clarify any terms or references. I remind people in the hearing room to ensure that their mobile phones are either turned off, Senator Heffernan, or switched to silent.
Finally, on behalf on the committee, I would like to thank Mr Joyce, Mr Buchanan and Mr Johnson for their cooperation with this inquiry. I welcome Mr Joyce, Mr Buchanan and all representatives of the Qantas group. You have lodged submission 2 with the committee. Would you like to make any amendments or additions to your submission.
Mr Joyce : No.
CHAIR: I invite you to make a brief opening statement and then the committee will ask questions.
Mr Joyce : Thank you for the opportunity to be here again today. As you know, I appeared before the committee on 4 November last year. I took more than three hours of your questions, and since then the Qantas group has answered more than 20 questions on notice. We have also responded to more than 200 supplementary questions. And just a week ago we received yet more amendments to the bill and we responded to them too. We have been very rigorous in responding to all that this committee has put to us. We have endured examination based on politics rather than policy. We have done so for one reason: we have grave fears for the future of Qantas if these legislation proposals come into effect. We want our position clearly understood and on the record because history will judge. The legislation proposed would constitute a major threat to our business, to Australian jobs in the cities and the regions, to investment and to growth.
I want to make three points before taking your questions. First, the Qantas Sale Act amendments go way beyond the original aims of the legislation and would strangle our capacity to run our business. We all know that the primary purpose of the Qantas Sale Act was to ensure that Qantas remained a majority owned Australian flag carrier while pursuing its strategy as a non-government company running its own business and answering to its shareholders. That outcome meant Australian taxpayers had all the benefits of a national airline without bearing the cost. Nothing Qantas is doing is in contradiction of the spirit or the intent of the act. The government has recently confirmed this. We continue to work hard to secure a viable future for our business, deliver sustainable returns to our shareholders and fly the flag for Australian jobs and success. These amendments would not increase protection for Qantas, they would not make us more Australian, they would not save or grow Australian jobs: they would have the opposite effect.
Senator Xenophon's most recently proposed amendments would have serious and, I assume, unintended consequences. To take just one example, he wishes to require that a Qantas group airline such as Jetstar conduct a majority of its heavy maintenance in Australia. Jetstar would then be confronting competitors who enjoy a lower-cost base by doing virtually none of the heavy maintenance here in Australia. Those of us running Qantas would then have a choice: allow Jetstar to fail within the confines of the Qantas Sale Act or sell it to allow it to succeed outside of the act. This is a simple statement of the dilemma this legislation would construct. These amendments in total, from the make-up of the Qantas board to the location of our flight training, would apply intrusions and restrictions on the Qantas group airlines that do not apply to our competitors. If Australians want a truly competitive national carrier, this parliament cannot tie up Qantas in this way. You would be responsible for making Qantas less competitive just when we most need the freedom to compete. This is not a controversial view. The Secretary of the Department of Infrastructure and Transport, Mr Mike Mrdak told you himself that, 'Australian airlines need to continue to have flexibility to adapt their business strategies to the changing market circumstances'. He said: 'the two bills being considered by the committee raise significant issues for the operations of all Australian airlines and their ability to compete internationally.'
Let me turn to my second point, which relates to the compliance impact of the Qantas Sale Act amendments and the cabin crew bill. I note that this is the standing committee on rural affairs as well as transport, but the amendments to the cabin crew bill would not preserve Australian jobs; they would destroy them, especially in regional Australia. As you know, for many years now, we have had a liberalised aviation sector with domestic open skies here in Australia, but this has not led to new or sustained international air services by foreign carriers to many of our regional centres. The fact is the Qantas Group network remains critical to maintaining and growing those direct services. That means, as a business, we need to be strong and profitable to retain sufficient scale in our regional, national and international networks.
Whenever Qantas Group airlines use foreign crew and Australian crew on the same flights, Australian crew operate under Australian wages and conditions and foreign based crews on the terms and conditions of the domicile country where they are employed and where they live. This is standard practice adopted by airlines all over the world. There are a limited number of routes where this occurs within Australia. We call them tag flights, involving a domestic sector of an international flight primarily services Australian regional destinations. These tag flights enable us to service regional destinations in Australia such as Cairns and Darwin. If the amendments are passed and the international crews will be treated as Australians in terms of wages and conditions on domestic legs of international flights, we will no longer be able to viably operate those international services. The proposed amendments would quite simply force the Qantas Group to withdraw services connecting Darwin and Cairns to tourism and trade markets in Asia and in Europe. The impact on regional tourism and development would be immediate and negative. It would result in loss of employment and investment in regional Australia with flow-on effects for the rural communities who rely on these services in regional centres. Strangling our international business and forcing us to pay uncompetitive wages compared to our foreign airline competition is no way to make us stronger, better or more Australian.
The third point I want to make is that we need to be aware of the global and national realities that frame our times. We confront very serious global economic challenges in Europe and the United States. We have a warning of deep downturns from the IMF and the World Bank, and we see daily news of more job losses here in Australia. The reality is simple: we must adapt or die. As Qantas we want to adapt. We must adapt if we are to survive. We are working very hard to make this company fit, productive and competitive so that we can continue to employ many thousands of Australians, provide great aviation services to our customers and play a vital role in regional and rural Australia.
The amendments that this inquiry was set up to examine, if passed, would force the Qantas Group to reduce and withdraw services and I want it clearly understood that the certain consequence of these bills would be job losses and reduced aviation access. Every state in Australia would be affected. Measures targeted at lowering our competitiveness, closing us off from global markets and raising our cost base are not patriotic, nor are they smart. Frankly, they are unworkable. Qantas is committed to Australia, to employing Australians and to growing and investing in Australia. We cannot be constrained by misguided legislation that will achieve precisely the opposite of these aims. Thank you.
CHAIR: Thank you, Mr Joyce. I appreciate that you came back with 20-odd answers to questions on notice, and then there were another 200, which you mentioned in your opening statement. In terms of the questions relating to the number of rooms booked overseas prior to the announcement of the lockout and shutdown of the airline, you would not provide us with the cost of those rooms, I think citing commercial-in-confidence. After four months, where is the commercial-in-confidence and can you provide that figure for us?
Mr Joyce : We have a deal with brokers both internationally and domestically, and the deal on what we buy hotel rooms for is commercial-in-confidence with those brokers. The fundamental basis of your question, which I think we did answer, was when the hotel rooms were actually booked in relation to the 2,800 hotel rooms in Los Angeles in Singapore. We were very clear in our answers—those bookings were made at 5.20, after the announcement of the grounding of the airline. For the international bookings, a call was made to a broker, and at 5.30 the domestic hotels were booked. In relation to the initial point, we have been very clear that both of those bookings were made after the grounding. In terms of purchasing hotel rooms, all of our commercial purchasing power terms are commercial-in-confidence and we do have contracts to keep them commercial-in-confidence.
CHAIR: What we can do, Mr Joyce, for the benefit of the committee, is seek answers to our questions in camera.
Mr Joyce : We obviously have to keep our commercial-in-confidence contract requirements with the purchasing of these hotel rooms but if you want to go into camera later on for us to obtain the information, if you regard it as that important, we will give you the information.
CHAIR: I am not assuming that you want to do more in camera but we will have that opportunity towards the end of the meeting. It is up to me to manage the time to do that.
Senator ABETZ: Chair, we may well discuss this at a private meeting, but the issue at the hearings was when the hotel rooms were booked. The actual cost of the hotel rooms, as I understand it, is quite irrelevant to the issue at hand because the issue at hand is whether Qantas booked these rooms before the announcement. That was the big issue at stake, not how much they paid for each room.
CHAIR: Your point is?
Senator ABETZ: Why are you seeking to put the committee into a private session to determine what the price of the rooms was when there is, from what I can gather, no dispute as to the actual time the rooms were booked?
CHAIR: Because that was a question from the committee at a previous hearing, and we wish to seek the answer. What you have said is noted. If you have a drama and you and your mates on that side want to have a private meeting, I will facilitate a private meeting.
Senator ABETZ: Thank you.
CHAIR: Mr Joyce, your decision to immediately ground the fleet on 29 October was based upon what you referred to as an increased risk profile and the introduction of new human risk factors. Were you concerned that Qantas employees would have been a risk to the business?
Mr Joyce : No—again, in the last session we covered this in great detail. I am happy to go through it again if you wish. We will go through the reason for the grounding. As I mentioned in the last session, we believed that we had three alternatives available to us. We had the alternative of keeping on operating the way we were before the grounding, which was death by a thousand cuts. That was going to put the organisation under severe pressure; it was going to continue for months, if not years, as one of the union leaders said. We had the option of a lockout action and, as a consequence of that option, grounding the airline, and we had the option of conceding to the unions. As I said previously, the option of conceding to unions, in my view, would have put the organisation at extreme financial risk. It would have meant over a period of time that Qantas would not be financially viable, it would not be able to operate competitively in the global environment in which we are faced. So we made the decision to bring the action to an end by conducting a lockout. The risk assessment that then took place once we decided to do the lockout was to ask when was the appropriate time to ground the airline. Given the issues around potential distractions by having a period of time between the announcement of the lockout and the grounding of the airline, it was felt that that was a risk that we were not willing to accept.
As I said in my previous testimony, we take a conservative view on all of these items. We were the only airline that grounded the A380s when the engine explosion happened over a year ago. We were the first airline to ground our fleet when the volcanic ash had an impact on us. This was not about us assuming that anything malicious was going to occur; this was us worrying about distractions that could be caused with the announcement taking place—the longer we left the grounding, the longer the time between the grounding and the lockout and the greater the risk. We decided not to accept that risk and to minimise it, and that is why we grounded the airline when we made the announcement of the lockout.
CHAIR: When you grounded the airline, was there any discussion with CASA prior to the announcement?
Mr Joyce : There were discussions with CASA on the ongoing issues that we were facing as an airline. We did talk to CASA before the public announcement about the grounding. We did talk to CASA about the reinstatement of the airline on the Monday before it was put back in the air. We did go through the safety cases of putting the airline back in the air. There was a lot of dialogue with CASA through this period.
CHAIR: So CASA had to give the all clear—is that correct?
Mr Joyce : No. For grounding the airline, CASA does not have to give the all clear. For putting the airline back in the air, CASA does have to give the all clear.
CHAIR: Okay. When did that happen?
Mr Joyce : On the Monday when the airline was reinstated. The order in which it occurred is that, I believe, over the Sunday night and into the early hours of the morning, Fair Work Australia made its determination to terminate the bargaining period between all three agreements, and then on Monday morning we made the announcement that we were going to put the airline back in the air as a consequence of that action being terminated and our action being terminated as well. We then had to go to CASA, sit down with them with a safety case and say why it was safe to put the airline back into operation. I believe that some time in the afternoon on Monday, CASA approved that reinstatement and by two or three o'clock, we had the airline operating again.
Senator XENOPHON: Thank you, Mr Joyce, for your opening statement and for your fourth appearance before this committee. You said that these amendments would strangle international business and that there would be significant flow-on effects, particularly in relation to foreign cabin crew being paid Australian rates. What percentage of the costs of operating an airline relate to cabin crew—not pilots but actual flight attendants?
Mr Joyce : Off the top of my head, I am going to have to take that on notice. Total payroll represents 26 per cent of the cost base of the airline. Last year, it was the highest component of our cost base for the group.
Senator XENOPHON: But for actual cabin crew, I put to you that it would be one, two or three per cent?
Mr Joyce : I think for an airline to be competitive, it has to be competitive in every area. We cannot have significant disadvantages in any one area. The proposal of these bills does not just affect cabin crew; it would affect maintenance, which is a big component of our cost. It would affect flight operations. It would affect a large element of airline's cost base.
Senator XENOPHON: I am surprised that you are not aware of what percentage of cost the Qantas group cabin crew are.
Mr Joyce : We know the overall statistics on it. This is a big company and there is a whole series of individual costs that make up the cost base. I am here answering 200 questions on notice—huge amounts of questions about the business—
Senator XENOPHON: No, I am only asking you one question—
Mr Joyce : I know, and you could pick on one particular item. We will take the question on notice. I think it is fair enough to take the question on notice. For detailed questions like that, you would expect us to take it on notice.
Senator XENOPHON: I think Senator Gallacher just gave you a compliment, saying you were a mathematician by training—
Mr Joyce : That is fair. I do not know the answer to that question. I am happy enough to take it on notice. If you want to make a big deal out of it, that is up to you.
Senator XENOPHON: No, I am not making a big deal about anything; I am asking you this because you said there would be dire consequences if cabin crew who fly on domestic routes are paid Australian wages and conditions.
Mr Joyce : A couple of things there. First of all, we are talking about the significant impact this legislation would have on our operation. Our operation does not just cover cabin crew; it covers a huge amount of the cost base. I think it is fair to say this would cover them. I will ask Bruce to talk about the implications for Jetstar because he knows the implications. We have done the numbers about what it would mean in terms of the Darwin and the Cairns cost base, and it would add over $3 million in costs for Darwin and Cairns just for the cabin crew alone, routes that are already unprofitable regional centres. It would add a burden on those routes which would make them uneconomic for us to continue. The impact will be quite severe. I might ask Bruce to comment on the detail.
Mr Buchanan : Let me provide some colour on this. What we are talking about are the tag flights. Ninety per cent of the Jetstar tag flights relate to Darwin, which is primarily where the tag flights operate. At the last Senate inquiry, I was asked a question about what constitutes a cost base of both cabin crew and tech crew, and I think I said, 'Somewhere in the order of 17 or 18 per cent of Jetstar's cost.' That is just two labour groups. Cabin crew are by far the largest labour group in our organisation and they probably constitute about 10 per cent. You are talking about operations in our business that are the least profitable in our domestic operations. The Darwin route group is the least profitable and the most marginal, and you are talking about a business that makes a margin somewhere in the high single digits. So something that does impact 10 per cent of the cost base is a significant impact on the economics of that route.
Senator XENOPHON: Thank you for clarifying that. Can I go to an article by Steve Creedy in the Australian on 4 February headed 'Jetstar puts cap on domestic routes its foreign crews can fly.' I understand that that relates to a Fair Work Australia investigation into the use of foreign cabin crews—is that correct? Is that a fair summary?
Mr Buchanan : It is a Fair Work Ombudsman investigation and there are two of them going on which we talked about at the last hearing. Those two investigations are still ongoing—one into cadets and one into cabin crew.
Senator XENOPHON: As a result of that investigation there now been changes in terms of the number of domestic sectors on international services foreign based crew can fly—is that correct
Mr Buchanan : That is correct.
Senator XENOPHON: So there has been a change since the last time you were here in the way foreign crew are rostered on those flights?
Mr Buchanan : I can provide a little more detail on the way it works. We have a number of restrictions that we place on our rostering practices for international crew. As you would imagine, primarily it is all the labour agreements and all the fatigue things that we have talked about where all the rostering limitations apply. We also have two other limitations, one of which is an international flight number limitation. So international crew can only work on international flight numbers. In addition, they have to comply with the visa rules, which is a 30-day requirement for them to leave the country.
CHAIR: Sorry to interrupt, the media are in the room. Mr Joyce, do you have any objections? You seem to be very photogenic when you are in this building! They are not looking at us; they are looking at you.
Mr Joyce : So it is not in real life that I am photogenic. I thought it was both in real life and on the cameras!
CHAIR: Mr Joyce, take this as a compliment because the heads at the front of the room are not photographic: it is all about you. Are you comfortable?
Mr Joyce : We are comfortable, yes.
Senator ABETZ: Politics is for the ugly!
CHAIR: I will not argue with you there, Senator Abetz. Please continue, Mr Buchanan.
Mr Buchanan : About 90 per cent of our tag flights operate through Darwin. Because of the Darwin operations there were some unintendered rostering practices where the system was automatically optimising around Darwin and some people were doing concentrated flying on what I would call domestic tag flights. Although the average is still only around 10 per cent of the hours that cabin crew are working, some cabin crew were doing a series of domestic tag flights. In talking that through with the Fair Work ombudsman, we decided that we would put some limitations on that. In addition to limitations on international flight numbers and the hours and all the other restrictions in the rostering practice, we have also put some limitations on the number of contiguous sectors that people can work on tag flights and also on the number of hours that they can work on tag flights. In addition to that, because this is not about financial gain, what we have done is gone back and paid some additional money to anyone who worked more than four contiguous sectors on tag flights in the country during the last two-and-a-half years.
Senator XENOPHON: Okay. Is it fair to say that this review within Jetstar occurred as result of the Fair Work ombudsman investigation?
Mr Buchanan : That is correct.
Senator XENOPHON: But these issues were raised by this committee some time ago. These changes were not triggered by that; these changes were triggered by the Fair Work ombudsman investigation.
Mr Buchanan : They were going in parallel. The discussion here was in November. The Fair Work ombudsman investigation was going on way before that. It started in July or August. So these processes—the discussions here and the discussions with the Fair Work ombudsman—were going on in parallel. The issue is now that those additional restrictions are in place.
Senator XENOPHON: Although that was discussed on 25 February 2011 at the first hearing to do with aviation.
Mr Buchanan : I do not recall that, but I do remember it being discussed in the November session.
Senator XENOPHON: Mr Joyce, I want to go to the decisions made by Qantas with respect to the job losses or redundancies in Australia and also the expansion into Asia. Are those decisions a result of Qantas International losing a significant amount of money and being unsustainable in terms of return on capital?
Mr Joyce : Not all the job losses. As we said at the last session, some of the job losses resulted from changes to the international network. We will be scaling back our operations to London from four services to two services a day.
Senator XENOPHON: They will be picked up by British Airways, won't they?
Mr Joyce : British Airways will be adding some extra capacity, but the services are not being picked up by British Airways. In fact, British Airways are also taking one of their services out of Australia from the end of March. They are scaling back as well. Both carriers are reducing operations in Australia. That is because the London route is the biggest loss-making route and because we feel that we need to reduce our exposure to the European market, with the economic situation and the significant deterioration that is likely to take place into the future.
There will be a lot of job losses as a result of changed work practices. For example, as part of the announcements that we made previously we are closing our catering centre in Brisbane because a runway is being built through that catering centre—taxiways and runways—and we have to build a new catering centre, which will be a $75 million state-of-the-art facility that requires fewer people to work there as a result of new technology. That was part of the announcement that we made at the time. So there is a combination of route changes and network changes as a result of the $200 million losses and also significant changes in work practices that are resulting in job losses as a consequence of new technology.
Senator XENOPHON: On 17 February 2011, a Qantas media release announced a profit result. It said that there was an underlying profit of $417 million for the half year ending 31 December 2010. It made reference to the strong domestic performance of Qantas and Jetstar. It said that while demand on key international routes continues to improve, the international environment remains challenging. But there was nothing in the media release about segments or that indicated that anything was wrong with Qantas International. Yet on 24 August 2011, six months later, there seemed to be a dramatic turnaround, with Qantas International reporting a loss of over $200 million and saying that a continuation down that path would be unsustainable. How could there be such a dramatic turnaround in the course of six months?
Mr Joyce : There was not. What you quoted there—
Senator XENOPHON: I quoted accurately.
Mr Joyce : You have, Senator. But we do report on the segments and their performance was reported on at the time. We made it very clear that the domestic business was performing well and we made it very clear for some time—even if you go back to some of Geoff Dixon's comments before I became CEO—that the international business has not been performing for a large period. We made it very clear during the global financial crisis that the international business was impacted more than any other business.
Senator XENOPHON: Mr Joyce, sorry. The media release on 17 February 2011 quotes you as saying that 'all operating segments of the Qantas group were profitable'.
Mr Joyce : Yes, that is true, because Qantas is the operating segment. So Qantas was making money because domestic was making money. That is the same today.
Senator XENOPHON: No, sorry. I will quote you. It says:
Mr Joyce said all operating segments of the Qantas Group were profitable …
Would that include international?
Mr Joyce : No, the operating segments for the Qantas group are Qantas, Jetstar, freight and frequent flier. They are the operating segments that we report, and all segments were profitable. Qantas was profitable. Within Qantas, domestic was making enough money to compensate for the losses in international, so therefore the Qantas segment was profitable. That is what the statement says and that is the position of the airline.
Senator XENOPHON: You did not think it was worth saying back in February, 'Whilst Qantas itself is profitable, international is causing us to haemorrhage'?
Mr Joyce : No. I think it is important for us to say that we made a decision that, to try to maintain confidentiality and not give competitive information away, we would report the Qantas segment as a whole. That is something that has been going on for some time.
Senator XENOPHON: But you gave that away in August though, didn't you?
Mr Joyce : We did, for a particular reason: because people were under an impression. You quoted those numbers. We had union leaders and other people quoting them and saying, 'Things aren't that bad; Qantas is still making money.' The problem was that we had one part of our operation, the international business, that was losing over $200 million, and we had the other components of the business compensating for that. They were making profits that were compensating for international, and that position was not sustainable because the international position was getting worse. We needed then to communicate in August the size of the problem, what we were doing to fix it, why the problem needed to be fixed and the scope of the changes that were needed to put it into context.
Senator XENOPHON: Mr Joyce, I accept that you take your responsibilities under the Corporations Act very seriously.
Mr Joyce : Yes.
Senator XENOPHON: There is a duty of continuous disclosure. If Qantas international, as a part of the Qantas business, was losing money back in February for the first half of 2010-11, wouldn't you have wanted to at least indicate that to your shareholders?
Mr Joyce : We do meet our disclosure requirements, we do report on a segment basis and we did report the segment of Qantas and where Qantas was performing. Those are my requirements under the legislation, those are the requirements I met and those are the requirements we continue to meet. We reported additional information in August about the performance of international. It is not my requirement today to report the profitability of London to the market, and I do not.
Senator XENOPHON: I am not suggesting you should.
Mr Joyce : It is the same with international. We report what is required under the law: how we manage the business and how the businesses are performing. That is exactly what we do and that is exactly what we continue to do.
Senator XENOPHON: My understanding is that you made an offer back in November to the unions to have the books audited by one of the big four. Is that right?
Mr Joyce : To be absolutely clear, the books are audited by KPMG.
Senator XENOPHON: No, to have an external—
Mr Joyce : Let me explain; I think it is important. The books are audited by KPMG. We are comfortable with that audit. Our board is comfortable; our shareholders are comfortable. That audit happens every year, as with every major company in the ASX. This issue keeps on coming up about the profitability of Qantas international and the unions claiming that that is not true and that international is not as bad as that and there are costs being moved to other segments. We said that is not true. Our CFO sat down with the unions, including the pilots union, and with our auditors for a significant amount of time to go through each of the items that they raised in immense detail. That was not sufficient to convince them that this was an accurate representation of the problems, so in good faith we offered an independent audit where we would invite in one of the big four. We had two conditions: that it had to be one of the big four—it could not be KPMG because they already do our audit, but we wanted it to be a respectable, large accountancy firm—and that we wanted the audit to bring the issue to an end and the unions to declare, 'This is an end to the issue; Qantas international is losing this amount of money; Jetstar and the other components are making that amount of money.' The last offer was sent to the unions in early November and we are still waiting for a response.
Senator XENOPHON: I spoke to advisers to AIPA, the pilots union, this morning, and my understanding is that negotiations are stuck as to the extent of the audit—whether it would be, for instance, a positive assurance audit or whether there would be agreed-upon procedures to stipulate the scope of the audit. So, as I understand it, there are still negotiations as to how detailed the audit could be.
Mr Joyce : We have presented a detailed proposal to the unions about the scope of the audit. As you know, Senator Xenophon, you can do an audit to a degree which is not material. We have said that we want the audit to be of relevance to material issues, otherwise the expense of the audit and the time involved in the audit will blow out of all proportion. It needs to be reasonable and it needs to be material. We are involved in discussions on the scope of the audit in that case. We have made that offer of a material audit to determine whether the reporting that we have said is material, fair and balanced.
Senator XENOPHON: But is it fair to say that at the moment there is an impasse as to what the nature of the audit should be, and that is why the audit has not actually occurred yet? That is putting it in neutral terms.
Mr Joyce : Putting it in neutral terms, we are still in dialogue about the audit, we have put a proposal to them and we think that our proposal is fair. If this is to be complete, it should be on material issues and not deciding whether engineer Joe Bloggs, when he did half an hour's work on Jetstar, should be allocated to the P&L. That is not material. In relation to the millions of dollars that we are talking about, the audit should ask on a material basis: is Qantas International losing more than $200 million; is Jetstar making more than $200 million; and do we have a problem with International? I think that is what we all want to get to. That is what we have volunteered and we are still waiting for that to be closed.
Senator XENOPHON: I go to the issue of Jetstar and Qantas. Mr Dixon, your predecessor, back in 2004, said: 'Jetstar is not going to get beyond about 23 aircraft.' In an interview on 4 December 2005 on Alan Kohler's business program on the ABC, he made reference to Jetstar not being bigger than 20 per cent of the size of Qantas. At the moment I think Jetstar has 86 aircraft compared to Qantas's 198, which is about 43 per cent of the aircraft. I do not know what that means in terms of capacity. It is planned to go to 131 aircraft—Mr Buchanan can confirm that—by 2014, while Qantas will go to 215 aircraft by 2014. That would mean about 61 per cent of the aircraft in the fleet would be Jetstar aircraft. Does this mean that there has been a clear change in strategy from what your predecessor said about growth of Jetstar, so that Jetstar will eventually subsume the Qantas brand?
Mr Joyce : I do not know the particulars of that interview, but I do know that the dialogue I was having with Geoff Dixon at the time was that the 23 aircraft referred to the initial operation of aircraft that we are approved for Jetstar. We had options for aircraft and we had Jetstar Asia starting up. Geoff and I always had the view that Jetstar could have the opportunity to grow significantly, and I do not think it is a bad thing. In fact, what we are showing here is the success of a little Australian brand that was created from nothing seven years ago and has grown to 88 aircraft, which is faster growth than Ryanair, easyJet or Southwest have experienced, and they are the largest low-cost carriers in the world. That is a great Australian success story. Any business that sets out at the start will have a business case and a plan. It will have opportunities and options that it can take, and if the business performs better than the original plan then of course the leaders of the business are going to expand faster. Of course the leaders of that business are going to take those opportunities. It has been a great success that we have got Jetstar to that size, and it is fantastic that we can look forward to growing Jetstar going forward.
I also want to be in a position where I can grow Qantas aggressively. I want to be in a position to turn around the International business so that we can add more aircraft to International and expand that at the same rate we are growing Jetstar. I want to grow Qantas in the domestic market, and we are. I want to continue the 10 per cent growth that we are having in Qantas's regional operations, and to add more Dash 8 Q400s to our domestic regional fleet. We will take whatever opportunities exist to grow whatever business exists, and that will be a great success of Australian industry if we can do it.
Senator XENOPHON: I go to Jetstar Asia. You can only be a 49 per cent shareholder in that, in terms of your Asian businesses, because of various requirements—correct?
Mr Joyce : Yes.
Senator XENOPHON: When you gave evidence on 25 February last year you talked about the issues of safety. You said, 'We can always withdraw our brand from an airline if we're not happy about safety issues.' Is that a fair summary?
Mr Joyce : We have a whole series of different measures that we apply to subsidiary companies. I think probably any company in Australia that has subsidiary companies around the world would do the same thing. We do have audits that we conduct ourselves. We have a group audit activity, where for example we code share on a carrier. We code share on a whole range of carriers around the world. The Qantas selling activity takes place through them. We have a whole series of procedures that we use in how we audit those airlines and make sure that we are comfortable with our brand being associated with those airlines. It is no different from the subsidiaries in Asia. We also have affiliate airlines. For example, Cobham airlines, which we do not own, operates aircraft on our behalf. We have zero ownership of that airline here in Australia, but we do have the Qantas brand operating on it and we do have the same audit activity that takes place with them to ensure that they are acceptable to us with the use of the Qantas brand.
Senator XENOPHON: Mr Joyce, in your opening statement back on 4 November, I know we were distracted by events that occurred just recently, you said:
The Qantas Group's investments in Asia are well within the act's intent.
You go on to say:
They are businesses in which Qantas is investing. But the revenue and profits will flow back to Australia, enabling us to invest in our Australian operations and protect and grow Australian jobs.
That is fundamental to your strategy?
Mr Joyce : Absolutely.
Senator XENOPHON: But if we go to Jetstar Asia, there was an article by Scott Rochfort in the Sydney Morning Herald on 19 January 2009 where he said, in an article headed 'Subleases to sister help struggling Jetstar Asia post $4.5 million profit':
The accounts show Jetstar Asia earned $S21.8 million in "sublease" revenue in the 12 months, as against $S12.5 million the previous year.
In other words, if it was not for the sub-leasing arrangement, Jetstar Asia would be making a loss. Is that a fair summary?
Mr Buchanan : I think the first thing I would say is do not believe everything that you read in the Sydney Morning Herald, but more seriously I would say that the commercial operation of Jetstar Asia was set up as an independent business. They operate leases on commercial terms.
Senator XENOPHON: When you say commercial terms, does that mean at market rates?
Mr Buchanan : At market rates.
Senator XENOPHON: So if there is a lease, it is the sort of lease that you would expect in any business?
Mr Buchanan : Yes. It is a misinterpretation of the facts, because in fact what that line item refers to in the P&L is referring to wet leasing back and forward between the two businesses. In some instances what we do is one carrier will operate a flight for another carrier. That may be because of aircraft availability, traffic rights, a number of different reasons. We often do it for short periods of time. It is designed to help us build a business in markets we would not otherwise be able to get into. It has got nothing to do with actually aircraft leasing.
Mr Joyce : That was from 2004, was it?
Senator XENOPHON: The article was on 19 January 2009, and it referred to I think the profits for the 12 months to 31 March 2008. They were disclosed several months later.
Mr Buchanan : I think the other thing to say is that the Singapore business that we have set up is a very successful part of the Jetstar business. As Alan said, it helps us in terms of the scale and size of the business in Singapore. It actually helps us build success back in the Australian operation.
Mr Joyce : The issue that occurred is again with the businesses. It can be quite complex. But what happened is that Jetstar Asia had surplus aircraft. I think it was two or three aircraft that they had out on lease to a Turkish company at the time. They were looking at bringing those aircraft back. We were short of capacity in the Australian domestic market. We had the need for us to dramatically grow the Australian business, which was making money. We searched the market for aircraft and found that the availability of the Jetstar Asia aircraft suited all requirements of the domestic market. We then negotiated at commercial terms the rates that we would have gotten for acquiring aircraft in the market from Jetstar Asia. Those aircraft then had a double benefit. They came into the Australian market, increased employment here in Australia, allowed us to fly extra capacity domestic, and make extra returns in the domestic market that we would not have made. We covered the cost of those leases and produced the profit out of them. I think it was a pretty profitable year for Jetstar in 2008. Then Jetstar Asia made a profit out of the leases. That was a win-win for both parties. It was done on pure commercial terms.
Senator XENOPHON: Based on market values.
Mr Joyce : It was on market values and it was negotiated on market values. I remember the negotiations, because at the time they were tough. We would have liked to have had them for a lot less. We got them at the rates that were appropriate and commercial in the market at the time.
Senator XENOPHON: I want to discuss this and some other issues around subsidiaries. In 2008, revenue was $182.1 million and expenses were $181.9 million—a profit of $200,000. The lease to Jetstar Australia was $20.7 million. In 2009, there was $245.1 million in revenue and $261.6 million in expenses—a loss of $16.5 million. The lease to Jetstar here was $31.8 million. In 2010, there was $224 million in revenue and $219 million in expenses—that is $4.2 million in profit but this was bolstered by $26.9 million in leases. What profits have come back into the Qantas group from Jetstar Asia?
Mr Buchanan : I think the piece that you are missing is that there was a real cost to Jetstar Asia for those leases as well. There is a revenue line item for three aircraft, but if you look at market rates for the leases of those three aircraft there is a real cost on the other side. It is not a straight-through profit boost for that 12-month period where those leases existed, and they only existed for a short period of time while we were leasing those three aircraft.
Senator XENOPHON: But without those leases you would not be making a quid, would you?
Mr Buchanan : No, we would. Last year we made a profit. We have actually exceeded our competition—we are now the most profitable low-cost carrier in Singapore. We are the largest low-cost carrier in Singapore and that brings considerable benefit back to the Australian business, in terms of scale, franchise fees and a number of other benefits.
Senator XENOPHON: I want to talk about New Zealand in a second. Regarding Jetstar Pacific, on 8 December Olivia Wirth from Qantas spoke to Matt Peacock of the ABC. Ms Wirth is quoted as saying that Jetstar Pacific is close to breaking even. So Jetstar Pacific has not made any money at this stage, has it?
Mr Buchanan : That is normal for a start-up operation. Jetstar Pacific was a particularly difficult case. We partnered with the Vietnamese government on the first privatisation of any government owned asset in Vietnam. We were not only starting a low-cost carrier, but also converting an existing full-service carrier in that market to a low-cost carrier. That does take time and the Vietnamese market has been challenging. To give you a feel for these investments, one of our competitors in Singapore has a business that is a similar size and scale to ours. It is valued on the Singapore stock exchange at $600 million. It is performing much worse than our business in Singapore. We have invested $80 million in our Singapore business. That is the return to shareholders that we were able to generate from these businesses. Small investments can create assets of huge value, not only in terms of the ongoing value but in terms of scale, franchise fees and other benefits that come back into the Australian operation. There is also intellectual property. We are creating knowledge based jobs in Melbourne and exporting the know-how of creating successful businesses in Asia. We are doing that from a business that started in Melbourne eight years ago. I think it should be something that we celebrate rather than criticise. It is something that creates enormous value for Qantas shareholders.
Senator XENOPHON: But neither operation has made money in eight years?
Mr Buchanan : It has made money. Singapore has made money in the last two years, and the leases that you talk about were terminated about 18 months or two years ago. It is making money, and it is making money for the Qantas group on different levels.
Senator XENOPHON: Could I just speak about Jetconnect? At a Fair Work hearing about a year ago, I think, one of the deputy commissioners there expressed a minority view. He was critical about the arrangement with Mr Daff and how little knowledge Mr Daff seemed to have about the operations and the books of Jetconnect. Are you familiar with that decision?
Mr Joyce : I am, yes.
Senator XENOPHON: You sign off on the accounts of Jetconnect?
Mr Joyce : Yes.
Senator XENOPHON: Jetconnect is a company wholly owned by Qantas that provides trans-Tasman services?
Mr Joyce : I think we have covered this before at some of the other Senate meetings.
Senator XENOPHON: We have not covered this before. I have actually got the books and I want to run a couple of things by you.
Mr Joyce : We have covered—
Senator HEFFERNAN: We have got two bills before the committee. Is this going to go on, because it has got nothing to do with the bill?
Senator XENOPHON: I am happy to answer that, Chair.
CHAIR: You will have an opportunity. Senator Heffernan, I have sat through many a hearing with you when I scratched my head thinking, 'What the hell are you talking about now?'. So with the greatest of respect—
Senator HEFFERNAN: That could not possibly be right!
CHAIR: So with the greatest of respect, Senator Heffernan, I think that Senator Xenophon can carry on.
Senator XENOPHON: I just have a few questions in relation to Jetconnect. The point made by Senator Heffernan is fair enough. The relevance is that this bill looks at issues of subsidiaries in terms of their international operations and intent.
Senator HEFFERNAN: You are entitled to minimise your tax and maximise your profits, surely?
CHAIR: Senator Heffernan, Senator Xenophon does not need a lecture from you.
Senator HEFFERNAN: I surrender.
CHAIR: If I can do the same in estimates with you, I would be absolutely tickled pink if this is the way we are going to work.
Senator HEFFERNAN: God bless you!
Senator XENOPHON: I have to correct the record. I think Senator Heffernan said I may not want them to stay in business. That is completely wrong. Senator Heffernan may want to withdraw that.
Mr Joyce : Can I respond in terms of your commentary about Jetconnect and explain exactly what Jetconnect is for the purpose of the Senate.
Senator XENOPHON: Sure, please do.
Mr Joyce : We have had an operation in New Zealand now, I think, for over a decade, where Jetconnect was established to operate initially into the domestic New Zealand market to allow us to have the feed necessary for a long-haul operation and a trans-Tasman operation. That is when it was established over decade ago. It could not make money in the domestic market. It lost significant amounts of money over that period of time.
We also started changing the mission of the airline to compete on the trans-Tasman, which, as you are aware, is a highly competitive market. It is a market that is open to fifth freedom carriers like Emirates and Etihad, carriers that, in the case of Emirates, can operate A380s and 777s across the market at unbelievably low cost because they marginally cost their aircraft and they are putting on a significant long-haul international product at very low fares. To be competitive on that market you need to understand the way the time cycles work. You are probably aware that placing aircraft in New Zealand is a necessity to get the utilisation out of them for trans-Tasman operations. Essentially, if you start an aircraft in Australia, you lose three or four hours because of when you start the operations. It leaves you with lower utilisation which makes the economics of the operation not viable. So starting in airline operations out of New Zealand was the only viable way for us to be economic and using a New Zealand operation to compete against a major competitor, which is Air New Zealand, and a second major competitor which is Pacific Blue, which are both New Zealand operations—was essential to us continuing services on that route. If we had not had Jetconnect, Qantas would not be operating the level of services on the trans-Tasman and that would have had serious impacts on our long-haul and our domestic operations here in Australia.
Senator XENOPHON: I just wanted to clarify a couple of issues. I have a copy of the financial report for the end of 30 June 2011, which I think was received by the business and registries branch in Auckland on 22 December. Chair, fairness to the witness, could that be shown to Mr Joyce? It might be easier. If Mr Joyce could just clarify something in relation to that.
You signed off on these accounts, as you do, as head of the group. You are a director of the company. In relation to its accounts, the statement of comprehensive income—
Senator HEFFERNAN: Are you saying that the books are cooked?
Senator XENOPHON: Chair, I am not saying anything; I am just trying to get a clarification of one particular aspect of the books.
CHAIR: You keep asking, Senator Xenophon.
Senator XENOPHON: I am not suggesting anything. I am just trying to understand something and I am sure Mr Joyce can clarify it for me. If I could refer to page 2, which is a statement of comprehensive income for the year ended 30 June 2011. Under 'Expenditure' it refers to 'Manpower and staff related' for 2011 of a bit over $37 million: 'Aircraft operating variable' is $23.9 million.
Mr Joyce : That looks correct.
Senator XENOPHON: Would 'Aircraft operating variable' include fuel costs?
Mr Joyce : 'Aircraft operating variable' would include fuel costs.
Senator XENOPHON: In terms of the cost of fuel, it is a bit over two tonnes per hour—this is information that some of your pilots have provided to me in terms of their concerns.
Mr Joyce : Sorry, Senator, I think there is a misunderstanding of what Jetconnect actually provides. The way the aircraft work and the way the accounts in New Zealand work is that we are actually leasing aircraft from a New Zealand entity to fly the trans-Tasman and the results are reported in the trans-Tasman of the Qantas results. Any profit Jetconnect makes or loses as a result of providing that capacity to Qantas is reported in the Qantas segment. This is an entity that operates in New Zealand that is providing, essentially the way it is structured, because of the way it has to be structured, aircraft and crew to Qantas to operate the trans-Tasman. We do not say that Jetconnect is a stand-alone profit centre; we have never said that. Jetconnect is part of the Qantas operation and is reported as part of the Qantas segment.
Senator XENOPHON: But, again, Mr Joyce, I just want to get a clarification so I can understand this: in terms of aircraft operating variable cost, does that include fuel?
Mr Joyce : The operating aircraft cost we do covers fuel. We have to check it on this occasion, but it is irrelevant to the reporting of this segment, because this segment makes its reports. It is a wet lease provider and as part of the wet lease provision it provides that capacity to Qantas and the profitability of those operations are reported in the Qantas segment. The purpose of this is not like Jetstar in Asia—
Senator XENOPHON: I am not suggesting it is.
Mr Joyce : is not like Jetstar in Vietnam, as a stand-alone segment. It is as a operating vehicle to fly the aircraft across the Tasman. We do not say that this is the profitability of these routes; we say that this is the cost that this organisation charges back to Qantas and on the route Qantas does take other costs itself like airport charges in Australia. Other costs are not included here.
Senator XENOPHON: I see.
Mr Buchanan : The complexity of this I think is that a wet lease arrangement can include different service provisions. Sometimes it may include fuel, it may not; sometimes it may include other aspects. But the issue is that it all gets consolidated back into the Qantas result anyway. But we can find out what is included.
Senator XENOPHON: Sure. But if it would include fuel it would include all fuel, wouldn't it?
Mr Buchanan : Normally a wet lease arrangement would be set one way or another. So it would either include fuel, it would include everything or it would not include. You can set them up many different ways. In fact, there are all sorts of different types of structures you can have in the airline. Sometimes it may not include some of the labour components; sometimes it may include all of them.
Senator XENOPHON: But Mr Joyce said a minute ago that it does include fuel or it does not include fuel.
Mr Joyce : Aircraft operating variables, we usually report those, but we are checking on this one because it may not include fuel in Jetconnect's case.
Senator XENOPHON: All right, if we can establish that. That is key to the question. I am just trying to establish whether it includes fuel or not.
Mr Joyce : As an operating vehicle, as Bruce is saying, it is wet lease aircraft to Qantas and the profitability is reported in the Qantas segment. Any profit that is made here—this profit, for example, a total comprehensive income of $11 million—is allocated back to the Qantas segment when we report the results to the market.
Senator XENOPHON: While we are waiting for that response, can you just explain: if you go to current assets off Jetconnect Ltd on the next page it shows cash and cash equivalents of NZ$144 million. Can you just explain that to a nonaccountant? Does that mean that that is money that is in the bank for Jetconnect?
Mr Joyce : It does. Part of what we make available to it. Obviously Qantas is paying for all of those services. That cash is a form of a payment from Qantas to Jetconnect to pay for the crew, pay for the aircraft, and that cash is held by the New Zealand entity. We can report that cash in the Qantas cash total as well. So when we report the Qantas segment and we report the group cash of $3.5 billion for the year, that is included.
Senator XENOPHON: That is included. But that is a lot of cash to have on hand for eight aircraft, or whatever it is.
Mr Joyce : We have $3.5 billion for the rest of the group. We have a lot of cash.
Senator XENOPHON: Okay. Any luck on the fuel issue, or a just trying to establish that?
Mr Joyce : We are just checking. We think fuel is not included on it but we will just check.
Senator XENOPHON: So fuel is not included?
Mr Joyce : We do not think fuel is included, but we are just checking.
Senator XENOPHON: All right. Chair, I have further questions but I am happy to defer to some of my colleagues.
CHAIR: Thank you. Let us go back to the international business if we can, Mr Joyce, which I think is very important. I have a couple of quick questions. You stated that the competition is fierce and that is where the company is hurting.
Mr Joyce : Yes.
CHAIR: Who are the major competitors on your international routes?
Mr Joyce : We have a large number of competitors. On the UK kangaroo route there are 32 competitors that compete against Qantas from the Middle Eastern carriers to the Asian carriers. Actually there are no European carriers left on the route apart from Virgin Atlantic. We have 32 different competitors operating against us. Into Asia we have a different competitor on just about every single route, so we have Malaysian competing to a wide range of destinations in China and India; Singapore to Singapore, India and China and the rest of South-east Asia; Cathay Pacific to China and North Asia; and Korean Air to Korea. There is a wide range. Then, on the trans-Tasman route, we have the Middle Eastern carriers like Emirates. Pacific Blue and Air New Zealand are large competitors, and then in the North Atlantic we have Delta Airlines, United Airlines, Virgin Australia and Air New Zealand as competitors.
Senator HEFFERNAN: Korean Airlines fly to Korea and across to Los Angeles, and it is cheaper.
Mr Joyce : You do have some passengers routing through Asia. I am sure some passengers would go with Japan Air Lines as well.
Senator HEFFERNAN: So Korean Airlines compete against you into the United States?
Mr Joyce : And we have Hawaiian Airlines that compete through to Hawaii and then onto the States as well. We have a massive number of different competitors.
CHAIR: What I am trying to lead to is what is causing the decline in your international market. I know you are going to say there are a number of factors, but I would be interested if you could briefly let us know.
Mr Joyce : We should not be viewed any differently from manufacturing businesses in Australia and the pressure that has been put onto them because of the high Australian dollar. The high Australian dollar gives our competitors an advantage in this market. It means the yield they get from the Australian market is attractive, it means that when they look at the Australian market what they get in their local currency is very attractive compared to other markets around the world, particularly the United States and the European countries where the euro has been depressed. So they are adding capacity into Australia because of the attractiveness from that yield perspective. We have seen the Australian dollar result in over 10 per cent capacity growth by our major competition all the way through the global financial crisis. In no other market around the world were those competitors adding that level of capacity. Similarly, that has had a negative impact on our cost base because we are an Australian company, with over 95 per cent of our employees here in Australia, and we do all of our major operations activity here in Australia. Like the manufacturing sector, our competitiveness has been hit as a consequence of that strong Australian dollar. A lot of our competitors have started up new operations. Emirates is a relatively new airline. They get a lot more productivity and a lot more efficiency out of their operations because they do not have the legacy that Qantas would have of 90 years, with the history associated with that, which makes us not as competitive because of some deficiencies. For example, in the utilisation of pilots Emirates, like Jetstar and like a lot of the carriers that have started up, can get 700 to 800 hours a year utilisation out of long-haul pilots. The Qantas number is closer to 500 hours a year, and that is a huge discrepancy in terms of efficiency between the different businesses. There are a range of things that come into it—a range of different inefficiencies in different areas of the company. There are things we are trying to change to ensure that Qantas international is efficient going forward.
CHAIR: What percentage of the group's cost is wages?
Mr Joyce : For the total group, last year wages was the highest cost item—26 per cent.
CHAIR: And this is international or all over?
Mr Joyce : That is international and domestic and Jetstar.
CHAIR: Can you break it up to international for me?
Mr Joyce : We can get you that number; I do not have it off the top of my head. It will be high for international.
CHAIR: I want to focus on international, because you have made it very clear that is where the challenges are for Qantas. Mr Buchanan, I agree with you 100 per cent that you should never believe everything you read in the Sydney Morning Herald, but I have been reading the Plane Talking blog. I have no doubt you have you will have followed the writings of Mr Sandilands, and I find them very interesting. They have been very, very critical and I think Ben Sandilands led off with it. On 11 May, he wrote:
About 10 years ago the then Qantas CEO James Strong said that one of the keys to its historic success as a carrier was getting its choice of jets right.
Mr Joyce, I have heard your comment on the decision not to purchase the 777, so you know where I am heading. He has been very scathing in saying that your competitors—and you mentioned Air New Zealand, Virgin, Delta, Emirates, Etihad and Singapore Airlines in particular—are operating the 777s. I heard your comments when you were asked this at the shareholders meeting. I know that you are going to defend the company till your last breath, but surely there must be some thoughts within Qantas as to why you let your competitors get a serious advantage over us by a better choice of aircraft.
Mr Joyce : Again, you are absolutely right. At the AGM I answered this in quite considerable detail. I think at the last Senate hearing we covered it off, but I am happy to go through it again because it is an important point and it keeps coming up in relation to the 777s. I am glad you picked Air New Zealand as the first carrier on your list of carriers that picked the 777.
CHAIR: That was on Ben Sandilands list. I just quoted him.
Mr Joyce : I think it is a good example, that this is not the panacea or the holy grail that solves your international problems. He is absolutely right: Air New Zealand have a large a large number of 777s and they recently replaced their 747s. But Air New Zealand are going through the exact same problems as Qantas with its international operation. Air New Zealand recently reported that its international business is losing over $50 million—a million dollars a week. Since Qantas is five times the size of that business internationally, that is roughly the same proportion of the losses we are experiencing in our international business. The Australian dollar has affected us more than the New Zealand dollar would have and we have got a lot more competition coming into this market. He says that the 777 has not been the panacea for Air New Zealand and has not turned around their international business. Air New Zealand are going through a comprehensive review of their business like we are.
Can I talk about the fleet decisions. My background has been in fleet planning for a number of different airlines. It is a topic I am very passionate about and a topic I do know a bit about. If you go back on the history of this, it would be very easy for me, as the current CEO, to blame the problems we have today on the previous decisions that were made on the fleet, because the fleet decisions were made back in 2000. I think it was at that point that they made the decision to go with the A380s. People are glossing over the history of this. First of all, every airline's fleet decisions are different. An aircraft that works for one airline may not necessarily work for another airline. Qantas has a unique operation internationally. It has superlong-haul routes that operate all around the world and because we have these superlong-haul routes there are what we call scheduling windows that work for the services for our biggest markets, which are to the UK and LA. For example, if you go to LA, at around 10 o'clock to midnight every night five or six Qantas aircraft all depart at the same time. Why is that? We like to get the aircraft out before midnight because it is a good local time. We cannot move them any earlier. If we move them any earlier out of LA, they hit the curfew—for example, in Sydney—or arrive at an unacceptable time at the other airports. That means we do not need frequency. We do not need another service to Sydney between 10 and midnight every night out of LA.
The best aircraft for us is actually a bigger aircraft to allow us to grow. The A380 was the decision that we made in 2000 because it is the best aircraft to LA. It has a lower seat-mile cost than the 777 because of its size. It is the same to London. If you look at a London schedule, the timings that work to London are an early afternoon service out of Australia. It has to arrive in Singapore before midnight and it has to depart Singapore at that time to get into London early in the morning—usually arriving at five o'clock. Other timing does not work. There is no point in us adding more frequencies to the London market because it does not give us any benefits. Therefore, the A380 is the better aircraft to London and to LA because of those scheduling windows. Then I look at Asia. The next question is: 'Why didn't you go for the 777s into Asia? That would have helped your operations there.' Certainly the 777 is a good vehicle but when we were making decisions back in 2008, the aircraft did not have the range. Not only was it not the right size, in our mind, or have the right economics compared to the 380; it did not have the range to go into North America or into Europe.
It was only in 2003-04 when Boeing produced the 777 300ER that the aircraft became a viable vehicle for us. At that stage we had already committed to the A380 and we already were of the opinion that Boeing was going to produce a new aircraft, the 787. The 787 then became a very interesting vehicle for us because not only is it a good vehicle into Asia also it has lower trip costs than the 777. Lower trip costs are important because frequency into Asia does matter. The 787 is a smaller aircraft and allows us to put frequencies in, and we want to do is service more destinations.
The 787 has another advantage: it is an aircraft we could use domestically. The 777 could not be used domestically. It is too big. It would need major changes to the infrastructure at our domestic terminals. It is an aircraft within a domestic consideration that could have over 400 seats and it is too big to operate on a lot of domestic operations. As a consequence of that, we believe that the 787 was going to be a better aircraft than the 777 and it gives us a leapfrog in technology, and that is why we went for the 787. It would be great if I could go back and criticise the decision and say that we are fixing the fleet going forward to recover the international issues, but the truth is they are the right fleet decisions, they were the right fleet decisions for Qantas's network and Qantas's operations, and I do fully support them.
CHAIR: Okay. It is unfortunately beyond your control that Boeing are not holding up their part of the deal in delivery.
Mr Joyce : Yes.
CHAIR: What about fuel? What percentage is the cost of fuel for you on the international market?
Mr Joyce : I only have it for the total business, which was around 23 per cent last year. It is going to be higher this year because our fuel bill in the first half of this year increased by $450 million. We are now spending $2.2 billion on fuel. This year it will represent the highest cost that we have in the organisation. I will get you the international split as well.
CHAIR: That would be great.
Senator ABETZ: The carbon tax will increase that as well.
CHAIR: Qantas have already made a statement on that. We saw that they have made arrangements to increase their fares. There is one thing I cannot let go, Mr Joyce: I find it ironic that the New Zealanders, who could never pride themselves on paying a decent wage compared with Australian conditions, are still struggling. If they were that great, we would still have our canneries here. I know you cannot but I will say that.
Mr Joyce : New Zealand is a very important market for us. We still have a huge operation in New Zealand and it continues to be very important for the group.
CHAIR: I fully understand that. It certainly was not wages that were a problem for Air New Zealand. That is the case. It would be interesting to compare the fuel costs on the 747s—and I understand the A380s; you put that argument very succinctly—with the 787s and the 777s. You would have that homework. As much as we have acknowledged that the high Aussie dollar is hurting us, the fuel usage figures would be very helpful for the committee.
Mr Joyce : I can give you some indication and we will get you more. The A380 has a 10 per cent fuel efficiency over the 747s. The 787 has a 20 per cent fuel efficiency over existing technology. That is the size of the type of efficiency we are going to be getting with these new aircraft. That is compared to the 747s and compared to the 330s that are operating with them. I will get you the comparison against the 777s as well.
Mr Buchanan : If you look at our competitors, there are a number of competitors operating similar aircraft types to Qantas who are making money flying into Australia with the same aircraft types. I think you have to look more broadly. Aircraft and fuel costs are easy to point to, but when you see competitors operating the same aircraft with the same fuel costs and see that they are profitable, you have to look beyond that. There are many things in this country that make the Qantas cost base much, much higher. We have touched on a few of them. Alan talked about efficiency. But you do not have to look very far to see the same sorts of things that manufacturing firms are struggling with—payroll tax and depreciation schedules, which are very different to those of our foreign competitors. Some of our international competitors have government sponsored debt, so their cost of capital is substantially cheaper. There are a range of factors across the business that affect the international competitiveness, not to mention the geography of not having a hub operation where you have passengers moving in and out like you would if you were in the middle of Asia.
Senator HEFFERNAN: I just want to clear up a couple of things we have been talking about recently. There is a yarn around the committee that there is some sort of dodgy lease arrangement, that some X employees of Qantas have a lease arrangement.
CHAIR: You have not said that.
Senator HEFFERNAN: But others have said it. Mr Joyce, I would like you—not today—to clarify that. The allegation is that there is some shonky lease deal which enables former employees to get a quid. Are you familiar with what I am talking about?
Mr Joyce : I am not, but I can tell you absolutely that there are no lease deals with former employees. I think there was a company that some former employees had a stake in. That might be what this is referring to. Those lease deals were locked in before they had a stake in that company. They were completely at market value. There was no difference in the lease rentals that were being performed against that company and there are no shoddy arrangements taking place.
Senator HEFFERNAN: Thank you very much. I just want to clarify that because they love to live on rumours. Regarding the lease arrangements that you have, what currency are they in?
Mr Joyce : What happens with our lease arrangements is that usually aircraft are purchased in US dollars. When we purchase or lease aircraft, they are US dollar denominated and then our Treasury department locks them into Australian dollars at the time when—
Senator HEFFERNAN: Do they hedge the lease?
Mr Joyce : The purchase of aircraft and the leases. Some of our aircraft were bought when the Australian dollar was 50c or 60c. Some of them are now being bought at a dollar and the lease is the same. But they are locked in to whatever the exchange rate is at the time to minimise our risk to exchange rate fluctuations.
Senator HEFFERNAN: Do you hedge your fuel?
Mr Joyce : We do hedge our fuel. We have what is called a tailing hedge policy, where we give ourselves certainty. We do not speculate on the market. We go out there and hedge fuel to give ourselves time to adapt and change. Our hedging has been very good in the past and has allowed Qantas to adapt to the higher fuel price. For example, in the last year the fuel price was over $100, but Qantas did benefit from the hedging. Our customers benefited from the hedging in planes, and it is only this year that we have had to put significant increases and fuel surcharges into place because our hedging is running out. Our hedging is very low, given current fuel prices, and we are seeing our fuel bill in the first half of this financial year go up by $450 million. We are now spending $2.2 billion a half on fuel. They are significant increases which, unfortunately, is why we had to increase our fuel surcharges.
Senator HEFFERNAN: Just on past questions, you generously read out to Senator Sterle a long list of airlines that you compete against. It would be fair to say that there is a long history of airlines in recent years going belly up, wouldn't it?
Mr Joyce : There is, even this year already. We are only one month into the year and Malev, the Hungarian airline, has gone bankrupt after 66 years. Kingfisher is having issues with meeting its payment requirements with IATA, and Spanair, a big Spanish carrier, has gone bankrupt already. So we are seeing failures even accelerating at the moment. As you point out, Senator, some amazing brands over the years have disappeared—Pan Am, TWA, Ansett. Every year there seem to be significant failures, and when we go into significant financial crises, which we have had, we see even more failures.
Some other airlines have had to go into bankruptcy for restructuring. American Airlines have used chapter 11 restructuring in the states to try and fix their business so that they can be competitive. JAL, another big partner of Qantas, have just left bankruptcy protection to restructure their business because they were losing significant amounts of money, were going bankrupt and needed the Japanese government to bail them out for that to be fixed.
Senator HEFFERNAN: The Air Navigation Civil Aviation Amendment (Aircraft Crew) Bill will require Australian airlines and their subsidiaries to provide pay and conditions for overseas based flight crew operating on their flights that are no less favourable than for those directly employed by the Australian airline. To put that into context, with the indulgence of the chair, I would like to paint a picture of where we have been and where we are going and ask whether you have modelled this. In recent years, we have gone from 47c to the US dollar. We signed a free trade agreement with the United States in 2005 when we were at 67c. In 2006, when we enacted the bill, we were at 70c. In that process, God love them, we did away with five per cent and 15 per cent tariffs. But we have now imposed on ourselves a 50 per cent currency tariff. And you have to compete against that. This bill is about a fortress Australia mentality. It is bad enough trying to make a profit by owning an airline now—it is nearly as bad as owning a farm.
Mr Joyce : Not quite.
Senator HEFFERNAN: To put this into context, I was in Korea on a trade mission some years ago and the cost of a meal in one of those international hotels was a month's wages for the woman who served it. That is what we are up against. To deny that there is a global market is ridiculous. Farmers have to wear the consequences of that. The car industry has their hand out to the government because of this.
CHAIR: I am waiting for the question, Senator.
Senator HEFFERNAN: These shoes were $30. I went down to RM Williams and they were $230.
CHAIR: Don't worry; he's not going to throw his shoe.
Senator HEFFERNAN: The banks are moving jobs to India; Telstra is moving jobs to India. At the same time, we are saying through this bill that you have to wear the consequences here in Australia. Obviously, we do not want you to go out of business. Have you modelled what would happen to the airline if in fact this was enacted?
Mr Joyce : We have done in part. I could not agree more with you. We are facing an open aviation market that is probably one of the most open markets in the world. Any airline can establish a domestic airline in Australia and have it be 100 per cent foreign owned. That cannot take place in any other country. Even in America, the home of capitalism, there is a restriction of a maximum of 25 per cent foreign ownership of any single airline there. We are setting up airlines in Asia and in some cases we cannot own more than 30 per cent of the airlines because of the restrictions. In Europe, the same restrictions take place. In the international markets, we have had an open access policy for some time. Emirates operate well over 70 services here per week. This is the biggest market in which they operate anywhere in the world in terms of the frequency and the capacity that they have added to the routes. So we have a very open market. And there are benefits to having that. But it does mean that Australian companies have to be able to be flexible and adaptable to compete in it. If we lock Australian companies into the terms and practices were there for decades before that open market access was granted and before those changes that you outlined occurred then we are signing the death warrants of those businesses.
Senator HEFFERNAN: I will come to where this is going to take us. I read recently—and Senator Sterle will be interested in this—that in the mining industry a requirement imposed by Chinese companies buying our iron ore is that Australian infrastructure be built with Chinese steel to Chinese specifications. I do not hear a whole lot of backlash about how we should manage that. I do not know how we should manage that. The mining industry has to cop it.
Mr Joyce : It is fair to say that these restrictions, as we have already said, would be unique to Qantas as an Australian company and would put restrictions on us that no other Australian companies would have to abide by. It seems crazy in one of the most competitive industries in the world. The total profitability of the aviation industry worldwide last year was $6 billion, which is less than an Australian bank made, and that is for the whole industry. This year it is going to be half of that. To make a profit in this highly competitive industry is to do exceptionally well. To have restrictions on Qantas and have it not able to compete on a level playing field with the rest of the world's aviation is crazy, and it will condemn Qantas to failure.
Senator HEFFERNAN: Obviously most Australians treasure Qantas and we want to see it survive. We want our pilots to be flying, but did you say that the average hours for Qantas was 500 hours a year?
Mr Joyce : Five hundred hours a year is the utilisation for long-haul pilots.
Senator HEFFERNAN: That is flying hours?
Mr Joyce : Yes.
Senator HEFFERNAN: What is the wage for a Qantas pilot?
Mr Joyce : An A380 captain would be paid up to $500,000.
Senator HEFFERNAN: That is $1,000 an hour flying time for the captain.
Mr Joyce : Yes.
CHAIR: What was that figure?
Mr Joyce : $500,000 is the top of the range for an A380.
Senator HEFFERNAN: That is the top of the range. What is the middle figure?
Mr Joyce : I could check, but I think it is around $380,000. What we usually say for an A380 is that the captain gets paid—
Senator HEFFERNAN: That is better than the average lawyer, to put it that way. I just wanted to put that into perspective. What we are up against, and this committee has to realise it, is that half the world is technically insolvent—the US is technically insolvent. They have $3 trillion of toxic debt, they are just moving from $14 trillion to $16 trillion of public debt to GDP. They are going to be at 100 per cent of GDP shortly. Japan is at 200 per cent of GDP. England, without the forward estimates, is at 100 per cent of GDP.
What that says to me—sorry, Senator Xenophon, but you have to get this into perspective—is that our terms of trade with our currency are going to be against us for a long time. The only way the US is going to scramble out of its mess is to use inflation to devalue their debt. So we are up against it. With all that in mind, I have some structured questions I want to ask about the effect of the bill rather than all the stuff we have heard about this morning. I do not want to read your books—I couldn't anyhow as I am flat out shearing sheep! If all that proposed in these two bills goes ahead—and the bills are what we here are supposed to be about—would you say that the future of Qantas is at risk?
Mr Joyce : I absolutely believe it. As I said in my opening remarks, for example, the Qantas Sale Act amendments that would apply to Jetstar, if they were extended, would leave us with the dilemma of either having Jetstar competing against its competitors on restrictions its competitors do not have—I think that would result in the failure of Jetstar in the long run—or that we would have to release Jetstar from the coverage of the Qantas Sale Act by selling it. The sale of Jetstar is not in the interests of Qantas in the long term. The reason Qantas is one of the only investment-grade airlines in the world and the reason Qantas has made profits through the global financial crisis is that it has a portfolio of premium airlines, low-cost airlines and the frequent flyer and freight businesses. If you start having to hive off components of that it will result in the Qantas group having immense exposure to its international business more than it does today. I think that will put Qantas in danger of failure. We are very worried about the implications of this.
Mr Buchanan : The facts are very clear. It was not too long ago that one in every two Australians travelling out of Australia used to travel on Qantas. Of customers today, 82 per cent, or 82 out of every 100, are picking someone other than Qantas to fly on when they fly out of Australia. That is a pretty compelling statistic in terms of the way customers are voting with their wallets and going for the cheapest fares. Although we talk about—
Senator HEFFERNAN: That is why I bought $30 shoes instead of the $230 ones.
Mr Buchanan : Exactly. You have these two policies that seem like they are incongruous. They just do not fit together. On one side you have open skies and trying to build a tourism industry and open the Australian aviation market to the world, which has resulted in Qantas's market share declining to 18 per cent. On the other side you are saying let us burden Qantas with all these additional costs in a highly competitive market—payroll tax, different depreciation rates—and now on top of that you are going to put extra costs in a labour environment where there are already huge burdens with labour costs, not just in terms of work practices but also with the exchange rate. All of those make Qantas more and more uncompetitive and it is going to result in a more rapid decline in the market share out of Australia.
Senator HEFFERNAN: Looking around Australia, a mate of mine, Roger Fletcher in Dubbo, has just shut his wool business. He cannot compete. When the US took over from Great Britain—sorry to give you a lesson in history, Mr Joyce—100 years ago as the industrial—
CHAIR: I am being very patient, Senator Heffernan, after your lecture of Senator Xenophon today.
Senator HEFFERNAN: Thank you for that. We have got to get to what we are up against. That is a statement by—
CHAIR: You have made it very clear. We have taken note of that.
Senator HEFFERNAN: This is putting Qantas at peril. The US had a two-to-one labour advantage over Great Britain. China, in a mid-section of its labour cost, has about a 25-to-one labour advantage against the US. The US is technically insolvent. We are trying to say that we are going to have a fortress mentality for airlines but not for everything else—we are going to meet the market with wool processing and with sheep and cattle on the export market. Do you think the parliament gets it? I do not know what the authors of these bills want out of it, but do you think they understand the implications of them?
Mr Joyce : I hope so. That is why we are now back to the fourth Senate committee hearing we have had in a year, we have answered 200 questions that were supplied to us and there are 20 questions on notice. This will be six hours in total just on this. If we have not made it clear what the implications of this bill are, we have failed. I think you are right. I cannot use any stronger language than I used here in my opening statement to indicate what I think it means for the Qantas group. This is fundamentally important for the Qantas group. We do not want to have restrictions on us that make us less competitive. We need to be flexible and to adapt.
I am very passionate about this brand. I think it is an amazing success story here in Australia. This little airline started in Outback Queensland and is now the 10th largest airline in the world, is the only investment-grade airline in the world, is one of the few profitable airlines in the world and has a group fleet of nearly 300 aircraft flying to every continent in the world. It is an unbelievable success story. We all should be proud of it and talking it up. We should all be saying, 'How can we ensure it is around for the next 90 years.' This act will ensure that it is not around for the next 90 years, if the changes are made. We need to ensure Qantas is flexible and adaptable, as it has been in its entire history. We were once just a regional freight business, then we were a domestic business and then we were only an international business. We are now a global business. We need Qantas to change and adapt, as it has in 90 years. This act tries to put us back a decade or more and restricts our ability to change the market environment.
Senator HEFFERNAN: I have said many times on this committee that my great worry about airlines, and Qantas is included in this—and a whole lot of others have gone belly up—is that the travelling public expect to fly from Sydney to Port Douglas for $50. And I saw over the Christmas break that you could go to Hawaii for $350. If we are to maintain the financial viability of an airline and at the same time maintain the safety record and maintenance of an airline, one or the other, in my view, will fail, if we continue along with the logic in these bills.
I do not get it. After the World War Two if you bought something Japanese it was cheap and nasty and did not work. Then Japan became a leader in car manufacturing and their costs caught up with them. We then went to Korea and 'Oh, God, Korean stuff is rubbish,' but they came good. Now we have gone to Chinese cars and because the cost of labour is going up China is about to use the labour in Bangladesh, where 80 per cent of the population earn a dollar a day. With all that in mind it would be fair to say that the average Australian wants to ensure the safety of Qantas and the maintenance of Qantas, hence the idea that you should maintain your planes in Australia. But lots of doctors come to Australia from overseas, especially the Coptic doctors from Egypt, and they are bloody good doctors. Just because they are trained overseas does not mean to say they are no good. If to survive as an airline you have to get some of your maintenance done overseas, is it not fair to say that that maintenance is up to scratch?
Mr Joyce : Absolutely, and I absolutely believe that you can get the efficiencies, make sure that you are efficient and maintain the immense safety record that Qantas has had. There is not a compromise between the two. I think absolutely that they can go hand in hand. If you think of what we are talking about, the A380s are a great example. We have 12 aircraft at the moment. We are not going to have 20 aircraft until the end of this decade. The size of that fleet is insufficient for us to have the critical mass to do it here in Australia. If we were based somewhere else where it made logical sense for other airlines to do their maintenance, then you might be able to construct a maintenance base to do the maintenance on those aircraft. Qantas has the dilemma of building hangars for A380s which are going to be massively underutilised, with labour that is going to be utilised, or doing the maintenance at one of the providers around the world. The maintenance that we have got done on the A380s has been in companies like Lufthansa. Who would say that the Germans do not have the technical or engineering expertise to repair or manage aircraft?
I think perceptions of safety are also changing. You look at the record of the world aviation industry and it has continuously improved. The number of accidents and fatalities every year has dropped as new technology and new systems have come into place. And now Australians travelling overseas take that for granted, because the world aviation industry is a lot safer. People are not willing to pay a massive premium for Qantas because of its safety reputation because people see the world airline industry as having dramatically improved. What I would say to the Australian public is: if it is important for you that maintenance is done here in Australia, then you only have one choice—that is, Qantas—because all of the other airlines that fly into this country have the vast majority of their maintenance done overseas, and 82 out of 100 Australians fly on those airlines.
The maintenance that is done by these airlines in other countries is not substandard, as you say. We are talking about people like Lufthansa, Cathay Pacific and Singapore Airlines. They have amazingly capable maintenance facilities that are world-leading maintenance facilities, and we should recognise that.
Senator HEFFERNAN: I am really worried about what this is really all about. Would it be fair to say that in the international market you are unable to compete and your competitors are? Why is that? Is that just a combination of all those things?
Mr Joyce : I think Qantas can compete, but we have to change to be competitive in the international markets. We have a plan that we want to implement and are implementing that we think will turn around our international business. I have committed to the market that we believe that in three years we can get the business back into profits, to a break-even situation, and within five years to returning its cost to capital, but that is going to need significant change to the way we do the business.
There are parts of our business that we are already, internationally, making money on. There are parts to our business internationally where we are losing a lot of money. We are addressing them with the combination of actions that we announced last year. One component is to pull back on the significant-loss-making routes. Another component is to work with our alliance partners. With American Airlines we have just got antitrust immunity. That is paying dividends. For example, our Dallas service is profitable already. It is outperforming the San Francisco service. For a new service, that is an amazing position to be in. We are looking at antitrust immunity and alliance partners in other areas to do the same transformation we have seen on the North American routes.
We are looking at what we do in Asia. We need to do something different in Asia because Asia is the weakest market for Qantas. It has the lowest share of our market share. It is the biggest growth market, and it is going to be the most profitable market in the world. So we are talking to a number of parties about what we do in Asia to make Qantas relevant to that market and how we can produce an alternative for our business customers that make us.
That plan we think can get us there and can make us competitive, but if the changes in this act go through it will be one step forward, two steps back, and that is the danger that this act will entail.
Senator HEFFERNAN: So this act will threaten your investments in Jetstar Asia et cetera. Do you think—God help us so we do not do it—you would actually lose those investments?
Mr Joyce : Well, I think the last modifications change the implications, in my understanding, of what it means for the Asia investments. But it does have severe implications for Jetstar in Australia. As I said, it means that either Jetstar will wither or Jetstar would have to be sold. If you had to sell Jetstar in Australia, then Jetstar in the rest of Asia would obviously logically go with it, and that would have implications for those investments—
Senator HEFFERNAN: Obviously Mike Mrdak is onto this. In terms of regional services, you say this could put at risk regional services. Mr Joyce, I hope we do not have too many Q400 incidents like the one we had the other day here in Canberra—and you can go there if you want to! How does this threaten some of the regional services in Australia?
Mr Joyce : I think I will mention the Q400 instance, because you—
Senator HEFFERNAN: This will come to us in due course, but it is probably not—through you, Mr Chairman—in the context of this hearing.
CHAIR: Yes, but we will deal with it.
Mr Joyce : On the Q400 instance that we have had: as we talked about, Senator, I think, at your last committee, engine failures are an occurrence on engines all around the world. Qantas has amazingly successful operation of twin engines. The safety issue, as you are aware, comes with the failure of twin engine aircraft. Our failure rate of twin engine aircraft is three in a million errors. So a million errors operate and you have three failures. The world average is seven in a million. The legislative limit is 20 in a million. If you go past 20, you have to ground the aircraft. Qantas has won awards from a number of different manufacturers for the length of time it has had engines on wing without failure. For example, on the Boeing 737-800s, we have had over a million errors of the aircraft on the wing without failure. No other airline has achieved that. That is an amazing success story.
Engine failures happen. They happen to every airline around the world, but they happen a lot less on Qantas. In fact, you are less than half as likely to have an engine failure on a twin engine with Qantas than you are on another airline around the world. That is how successful we are with our maintenance of those vehicles.
I will ask Bruce to talk about the implications for regional Australia of this.
Mr Buchanan : I will use the example of Darwin, since we were talking about some of these statistics before and I think that is probably the most relevant. We have set up a business in Darwin which is quite unique. We have an international hub that operates in Darwin and we have a number of aircraft and a large employee base based in Darwin that support that operation. The way we have been able to build that significant hub in Darwin is by operating services from other points in Australia through Darwin to a number of points in Asia. It is our most marginal of the domestic ports. It is the one that is the most marginal in terms of profitability, so it is the toughest one to make—
Senator HEFFERNAN: This is Darwin?
Mr Buchanan : Darwin. It is a tough operating environment. Getting international services to work out of Darwin is tough because they are not big routes; they are quite marginal. Most of our competitors have pulled out of Darwin. We are one of the few carriers that are still servicing Darwin. We use the tag flights and the international feed to support those international flights out of Darwin. That has obviously helped the Darwin tourism industry. It helps with some of the mining and mineral boom that is going on there as well that people can get directly into Darwin from some of those international destinations.
But, just for instance, if our cabin crew cost were to double in Darwin, the viability of those services just would not be there. We would have to pull a number of services. We are already pulling some of the services and constantly tweaking the Darwin network, and we are going to need to do more just to continue to make it work with the current cost imposts that we have on our business in Darwin. But if you double the cost of cabin crew in Darwin—and we talked about the numbers before; I do not know the AC number but I think it is somewhere around 10 per cent—you double the cost base, and that will put it so far underwater that we would have to pull about half the Darwin flying. That would have a serious impact not only on Darwin but on Cairns and on all of the tourism industry that relies on those services to feed passengers into Darwin.
Senator HEFFERNAN: At the same time Thai airlines, for instance—who camp at the Boulevard, where I camp in Sydney—would eat your trade.
Mr Buchanan : Exactly, yes. We are competing with carriers that are flying directly over the top, and we are trying to get to the Darwin proposition. We also compete directly with those carriers. In fact a lot of those carriers also do tag flights in Australia as well and they are obviously not subject to Australian terms and conditions and wages. So we are competing with them on a number of different dimensions. Darwin is one of them. We are competing directly with them and we are competing in the intra-Asian markets with them. As you point out, the labour rates are considerably different.
The other impost is that a lot of these get government sponsorship, so they can access sovereign debt rates. They get significant support in terms of depreciation rates. They are not subject to things like payroll taxes and other obligations which all add up to considerable burdens when you have the large labour force you are employing in this country.
Senator HEFFERNAN: This is a serious problem for Australia, as is the bloody dollar for farmers. I will not say what the price of wheat is now because I will get pulled into gear—
CHAIR: You will.
Senator HEFFERNAN: but it is no good. What would the average be, say, for Philippine Airlines for a pilot? You say for Australia the top is $500,000—$1,000 a flying hour. Have you got any idea what you are competing against in terms of dollars an hour?
Mr Buchanan : I am going to give you some examples of cabin crew and pilots. A lot of the competitors we compete with in Asia are for cabin crew. The standard salaries we see in the more developed Asian economies—I say that because there are some economies like Vietnam, China and Cambodia where the salaries are significantly lower—for cabin crew are around $1,000 a month. That tends to be a typical salary. We tend to pay salaries for our offshore cabin crew of $2,000 a month and for our onshore cabin crew of around $5,000 or $6,000 a month. So there is a significant difference just for cabin crew alone.
In a lot of the more developed economies there is a global market for pilots. It tends to be for a captain around the US$200,000 mark. There are significant differentials in some of the less developed places like Malaysia, Vietnam and China, where the salaries for captains can be as low as $50,000 or $60,000 a year.
Senator HEFFERNAN: My point though is that that is in US dollars. We have appreciated 50 per cent against the US dollar in recent years.
Mr Buchanan : Yes. A lot of these rates at the global level—
Senator HEFFERNAN: This fails to recognise any of that. God help us.
CHAIR: Just to clarify, are any of your competitors paying more or equivalent to you, to your knowledge?
Mr Joyce : Off the top of my head, I do not believe there are any competitors paying more. If you relate everything back to US dollars then certainly not. I know the stats when it comes to British Airways because we do a joint venture with them. If you go back to 2004, our pilots were not being paid more than those working for British Airways. Today it has turned the other way. Two-thirds of the movement is because of the currency rate. Our pilots are now paid a lot higher than those working for British Airways, and one-third is because British Airways have gotten efficiencies which we have not. But we are significantly higher than that. British Airways used to have the highest paid pilots in the world.
CHAIR: Sorry to interrupt you, Senator Heffernan, but I will just ask while we are on that: you have had a turnover of pilots lately, have not you? There has been quite a substantial number gone off on sick leave—
Mr Joyce : No, it is—
CHAIR: Leave without pay?
Mr Joyce : Yes. The actual resignation rates of pilots is extremely low. It is actually one per cent or less. Pilots typically stick with the airline that they join, and I think that is the same for the Jetstar as it is for Qantas. We did have surplus pilot numbers as a result of us scaling back out UK operations from the four to two services per week and scaling back some of the other services internationally. We had a surplus of around 150 pilots. We did not want to make redundancies because, as I said, we want to turn our international business around so we can start growing again. So we offered pilots leave without pay to work for other airlines. Some of the pilots went to Jetstar with the growth that Jetstar has experienced not only in Asia on Jetstar terms and conditions and have taken a three-year leave of absence after which they can come back to Qantas. Some have gone to—
CHAIR: Or you can make them redundant in the interim.
Mr Joyce : No. They may not be the same pilots. It is a last-in first-out system. So some of those pilots could be way up in seniority. So when they come back it depends where they are in seniority. They may have a job and then we would have to revisit whether the international business has recovered sufficiently enough and whether there are redundancies. To give an example of how we are planning for this, in London we had those four services. Heathrow slots are very valuable. We have kept the two slots in Heathrow that were leased in April.
CHAIR: Even though you are not using them.
Mr Joyce : Yes. BA are using them for three years and are paying us money for the slots. So we actually make money out of it, and in three years time we get the slot back. Hopefully we can turn the international business around so we can reclaim those slots, put the flying back into London and take those pilots back into the Qantas operation.
CHAIR: It may assist the committee if you could provide numbers around those pilots that you have got off.
Mr Joyce : I might answer a few more questions while we are here. For Senator Xenophon we have clarified that fuel costs are not included in the Jetconnect numbers. It is a wet lease arrangement, so the aircraft variable costs include the aircraft ownership costs and the lease of those aircraft but do not include fuel costs.
Senator XENOPHON: Thank you for that answer, but I want to ask a question further to that. It says 'aircraft operating variable', and when you first looked at that you thought it seemed like fuel. That was a reasonable assumption to make, because when you look at other accounts 'aircraft operating variable' would include fuel. So it is NZ$23.9 million for 2011 and NZ$24.7 million for 2010. What would the aircraft operating variable expenses be?
Mr Joyce : That is the maintenance of the aircraft and the ownership of the aircraft. All of them are done by Jetconnect locally. Those costs are charged back to Qantas. It is very similar to a relationship we have with Cobham, which is a non-owned entity. They wet lease aircraft to Qantas—the 717s—to do all of our regional operations. It is the exact same mechanism that we would have there. We would have the airline operating costs—which are the cost of maintenance, the cost of the aircraft, the cost of the pilots and the cost of the cabin crew—allocated back. Then Qantas would pay all of the en route charges, the fuel costs and the landing fees at the airport, as part of that operation.
Senator XENOPHON: So Qantas pays all the fuel costs.
Mr Joyce : Airport costs and en route costs are all covered by Qantas.
Senator XENOPHON: So that would show up on Qantas's mainline books.
Mr Joyce : Yes. But this is all put back into Qantas's mainline books. We do consolidate them back in. We are not saying that Jetconnect is making $11 million as a stand-alone entity that is completely different from Qantas. It is allocated back into the Qantas resource, because it is part of the Qantas network.
Senator XENOPHON: I am just trying to sort this out—and I am not suggesting anything improper. Regarding the revenue from operating activities of NZ$73.4 million in 2011, you have manpower and staff related costs of $37 million, aircraft operating variable costs of $23.9 million and 'other' costs of $5.3 million. That is $66 million. And you had some other revenue, so it is $77 million in revenue, $66 million in expenditure and profit before related income tax expense of $11.2 million. Is fuel not included in that?
Mr Joyce : No, it is not.
Senator XENOPHON: So if fuel was included in it you would be losing money. Is that right? I do not want to misunderstand you.
Mr Joyce : That is not the way it works. Wet lease provision is a standard process in the aviation industry. We have wet leased aircraft from other entities around the world. Because this is a New Zealand based company, it is not operating these routes in its own right. The service it is providing is a wet lease operation. What we mean by 'wet lease' is that it provides aircraft with crew to Qantas—
Senator XENOPHON: But not fuel.
Mr Joyce : No. It just provides the aircraft.
Senator XENOPHON: Would other wet lease operations include fuel?
Mr Joyce : Yes. A normal lease, called a dry lease, would. You can get leases that include fuel and other costs associated with it.
Senator XENOPHON: Would a normal wet lease include fuel?
Mr Joyce : No, it does not. Cobham is a great example. With Cobham, we get what is called aircraft, crew maintenance and insurance. It is usually an ACMI rate.
Senator XENOPHON: But not fuel.
Mr Joyce : Not fuel. And that is the exact business relationship we have with Cobham. At Cobham they make a margin out of it. This company is reporting a margin—because there must be commercial terms—for the New Zealand statutory requirements. But when that margin is made, it is reallocated back to Qantas so that margin is shown in the Qantas results.
Mr Buchanan : I think the confusing part there, Senator, is the revenue line in those accounts is not the revenue from passengers; it is the revenue that Qantas pays to Jetconnect for mounting those services.
Mr Joyce : For a wet lease. So we actually have a wet lease revenue. It is not allocated the entire revenue on the trans-Tasman. That is a great point. It is clearly a cost for providing those services that is charged to Qantas by that entity and then it is reconciled back at the end of the year.
Senator XENOPHON: Does Jetconnect lease its aircraft?
Mr Joyce : The Qantas group purchases aircraft and allocates them to Jetconnect business, and the Jetconnect business operates those aircraft and charges them back.
Senator XENOPHON: So all the Jetconnect fuel bills for those flights are paid for by Qantas?
Mr Joyce : Yes.
Senator XENOPHON: What else does it pay?
Mr Joyce : As I said, airport landing charges, en route costs, costs associated with overheads for sales and distribution.
Senator XENOPHON: Would you call Jetconnect an airline?
Mr Joyce : No. Jetconnect is an operating entity. We have never said it is a stand-alone business. It is not reported as a stand-alone business. We do not portray those profits as stand-alone business profits. It is an entity that is operating on behalf of Qantas, but for statutory requirements in New Zealand we have to report a revenue line, which is the charges it covers to Qantas for operating purposes and we have to cover its costs line. But this business, when it comes back to reporting overall group profitability, is consolidated back into the Qantas segment and it does not cause a distortion on the Qantas numbers.
Senator XENOPHON: Basically, the savings you get from it are because you are paying people out of New Zealand at New Zealand rates. Is that a fair summary?
Mr Joyce : And the aircraft are based in New Zealand, which is the most efficient location. As I mentioned to you earlier, Senator, you get an extra three or four hours utilisation out of the aircraft because of the time zones. Essentially you start an aircraft at 6 o'clock in New Zealand; it is 3 o'clock here. You can't start the aircraft at 3 o'clock here; it is not a commercially viable operation. So you start in New Zealand. That is where the economics work. The aircraft flies from New Zealand to Australia and it gets back to New Zealand at whatever—midnightor 11 o'clock at night. You get a longer day and better utilisation and that makes the operation more efficient.
Senator XENOPHON: It is basically about efficiencies in terms of labour hire. I am not criticising you; I am just saying.
Mr Joyce : It is a combination. Labour comes into it, absolutely, because it is at New Zealand rates and it is competing against Air New Zealand and Pacific Blue. This operation would not exist if it were not competitive against Air New Zealand or Pacific Blue. That is why we needed a New Zealand cost base, but a large element of it is the efficiency you get out of the aircraft. If we had to deal with Australian crew, we would have overnight accommodation to start the aircraft in New Zealand; that would be a burden on these routes that they cannot support.
Senator XENOPHON: The wet lease arrangements are between Jetconnect and Qantas in terms of working out who is what, but it is basically wholly owned by Qantas, isn't it?
Mr Joyce : It is, but we do these things on a commercial basis, so we have dealt with wet lease arrangements previously. As I said, we have a commercial agreement with Cobham, which is 100 per cent not owned by Qantas; it is a separate entity. Cobham wet leases aircraft to Qantas under commercial terms, and Jetconnect's terms are no different.
Senator XENOPHON: So Cobham is not owned by Qantas; it is completely separate. Would it be fair to say that the wet lease arrangement between Jetconnect and Qantas is on the same commercial terms as Qantas and Cobham?
Mr Joyce : There are differences because of the aircraft type. There are differences because of the crew—
Senator XENOPHON: In terms of market rates?
Mr Joyce : It is on the same terms, yes. Cobham would make a similar margin out of the operation of the aircraft as Jetconnect would based on the operation that we would have.
Mr Buchanan : I think it is worth saying that the other factors are very important, not just labour rates. As Alan talked about, productivity is critical. Also, things like payroll tax and the other on-costs that you pay in Australia are significant differentials. So there are a number of factors that do feed into—
Senator XENOPHON: I think both you and Mr Joyce have said before that, with depreciation rates for aircraft in Australia, there is a disadvantage compared to other jurisdictions. Could you provide a sketch of what the differences are?
Mr Joyce : That is quite significant.
Senator XENOPHON: That is something you have lobbied the government about?
Mr Joyce : It is something that has continued. For a decade now, I think, Qantas has been lobbying the government.
Senator XENOPHON: So it is continual lobbying.
Mr Joyce : Yes. We have been unsuccessful for at least 10 years. Can I answer a couple of other questions that we have had. First of all, in terms of the pilots, there are 128 pilots on leave without pay at the moment and the rest of the surplus is being managed by leave, so it is 128. In terms of the average captains' salaries for the Qantas fleet—I think Senator Heffernan had them—for the A380 the average captain's salary is $416,000, for the 747 it is $371,000, for the A330 it is $342,000, for the 767 it is $271,000, and for the 737 it is $257,000. In terms of employee costs—I think there was a question raised—Emirates' employee costs represent 15 per cent of revenue and Qantas's employee costs represent 26 per cent of revenue. That 10 per cent difference on Qantas's revenue base is worth $1.6 billion in terms of inefficiency compared to Emirates.
There is one other thing. We have contacted our providers of hotel rooms, and to avoid you having to go in camera on this issue we are happy to cover what we are paying. We have asked for our confidentiality to be waived. In terms of the average room rates booked for Qantas passengers between 30 October and 1 November, when the grounding happened, the international rate was $190 per room and the domestic rate was $240 per room. The total estimated cost for the accommodation was $1.9 million. The international cost was $1.2 million and the domestic cost was $700,000.
CHAIR: Thank you very much for that information to save us doing that. Before I flick to Senator Gallacher and then to Senator Abetz, I just want to follow up very quickly on Senator Xenophon's line of questioning in terms of Jetconnect. Is it right to say that all trans-Tasman operations to New Zealand by Qantas are carried out by Jetconnect?
Mr Joyce : No, there are Qantas operations on the route. For example, we have an A330 that flies Sydney-Auckland-LA. That Sydney-Auckland leg is operated by a Qantas A330. There are Qantas services into Wellington, I think, from Sydney. There are a number of Qantas services on the trans-Tasman, and of course there is a big Jetstar operation also on the trans-Tasman.
CHAIR: Okay, but without the opportunity in terms of facing the competition in wages, payroll tax—I think you said—and productivity you could not operate the routes from Sydney direct to Auckland and Melbourne direct to Auckland unless you were using Jetconnect?
Mr Joyce : Yes. As you are probably aware, the trans-Tasman has not been a very profitable route group for the group—having it with, as I said, the complexities of having Qantas aircraft based in New Zealand operating with crews overnighting in New Zealand and with the discrepancy we would have between the rates our competition pays and what we pay. The combination of all of them would result in the trans-Tasman operation not being viable. Trans-Tasman is a struggle for the group today; the Christchurch earthquake has not helped. So the trans-Tasman is a route group that could not digest those extra costs.
CHAIR: I suppose the fear is—and it is a reality; it is there—is: with what other routes are you under extreme pressure in terms of the same productivity and payroll tax issues and all that where you are now operating Qantas employees on Qantas routes? What I am trying to say is: what is stopping you having to go down that same path with other routes where there will be, for want of a better term, labour hire or alternatives to Qantas employees on Qantas wages and conditions.
Mr Joyce : The first thing, I think, is that the New Zealand operation is very different because Jetconnect has now been operating for more than a decade, so it is a long-established operation. I have to say that it was recognised by the unions that we did need that operation to be competitive. I think the pilots recognised in the previous agreement the fact that we did need it and the role that Jetconnect had to play.
When it comes to the rest of the operation there are very different problems that exist. We are not planning a Jetconnect to be operating anywhere else. We have to turn around the Qantas business in the rest of the world. The A380s operated by Qantas will continue to be operated by Qantas, and we need to get them efficient to be competitive. We are in a different position in different markets. There are some markets where we are structurally advantaged. Take the North American market, where we are competing against American carriers and Virgin Australia. We believe our product, our network and our partner allow us to have a structural advantage on that route, and with Qantas's operation we believe we can turn that round and make money. We have, as I mentioned, seen Dallas and LA turn back into profits. Within Europe it is different. We are going to have to work on what we need to do in Asia and the plan about what we are doing in Asia is going to help support the Qantas jobs and the Qantas operation. It is not to replace the Qantas jobs and operations. We said what we are going to do in Asia with the new Asian premium carrier will not affect one single Australian job. Its intention is to be there to strengthen our position into Europe, to strengthen our position as to the other Asian destinations and to keep the corporate market with Qantas. So we are not creating Jetconnects around the world to do this. This is unique to the New Zealand market. The problems are different in other markets and they need different solutions and Jetconnect is not the solution.
CHAIR: Just before I do fly back and I understand and appreciate that—and I will come to you in a second, Senator Xenophon—but am I right in assuming there are similar arrangements from Singapore to London now, because every time I have done that it has always been British crewed?
Mr Joyce : No. That is something that has been established for some time. We have a UK based cabin crew base. Again, it was more efficient for us to do that. I think we are the biggest purchaser of hotel rooms in Singapore today because we have so many crew overnighting in Singapore and we felt that it was needed for efficiency to have a UK based crew base. They are employed by Qantas in the UK. It makes it a lot more efficient for us to do it that way. There are no pilots employed by that. It is very different. It is cabin crew, not pilots. It does not have a maintenance arm, like Jetconnect has, to do its own maintenance. So it is a very different type of set-up. That is not uncommon. If you look at international airlines around the world, they will not just have a home base for their crew; they will have bases around the world where crew are located, because it is a more efficient way of actually crewing the operation.
CHAIR: Thanks, Mr Joyce.
Senator XENOPHON: Chair, if I can follow up your line of questioning: but in terms of the trans-Tasman routes being a tough market, Qantas actually increased their frequencies to about 168 flights a week. Isn't that so?
Mr Joyce : Sorry, Qantas itself or Jetconnect?
Senator XENOPHON: I am sorry; well, Jetconnect has increased. Well, Qantas advertises. You see the ads and you assume it is a Qantas flight that you go on.
Mr Joyce : No. What has happened trans-Tasman is that we have actually reduced, I believe, the size of aircraft and increased frequency to appeal to the corporate market because we felt our frequency was a requirement and the wide bodies in particular were losing a huge amount of money.
Senator XENOPHON: So you have the 737s?
Mr Joyce : We have got the 737s, a set of 767s and A330s operating. At one stage we used to have a 747. We used to have a Brisbane-Auckland-LA service with the 747. That was using a significant amount of money. We have replaced that 747 with 737s and that is a significant increase in frequency but not an increase in capacity.
Senator XENOPHON: In terms of when you decided to ground the airline on 29 October, you did not ground Jetconnect, did you?
Mr Joyce : No, it was a separate entity, as you have said.
Senator XENOPHON: But you have control over that entity, don't you?
Mr Joyce : We do. But we did not have—
Senator XENOPHON: You could have if you wanted to.
Mr Joyce : We could have. The reason why we grounded the airline was because of the lockout. The lockout applied to employees of Qantas Airways—the pilots, the engineers and the TWU employees—which meant that it was impossible for us to continue the operation with that lockout taking place. Jetconnect was not subject to the same industrial relations dispute.
Senator XENOPHON: Because it is a totally different workforce?
Mr Joyce : Nor was QantasLink and nor was Jetstar, so QantasLink continued and Jetstar continued and Jetconnect continued.
Senator XENOPHON: Because it was a different—
Mr Joyce : A different workforce and different employment conditions.
Senator XENOPHON: So different employment issues. Okay, thank you.
Senator GALLACHER: The lockout certainly put two things in perspective. One is that you had a dispute that was not being resolved with your employees and the other was the absolute catastrophic damage to the Australian economy that the 24 hours-plus of no flying did. So in that environment clearly under the Fair Work Act you had no requirement to notify anybody, under your aircraft operating certificate you had no duty to notify after you made the decision and under the Qantas Sale Act there was no requirement to talk to anybody. Is that a fair assessment?
Mr Joyce : No, I do not think that is, Senator. I will take the first part of your question. I do not agree with the premise. The damage to the Australian economy was already taking place because we already had industrial action taking place by the three unions that had disrupted over 70,000 passengers and had cost Qantas over $68 million. And we had the unions talking about 48-hour stoppages as a slow bake taking place over a year. So the damage to our economy would have been a lot greater if we had let this continue. Actually, by our actions I would contest that we minimised the damage to the economy and to Qantas, because we brought it to a head, we stopped it lasting a full year, we stopped hundreds of thousands of customers being disrupted and we stopped hundreds of millions of dollars of cost to Qantas by dealing the way we do. So I contest that the damage was caused by the grounding; more damage would have been done by the continued industrial action.
Senator GALLACHER: I am really concerned about the domestic side of the Qantas business. For argument's sake, Sydney to Melbourne is reportedly the third or fourth busiest domestic route in the world and you are operating that sector with probably the oldest planes in the Australian domestic market, versus four years for Virgin and probably 4½ years for Jetstar. I think that is what was report this committee. What age are your planes that operate in that sector—the third or fourth busiest domestic sector in the world?
Mr Joyce : I think we supplied the answer to the average Qantas fleet age, which is 11.9 years, I believe. That is in the numbers. We have some aircraft—
Senator GALLACHER: If I could butt in there, if I were to take out the A380s, which do not fly domestically, and there are six of those, you are probably three times the age of the Virgin fleet, at 11 or 12 years?
Mr Joyce : You are right, Senator, we have some aircraft that are 20 to 25 years of age, but we do have a plan for those aircraft to be replaced. The older 767s will be removed from the fleet next year when the 787s come into the fleet. They are the oldest aircraft that are operating—the Rolls-Royce 767s. I believe seven of them will be removed during the financial year of 2013-14.
This comes back to why you need a successful, healthy Qantas. We are spending this year—we have reported to the market $2.5 billion. Next year it will be $2.8 billion on new aircraft and new technology. We are spending more than any other major airline, apart from the Middle Eastern carriers. We have to be able to fund that out of operating cashflows. This year our operating cashflows were $1.7 billion. So we are actually borrowing $800 million to replace the fleet. No business that keeps going like that is sustainable. We need to renew it. We are going through a renewal phase. We are replacing these aircraft and have significant orders over the next few years. If Qantas cannot get its free operating cashflows up to that $2½ billion so that we do not have to borrow, it will go into a vicious circle of losing its investment grade credit rating and not being able to fund the replacement aircraft, and that is unbelievably detrimental to the airline. We know we have to do it for renewal. We are doing it at the fastest pace possible. Actually, at the moment we are doing it through borrowings, which we should not be doing, and it is not sustainable in the long term, but it shows you the importance of improving our profitability, otherwise we will not be able to replace those aircraft.
Senator GALLACHER: You mentioned depreciation. Would it be wrong to assume that you are operating domestically a fleet three times older than your competitors—fully depreciated and generating lots of cash, and then putting it into these start-up ventures, which will not be called Qantas, and the majority of your staff, whether they are baggage handlers or pilots, will get no opportunity to work in and share in that venture, and they are funding those start-up ventures, about which Mr Buchanan said, 'If they have to pay Australian wages on the domestic sectors, it will fall over'?
Mr Joyce : No, that is not true.
Senator GALLACHER: What hope does your staff have of believing your plans?
Mr Joyce : That is not true, Senator. The vast majority of the capital that we are expending goes on to the Qantas brands. I think that, in the response to questions that were asked on notice—one of the senators believed we were only taking one 737-800 this year—we said we were taking nine 737-800s this year, and 16 are coming in the next two years. In actual financial terms, we are spending more on Qantas's domestic fleet that we are on Jetstar's fleet. We are spending more on Qantas's international fleet that we are on the Jetstar fleet. In fact, over the last four years, we have spent nearly $4.6 billion on the A380s alone. That is far more than we have ever spent on Jetstar aircraft. So it is a completely false belief that somehow the Qantas brand is not getting the capital. The Qantas brand is getting the vast majority of the capital, and that goes both domestically and internationally, and Jetstar, which has the biggest return on invested capital as a segment, is actually getting less capital. That is the situation. There is not this position where Qantas domestic is subsidising Jetstar. In fact, Jetstar is helping subsidise Qantas international, as Qantas domestic is. For all of those segments, all the profits they make are going against a significant deficit that we have in our international business.
Mr Buchanan : The other thing that I think is worth pointing out is that there is a lot of focus on the subsidiaries in Asia. Our total cash investment or equity investment in all of our Jetstar ventures in Asia is probably around $200 million. When you think about the cost of one A380, which is in excess of $300 million, it puts into perspective where the capital is going. Where is the $2.5 billion or $2.8 billion a year that talked Alan talked about going? It is not going into those investments in Asia. Those investments in Asia are creating real opportunities for shareholders in the future, but the primary investment, for the largest bulk of capital, goes into aircraft into our Australian domiciled businesses.
Senator GALLACHER: To take up Senator Heffernan's point about the uncompetitive nature, Qantas has grown in Australia, it employs 30,000 people in Australia, it is governed by Australian industrial relations laws and it has agreed over the years on many agreements. Your comments basically are saying that those people are not competitive in the world marketplace. So are you suggesting that we tear up agreements, tear up the Fair Work Act, get rid of payroll tax? You live in Australia, you operate in Australia, your profits are generated in Australia and you come here making statements about payroll tax, which most reputable employers in Australia pay, and the like.
Mr Joyce : No, Senator, what we have said very clearly is that our business needs to adapt to the environment out there. We are not asking for a free kick. We are not asking for a free handout. What we are asking for is the ability to be able to manage our business and to change it and make sure it is flexible to be able to adapt with the environment. We are pointing out the advantages our competitors have. I think Senator Heffernan was pointing out the damage that is caused to the manufacturing industry, the wool industry, a whole series of other industries because of the strong Australian dollar and because of what that means in terms of our competitors as a country. That is a reality. We all have to face up to that reality. And it means that Qantas needs to adapt.
The issue that we are focusing on is the work practices that have been there for a long time, that new technology and changes mean we have to adapt too. We have mentioned the heavy maintenance as an example. We have a review of our heavy maintenance facilities taking place. We have three heavy maintenance facilities in this country. They were set up 20 years ago when aircraft technology was very different, like your car was very different, in terms of how we serviced aircraft. We have different ways of aircraft being serviced; they are new aircraft with new technology. We need to change to adapt to deal with that new technology.
We mentioned our catering facility in Brisbane. The catering facility is a $75 million facility that is state of the art in its food preparation and food disposal. It needs a lot less people, it is a lot more efficient, and we need to adapt and change to that. So this is all about us having the flexibility to do it.
What we are saying about this legislation is that this takes us backwards. This imposes conditions on us that none of our competitors actually have and it does not allow us to be flexible and adaptable to cope with that environment. The consequence is that there will be less jobs in Australia, because we will not be able to employ the 35,000 people that we have because we will not be able to invest in the new technology in the new aircraft and our fleet replacement program will meet a hurdle. That is the reality, and that is what we are saying, Senator. We are asking for the ability to change and be flexible—that is all we are asking for.
Mr Buchanan : Talking about the competitive differentials, we should not stick our head in the sand. We should be able to freely talk about the differences between ourselves and our international competitors. We are not asking for a handout on any of those items. We are merely saying these are the operating parameters that we operate in and the differences that we have to compete with versus our international competitors. So not only do we have to get all our labour practices efficient in their own right, we have these additional competitive pressures that exist.
Senator GALLACHER: And you come to the Senate committee with the opening statement that if you do not get your own way you will remove yourself from Cairns or Darwin. Cairns and Darwin airports will survive after Jetstar goes. That is the reality of it. You went there and took somebody else's business. If you go, someone else will come in and take up that business. Tourism will not stop because Jetstar does not fly. I find it offensive that, in the opening line of your gambit, you take probably the Ryanair business model of threatening to withdraw from services. Basically there is a process going on here which will take its course in parliament and, given the divergent views around here, it is not likely to be all that threatening to Qantas. But you come in here and the first opening stand that you take is: 'If we don't get our own way, we're out of Cairns and we are out of Darwin.'
Mr Joyce : I am sorry that you have interpreted it that way, because—
Senator GALLACHER: That is what you said.
Mr Joyce : I made it very clear what the consequences of the changes to the act were. I thought that was the reason that we were asked to appear before the committee—to be completely open, transparent and very clear on the implications of this. I do not think I would have done anybody any favours, anybody in Cairns any favours or anybody in Darwin any favours, if we were silent on the implications of this and let this debate go down that course—which it will—and let a change to the act occur and then come out and say what we are doing as a consequence of it. We wanted to be clear about the implications.
If somebody else can economically do those routes, Senator, I could not agree more with you: let them fill up their boots with them. But the fact is that we have had open policy, as we said in the opening statement, for international carriers to fly here without any restrictions to these regional destinations, and they have not. They cannot make money out of it.
Senator GALLACHER: There is only a certainly number of airports and you have locked up most of the leasing space on those airports. They can have a tin shed at the end of the runway at Darwin airport or they can be five miles down from the car park at Melbourne.
Mr Joyce : Senator, as you know, Cairns airport has lost a lot of capacity. They absolutely have the ability to have as many international carriers operating in there as they can. We filled up Darwin because we put the aircraft in that were never there before. We have four aircraft based there and employ 160 people. Nobody based aircraft there before. Nobody employed that level of people before. So this did not exist before Qantas and it will not exist after Qantas. We are fooling ourselves to think somebody will come in to fill up the gap, because it will not happen. We know the economics of these routes. So Darwin and Cairns will lose as a consequence of this. That is not a threat; that is just a fact. We are not threatening anybody, but it is up to us to outline exactly what the facts are so that nobody has a misinterpretation of what will take place if this legislation is passed. That is why we are here. So I am not going to mollycoddle you or coat it; these are the realities of life.
Senator HEFFERNAN: Can I move a censure motion?
CHAIR: I know what you are going to say, Senator Heffernan, but I am just thinking—
Senator HEFFERNAN: T or a P?
CHAIR: We will take a short comfort break.
Proceedings suspended from 10:58 to 11:05
CHAIR: Senator Gallacher, did you have any further questions?
Senator GALLACHER: Yes. You are very clear in your submission with regard to the amendments to the Qantas Sale Act. What is your view on the Qantas Sale Act per se? Is it still relevant current or do you have it removed?
Mr Joyce : We support the government's view on this that the Qantas Sale Act has a purpose. We support the minister's position, which is a modification of the Qantas Sale Act, in his white paper which I believe would review the 25 per cent ownership requirements but keep the 51 per cent ownership requirements, which we think is appropriate. We obviously as an Australian carrier also have the Air traffic act and Air Navigation Act requirements which means for traffic rights we have that 51 per cent. Qantas today has well over 60 per cent of its ownership in Australia so that those requirements under the act we agree with. Of course the other requirements that require us to have the chairman and the majority of the board being Australian we totally support.
Mr Buchanan : It is worth saying that we spend all of our time in spite of the competitive challenges in our business trying to create a very strong and viable Australian aviation industry. A lot of what we have done in Jetstar and on the Qantas side is build strong franchise services, IP that we can export and a strong and viable business that creates real knowledge jobs in Australia. Fundamentally, it is all about building a strong aviation sector that started from Australia.
Senator GALLACHER: The morale amongst your 30,000 employees, given the events of the last six months—this is probably not directly related to the Qantas Sale Act or the proposed amendments—and in light of the absolutely catastrophic to the Australian economy in one 24-hour period, where are you taking your people? Have you got your people on side with this model that you are proposing and investing in Jetstar Japan and Jetstar Vietnam and all of the other Asian adventures, which I think would be quite exciting? Why can't you take your people with you?
Mr Joyce : We are working on that. For a lot of the groups of employees, bringing that action to an end last year was a big release for them. I would not underestimate the pressure that our front-line staff, ground staff or in-flight cabin crew were under with the continuous disruptions that were taking place. We were cancelling and delaying hundreds of flights. We had customers extremely unhappy. We had passengers moving to Virgin and the competition, and that was heartbreaking for a lot of our front-line employees.
In bringing this to a close, a number of front-line employees have said to me that at least we did something about it and stood up and brought it to an end because they could not have survived the slow bake. The morale of the company would have gone through the floor if we had had the disruptions for another year with the front-line staff taking the brunt of the aggression that was out there and the disappointment from our customers.
Every organisation wants to work on engagement, and we have a big engagement focus in this organisation. We would like to bring all of the employees with us in what we are doing. You are absolutely right: it is very exciting what is taking place in Asia. But we have to be honest with the employees about the problems that we are facing and the need for change, and some employment groups have made the transition and are fully behind us.
We are making significant changes to the airport environment. The airport staff have introduced a major change with a new automated check-in system and our cabin crew have worked with us on significant changes to our operations internationally, but there are some areas where we have had resistance. In those areas we have had to make a stand because it is important for all of the employees that we make the transformation that is needed. If that has hit the engagement in those areas, I am very disappointed. We have to work at turning that around, and we will work at turning it around.
Senator GALLACHER: The opposing view is that you simply took a pre-emptive strike, closed down negotiations and are now going to continue to attack your workforce's wages and conditions until you get your Ryanair model. I do not expect you to respond to that. My final question is—
Mr Joyce : Sorry, I have to say that is completely not the case. There is no Ryanair model that we are modelling ourselves on. Qantas is a premium—
Senator GALLACHER: There is clearly a Ryanair business model. It is freely available.
Mr Joyce : It is not clearly the Ryanair business model. We have a very different business model in different parts of our business, and we run a far more complex business than Ryanair. We have a premium business, a regional business, a domestic business and a low-cost business. Even the Jetstar business is not modelled on Ryanair. The Jetstar business, which is the closest to it, is modelled on the best of low-cost carriers around the world; it has some aspects of Ryanair's operational efficiencies, some aspects of easyJet's branding and some aspects of AirAsia's purchasing and negotiations. We take the best of every airline around the world and we create a new standard. People are looking at Jetstar and Qantas as the standards around the world, so we do not have a model that we are copying. Other airlines are copying Qantas, and that is something we should be proud of. Singapore Airlines have just created Scoot, an exact copy of our strategy. Other airlines around the world are trying to copy exactly what Qantas has been doing. We are the trendsetter, the market leader, and it is our model that is being copied by the rest of the world, not the other way around.
Senator GALLACHER: Just one final question. Mr Buchanan, I think you said that the practice of using international flight attendants on domestic legs is now discontinued.
Mr Buchanan : No, I did not say that. What I said was the practice of concentrated tag flying has been discontinued. Let me give you an example of a cabin crew member in Darwin. The rostering system may have put them back and forth from Darwin to Melbourne, doing multiple legs on international tag flights. That is what we have discontinued, not the practice of tag flying. The hub still operates, but we are making sure that they do not do concentrated domestic tag flying.
Senator GALLACHER: So to try to get an answer to a particular question which I asked at an earlier hearing, if someone comes into Darwin and goes through customs and that aircraft then operates as a domestic leg, are you saying that no international flight attendants operate on those domestic legs, or are you saying they do operate?
Mr Buchanan : What we are saying is that the Darwin hub operates with international crew on all of the international tag flights through there. If there is a purely domestic numbered flight to and from Darwin, which we do operate at the back of the clock, which does not connect to any of those international flights then it will be served by an Australian domestic crew. The flights that are international tag flights will be served by an international crew, which is a mix of Australian based international crew and international based international crew.
Senator GALLACHER: I am just trying to work out whether, when they are flying in the domestic sector in Australia, they are being paid Australian wages and conditions.
Mr Buchanan : When they are flying on international flight numbers that are going in and out—for example, the tag flights that go from Darwin into any of the Australian ports—they will be paid wherever the domicile of the employee is.
Senator EDWARDS: There was a scant reference earlier to the carbon tax. In light of your announcement last week of an increase in fares by virtue of the imposition of the carbon tax on 1 July, do you expect your business to recoup, with that announced increase, the full cost of the carbon tax from fare payers, or will you be diverting other revenue from your business to subsidise the cost of the carbon tax on your business, which could be going towards better employment conditions for Australians?
Mr Joyce : We cannot digest the cost of the carbon on our domestic operations. We made that very clear when this was announced last year. We signalled our intention to pass that cost on to the consumers. At the announcement last week, we announced a range of fare increases ranging from $1.80 per sector on a Sydney-Canberra leg, for example, short-sector legs, in four sums all the way to $6.80 for a Sydney-Perth sector, a long sector on the domestic market, per sector per passenger booked. That is what we will be increasing the airfares by on 15 February. We are a unique company in that this applies from 1 July, but we have people booking now for 1 July travel. That means we have to increase the airfares now for travel from 1 July.
It will impose around a $115 million cost on the airline. Our intention is to raise that through this increase in airfares. Our belief is that it will be fully recovered. In the domestic market we have seen fare increases that have taken place as a consequence of the increased fuel cost. In the domestic market we are recovering that full fuel increase, so we believe on domestic we can recover the carbon tax as well. If it was on international, we would not and we would be very worried about it.
We also announced a $3.50 increase because we are subject to the European trading scheme which also comes in this year. That is a $3.50-per-sector increase on applicable sectors into Europe that we have also increased airfares for. We are the only airline in the world subject to three regimes because we are also subject to the New Zealand regime which is going to have a carbon tax.
Our view is the same as the IATA view. Our preference would have been a worldwide system based on an approach per sector. All of the airlines in IATA would have preferred a system that would apply to all airlines so you do not have distortions associated with it and the complexity of managing a huge amount of different types of schemes with the different requirements on them. That would be our preference.
We are also undertaking a huge amount of activity to reduce our carbon footprint. In line with our CO2 reductions we can reduce fuel cost. As I mentioned, our bill in the first half of the year is $2.2 billion. It has gone up by $450 million. We have every incentive to reduce our fuel cost anyway and we will be doing a range of activities to reduce that cost. There are a number of things we intend to do. First is to continue the rollout of efficient aircraft—I think the chair asked about the fuel efficiencies of the new technology. The new aircraft like the A-380 and 787s will dramatically reduce our CO2 footprint and reduce our fuel cost.
We are the first Australian airline to operate a sustainable aviation-fuel flight and we are doing this in March. We believe that there is huge opportunity to create sustainable aviation fuels here in Australia. We spend $4 billion a year on fuel. It is going to the Middle East. There is an opportunity for us to invest here in Australia and we are working with state governments for funding to try and start testing a number of different alternatives for sustainable aviation fuel which could create thousands of Australian jobs and, we believe, can do it at an efficient rate. We have signed up for two alternatives, Solazyme and Solena. One of them is using algae from sugar cane and the waste from sugar cane. One of them is using rubbish from the cities. We are also trying some other alternatives because we believe no one source will produce the fuel that we need. It is a great-news story—
Senator ABETZ: It sounds like a direct-action plan to me.
Mr Joyce : It would be a great story for Australia if we could get this up and running. Of course, we have been spending a lot of time on reducing our weight on the aircraft and using sophisticated new tools like satellite navigation to improve the flight paths into airports. I think there has to be one big debate going forward about the trade-off between CO2 pollution and noise pollution. There are certainly ways for us to reduce CO2 pollution by using standard flight paths into various airports, but that increases the noise pollution over individual constituencies. I think it is a worthwhile debate to have going forward because there is a real opportunity for us to reduce fuel costs and CO2 costs with the use of the satellite navigation systems that we are employing at the moment. So it is something that we do not take lightly. It is something that we need to invest in, but we have the biggest incentive you can imagine. If your fuel bill increases by $450 million in half a year, you do not need any other incentive to reduce your fuel costs.
Senator EDWARDS: $150 million annual costs—
Mr Joyce : $115 million.
Senator EDWARDS: $115 million fully recouped by the Australian consumer.
Senator JOYCE: It is passed on to the Australian consumer. We cannot digest it.
Senator EDWARDS: So the Australian public pays. That is at variance with what other airlines around the world will be forced to pay?
Mr Joyce : It only applies to domestic travel, so it does not apply to international.
CHAIR: You have made that very clear, Mr Joyce. I am going to pull it up because we are mindful of the time and Senator Abetz has been waiting patiently.
Senator EDWARDS: You do not want to talk about the carbon tax.
CHAIR: I am happy to, Senator Edwards, if you want to waste your colleague's valuable time on questions to which you did not like the answers. There is nothing in it for you for the Adelaide Advertiser, so move on.
Senator ABETZ: It was a very good answer and very helpful. It shows the cost of living will increase and that a direct action plan would work. Chair, unlike some of my colleagues, I am happy being a senator. I am not auditioning to be a CFO of an airline. I might just ask a few questions. First of all, Mr Paul Sheehan had an article in today's Sydney Morning Herald. I do not know if it has been drawn to your attention. It tells us that a Sydney to London business class airfare on the website was $7,547, whereas with Emirates it was $3,757, which is a pretty stark difference. Without going into all the reasons why that is, is that an indication of the sort of competition that Qantas is facing on its international routes?
Mr Joyce : Absolutely. I think it is a good example. We know that the Qantas brand does demand a premium, but that premium has limits. The premium that we have both domestically and internationally is something that we think is very valuable. It is something that we nurture and it is the reason why we are investing in new product and new technology. The fact is, as we mentioned before, Emirates' labour costs are 15 per cent of their total costs. Ours are 25 per cent. That 10 per cent difference on a $16 billion business is $1.6 billion. That makes a huge difference. We also have a difference, as Bruce pointed out, in depreciation because they have accelerated depreciation over their assets. They also have other advantages given where they are located. They do not pay any corporation tax or payroll tax. All of those make a huge difference and mean that Qantas has to compete with those types of airfares.
There is another carrier on the economy side that just came out with a $650 airfare to the UK, so we are competing with extremely low airfares. Because of the economic situation in the European market, with the economy suffering and the impact that is having on travel, we are seeing very aggressive airfares out there in the marketplace with people filling up their capacity. Airlines have a lot of fixed overheads. A lot of fixed costs are in place and incentivize carriers to go out there with very attractive airfares to fill them up and get some revenue for them. That is what we are experiencing at the moment.
Senator ABETZ: I think at the last hearing you indicated to us that the commentary by one of the unions about doing a slow bake on Qantas was having a huge impact in relation to forward bookings. I understand that the author of the slow bake comment and his union have now come to an arrangement with Qantas. Has that been fully finalised yet?
Mr Joyce : It has. Through the Fair Work Australia process we went into arbitration. Both parties then had constructive dialogue in that process and reached an agreement before Christmas, which has just been ratified by Fair Work Australia.
Senator ABETZ: So when are you building the new hanger?
Mr Joyce : We are not building it. This is a deal we could have done nine months ago. This is a deal we could have done a long time ago. All of those conditions and requests were dropped when we signed the deal.
Senator ABETZ: We have had a lot of this agitation within the marketplace and quite inflammatory commentary by certain people against Qantas for a period of nine months. You are saying that through the Fair Work process Qantas has ended up largely with what was on the table for the union nine months ago.
Mr Joyce : Yes. As you know, Senator, the important part we were always concerned about was the so-called additional job security conditions that the unions were asking for. These were restrictions around building hangars for aircraft that are not going to need any heavy maintenance for a long time, and may never be economic to do here in Australia; conditions around how we would maintain our fleet; and locking in outdated work practices that are changing, because the regulator is changing those practices—we call them maintenance on demand, and there is the use of what we call A licences in particular. The company now can get on and manage the business the way it needs to manage the business to bring in those changes and get the benefits of the new technology. All of those restrictions that were being asked for have been dropped and are not in the new agreement.
Senator ABETZ: How long does this agreement last for?
Mr Joyce : It is a three-year agreement, so I believe it will expire on 31 December 2015.
Senator ABETZ: Many Australians were clearly inconvenienced, not only by the threat of stoppages and actual stoppages but then also by Qantas's lockout and subsequent grounding of the fleet; or, I suppose, grounding of the fleet technically before the lockout took place.
Mr Joyce : Yes.
Senator ABETZ: But you are saying all of that took place over a nine-month period when, at the end of it all, that which Qantas had on the table was the deal struck with your negotiations in Fairwork Australia?
Mr Joyce : Yes. That deal would have been doable, as I said, nine months previously. We always said we would have a fair and equitable pay arrangement, and this did include a three per cent pay increase for the engineers for every year over the period plus backdated money associated with it. That was always going to be what we were going to pay. So as we said at the time, this was never a dispute over the pay. This was a dispute over job security claims, which we would have said were anti-job security claims. They would have restricted this company to an environment where it could not be flexible and adapt, and it would have endangered jobs. That is why we had to stand.
You just mentioned the implications for our customers. Again, I would emphasise that there were 70,000 customers before the grounding and there were over 90,000 affected by the grounding. We have been working diligently, building back and apologising to those customers, both before and after. But the biggest thing that caused us the problem, and that we hear continuously was causing the Qantas brand problems, was the unreliability of Qantas. We were in the position where—I think I mentioned to you in the last Senate committee—we had a 40 per cent drop in premium traffic on our east coast services, a 20 per cent drop in Canberra and a 14 per cent drop on the Perth-east coast market. It was costing us $15-20 million a week, and it was getting worse.
What happened after the grounding? It is great to see the business market unbelievably support Qantas. We started seeing immediate, rapid return of that business community. The business community was saying, 'We were thankful to Qantas to bring back certainty'. If you actually look at our on-time performance, in the three months before the grounding Virgin beat us on on-time performance in those three months—the only three months of the year. Since the grounding, in November, December and January, Qantas is back in the lead—the most reliable carrier, the best on-time performance and the lowest levels of cancellations. We have seen the business market respond dramatically to that and come back to Qantas. We are seeing double-digit growth on last year for our flexible airfares at the moment, and our market research shows that platinum/gold frequent flyers are unbelievably supportive of what we did because it brought certainty back to Qantas's operations. That engagement has been fantastic. I personally have received a huge amount of calls from corporate CEOs around Australia saying it was absolutely the right thing to do, showing support for what Qantas did and the fact that it brought certainty back for the business community, which is great.
Senator ABETZ: So in short, your forward bookings have increased substantially to where you were, when you were before the committee the last time?
Mr Joyce : Absolutely. Some of the corporate accounts that have come up for renewal would have been difficult if we were in the period of slow bake, as one of the union leaders put it. I would have said there was a high risk we would not have renewed them. We renewed those contracts at the end of last year, and we even obtained some contracts we did not think we were going to get because of that support from the business community. They believed that this brought certainty to Qantas's operations and it was absolutely the right thing. So, not only are we back to where we were before I think our brand for those core frequent flyers is a lot stronger than it was before this.
Senator ABETZ: Last time around you were being vilified as a rogue employer for having used the provisions of the Fair Work Act. It is interesting to note that the person who made that highly inflammatory commentary, Senator Bob Brown, is nowhere to be seen. When the real hard work is done, without TV cameras, Senator Brown is never to be seen. That aside, are you aware of any other employers who have taken similar action to yourself in relation to lockouts, which would indicate that if you are a rogue employer then there must be a lot of other rogue employers out there in the market place?
Mr Joyce : I think there are. I do not know that the list—
CHAIR: Might have been the truck industry.
Mr Joyce : There have been a few, I think, that have done that. Again, it is—
CHAIR: A few rogues, or a few lockouts?
Senator ABETZ: Lockouts, I think.
Mr Joyce : You are right about the language and how disappointing it is that when a company, for its own survival, has no alternatives but to do this dramatic action of a lockout—because we do not take it lightly to have to do a lockout and ground the airline, with the implications that has for employees and for our customers. It was something, as I said, we do not take lightly. We did it as a consequence of the union action and we did it as a consequence of the union saying that this was going to last for another year. They were going to have 48-hour stoppages. The unions would have done this to us anyway, and were doing it. We cancelled over 800 flights because of the union action. We delayed another 350 flights; 70,000 people were impacted by it. There was no condemnation of the union, or saying that they were rogue unions, or that their action was more detrimental to where we stand. It does not help debate in this country when you have a very tough industrial relations environment in which companies have no alternative but to take the action they have in order to ensure their survival. As I said at the time, the easiest thing for me to do would have been to give in to the unions. That probably would not have been a problem on my watch as CEO of Qantas, but we had to stand up because we have to ensure that Qantas is around for the next 90 years. Conceding to those outrageous union demands would have resulted in this company not being viable into the future. I had no alternative but to do what I did.
Senator ABETZ: As I understand, last time there were three unions with whom you were in dispute. The engineers have now settled. I understand the pilots are off to the High Court, is it, or the Federal Court?
Mr Joyce : Yes, the pilots have—
Senator ABETZ: And they are appealing that so we will have to await the decision of the courts on that one. Can we move to the Transport Workers Union?
CHAIR: If we do—sorry, Senator Abetz—can I declare an interest? I am a member of the Transport Workers Union.
Senator ABETZ: We would never have guessed from the last hearing, but there you go.
CHAIR: Just in case you forgot. If you have forgotten I will remind you as many times as you like. I am proudly a member of the Transport Workers Union. There you go.
Senator ABETZ: Does the Transport Workers Union cover the cabin crew?
Mr Joyce : No, it does not.
Senator ABETZ: Thank you for that. I want to move on to the cabin crew issue, and that is about the co-mingled crews. For example, Australians and Thais on the same flight doing the same thing but allegedly on different wages. Is that correct, and is that a standard practice across the industry internationally?
Mr Buchanan : It is probably worth clarifying: we do. As I understand it, the TWU is not a party to the Jetstar cabin crew agreements in Australia but, as I understand, they do have some members in the Jetstar cabin crew who work for us. Yes, like all international airlines, we use a variety of labour and basing of staff to mount our international services. We will have some crew out of Singapore, some out of Thailand, some out of New Zealand, some out of Australia, to mount our operations. Still, despite Jetstar growing to 3,000 flights a week and two-thirds of those flights operating outside Australia, we still employ two-thirds of our cabin crew inside Australia. Even for cabin crew on the business that we are talking about in the Australian market, still two-thirds of the cabin crew are employed in Australia. So, the lion's share of all of our staff are still employed in Australia and all of the knowledge workers where the IP is created are in Melbourne under Australian contacts.
Senator ABETZ: In relation to those that come from overseas, that other one-third: one would assume that they are paid less than Australians?
Mr Buchanan : That is correct. I think we talked about the statistics before: on average a Thai cabin crew member gets around $2,000 a month and an Australian cabin crew member would be somewhere between $5,000 and $6,000 or $7,000.
Senator ABETZ: How do you strike the rate of pay for those overseas cabin crew members and is it also related to the cost of living in those countries?
Mr Buchanan : Absolutely. We set up rates of pay that are generous in each of the markets, because we want to be an employer of choice. For instance, in Thailand our cabin crew are paid around 10 times the average salary—17 times the minimum wage—and therefore we have a very low attrition rate in Thailand. We put an ad out for cabin crew, to give you a feel, looking for 100 cabin crew jobs in Japan at the moment. We have had 10,000 applications. We were looking for 28 cadets to employ in Australia recently and we got thousands and thousands of applications. These are very sought after jobs. We have very low attrition rates and we attract some of the best talent into the business. Because the cost of living in Thailand is substantially lower, you can imagine their peers with a salary that is 10 times the average. These people are fairly well off in the market and are well looked after when they work for Jetstar.
Senator WILLIAMS: Are the people recruited from Thailand paid in Australian dollars?
Mr Buchanan : No, we pay them in Thai bahts. I have given you the conversion to Australian dollars.
Senator WILLIAMS: So you are looking at about 60,000 Thai baht a month—A$2,000 at around 30 Thai baht to the Australian dollar.
Mr Buchanan : It is around that, yes. The exchange rate obviously moves all the time.
Senator WILLIAMS: That is a huge salary in Thailand—60,000 Thai baht a month.
Senator ABETZ: While the wages differ, what about things such as hours of duty, fatigue regulations and other conditions? How do they compare?
Mr Buchanan : That is something we talked about—I think Senator Xenophon asked a lot at the last hearing, in November. The training standards are identical. The rostering practices are identical. We do not treat cabin crew working on any of our services any differently based on where they are employed. In fact, talking about our training and fatigue risk management, which got a lot of discussion last time, we have had 12 external audits on our fatigue risk management over the last 12 months, we have done 150 internal audits on our safety management systems and practices, we have done 1,000 investigations and we have had 12,000 reports from staff. This is something we take seriously and are working constantly at.
Senator ABETZ: There has been a suggestion that if the proposed legislation were to be implemented Qantas's viability would be seriously at stake. Can you indicate to us how many other airlines—genuinely private and profitable airlines, not under some sort of arrangement like in the United States or state sponsored and subsidised like so many other airlines around the world?
Mr Joyce : Are profitable?
Senator ABETZ: Yes. Private and profitable. And when I say private I mean genuinely private.
Mr Joyce : I think British Airways is profitable again. Lufthansa would be profitable. Air France is losing a lot of money—most of the European carriers are losing money. The North American carriers have turned the corner, because they have gone into bankruptcy—chapter 11. Essentially, as you know, bankruptcy allows them to renegotiate all their workplace agreements and lease agreements. Delta and United have turned the corner and are profitable again. American was losing money, but that was the only reason they had to declare bankruptcy. Air New Zealand overall I think is government owned, so that does not apply. So there are very few in that category.
Senator ABETZ: That is what puts, if I might suggest, immense pressure on Qantas, because you cannot rely on the government handouts or the chapter 11 arrangements to keep you going, that seem to be continuously arrived at in the United States for the airline sector.
Mr Joyce : I think that is absolutely right. There is a lot of distortion in our industry with governments' involvement and, as you said, chapter 11 bankruptcy, which helps. That makes our challenge even greater. You see on certain routes—I mentioned the United States routes—even with that we have seen Qantas turn the corner there and go back into services to LA and be profitable. We can manage things and fight, even with that extreme disadvantage. We find it very difficult to do it against the Middle Eastern carriers with what is happening in Europe and that is why we need to make the structural changes.
Mr Buchanan : One of the interesting examples with a similar sort of cost structure Australia is a partner of ours. Through that example, you can see what can be done through restructuring a business. That example is Japan Airlines. They are obviously not operating from what would be regarded as a lower cost Asian labour market; they are operating from Japan, with all of its cost structures and currency issues as well. Having gone through a special bankruptcy process that was set up by the Japanese government specifically for JAL, they have been able to turn around from losing $1 billion or $2 billion to making $1 billion. That is straight out of bankruptcy. That is an incredible turnaround when you think about the state of the global economy at the moment. That was not about changing their location or getting rid of all their Japanese heritage; that was about restructuring their business to drive productivity. That is the sort of thing that is open to a business going through bankruptcy.
Senator ABETZ: Are you aware of the new workplace adviser in Mr Shorten's office?
Mr Joyce : No, I am not.
Senator ABETZ: You are not? I understand that she may have worked for you during the dispute. That will be interesting to see. That was more a comment rather than anything else.
Mr Joyce : Can I comment on that? I have just found out that the person in question worked for us for six months. She had a temporary appointment from Freehills into Qantas on secondment to replace a lady who was on maternity leave. It was a Freehills appointment that helped us with that.
Senator ABETZ: All right. Let us help from some robustness out of Minister Shorten's office.
Senator HEFFERNAN: What is the relationship between the regional, national and international divisions of Qantas? Do you say that each is dependent on the others? So if your international division had to put up with this act and went belly up, what would that do to your regional and domestic divisions?
Mr Joyce : That is a great question. We are very worried about this. We think that the Qantas domestic business, our frequent flier business and our international business support each other. Their relationship is such that if a part of the business is not viable and cannot be supported then that will have a detrimental impact on the other parts of the business. As an example, we know that if in the corporate market we were bidding for BHP or Rio Tinto work we would have to offer not only regional and domestic networks but also an international network. It is very important for us to have that. But if the international network is losing over $200 million per year, it does not matter what you are making in the domestic or regional networks—it is just not sustainable.
The real dilemma that we get into is with those figures that we talked about in terms of the fleet renewal. Those numbers are usually related back to a person's home mortgage. If you were in the position such that your income was $1,700 a week but you were spending $2,500 on rent you would be extremely worried. You would know that your income was not supporting your rent. That is where we are today. We are not covering our mortgage. We are in the position of having a $1.7 billion cash flow and a $2.5 billion requirement for new aircraft each year. There are two alternatives. We could stop ordering aircraft, but then we would have the problem that Senator Gallacher talked about: the fleet ageing and our competitive position against the other carriers getting worse and worse, because we do not have the fuel efficiency and we do not have the product. Or we get our profitability up to cover the cost of that fleet. The profitability improvement is dependent upon one division, the international division, because you cannot make super profits on domestic routes, as that would invite a large range of competitors to come in, as it would be a great market to go after. We have seen airlines like Tiger, Impulse, Virgin, Compass 1 and Compass 2 whenever that has happened. So you cannot have super profits in one part of your business.
That means that every part of your business has to perform. Because the international division is not performing, it is threatening the renewal of our fleet and the economic performance of the entire group. That is why there is an imperative for us to turn it round.
Senator HEFFERNAN: So the concept behind the bill of strengthening the conditions of international flight crew on your flights would directly impact on the regional business?
Mr Joyce : It would. Different parts of the bill have different implications for us. As we pointed out, the big issue for us is that the Qantas Sale Act amendments would have an immediate effect on employment conditions on Jetstar, which we believe would cause Jetstar to have an economic problem or force us to sell Jetstar. That is the reality of applying those conditions. Losing Jetstar from the group would lose us future profitability, because Jetstar is very profitable. The profits from Jetstar contributes to that $1.7 billion of income every year. If we lost that, that puts even more of a burden on Qantas as we try to fund our fleet replacement program—in fact, we will not be able to do that. That threatens the entire group.
The second component is the crew changes, which will have an impact on Jetstar's operations and make Jetstar non-competitive on a whole series of regional operations. That would mean that those assets would have to be removed and there would be job losses as a consequence. The assets would either be returned or redeployed somewhere else, because they would not be making sufficient return for us to be able to justify keeping them.
Senator HEFFERNAN: So in terms of what being good for the goose being good for the gander—comingled crews—what is the common practice internationally compared to at Qantas?
Mr Joyce : A lot of carriers have what we would call tag flights of one kind or another. They would operate their own crews in different jurisdictions and pay their local domicile rates. A good example of something that we do at Qantas is what happens on the Sydney-LA-New York route. The last part between LA and New York is a tag flight. We provide Australian terms and conditions on that tag flight, even though it is across another jurisdiction. The one difference is that we cannot pick up local traffic, because there is none. But we carry our own onward traffic. There is traffic that we let off in LA that we can pick up and take on to New York. A lot of carriers do that. Cathay do that in this country. They have what is called their own onward traffic, which they can pick up and fly on over a different leg. Adelaide-Melbourne is a good example of a route over which Cathay does that. They employ their people under Hong Kong terms and conditions.
Senator HEFFERNAN: Is the pay rate in Australian dollars or US dollars over the American route?
Mr Joyce : We pay in Australian dollars.
Senator HEFFERNAN: That doubles their—
Mr Joyce : It makes the route even harder.
Mr Buchanan : It is worth saying that most international airlines have bases in different parts of the world and use a variety of crewing models to get both efficiency and productivity and to compete with the local providers. A lot of the US carriers have bases in Asia. We talked about the Qantas base in the UK. It is quite a common practice to have people located in different parts of the world, as it helps you with the logistics of running an international airline.
Senator XENOPHON: Does Qantas pay all the bills for Jetconnect?
Mr Joyce : No, Qantas does not pay all the bills for Jetconnect. Jetconnect is a New Zealand wet lease business that operates wet leased aircraft for Qantas. Qantas pays Jetconnect a fee, which is on commercial terms, for the wet lease arrangement. Jetconnect provides aircraft, crew, maintenance and probably insurance for that rate. Jetconnect makes a margin out of that provision to Qantas. Qantas then operates those aircraft on commercial routes, like the trans-Tasman route. Then Qantas pays, in addition to the charges that I have mentioned, for the fuel, the airport landing fees and the sales and distribution costs. Qantas keeps all of the revenue associated with the sale of the tickets. Some of that revenue goes to pay Jetconnect.
Senator XENOPHON: Senior Deputy President Drake, in the Fair Work Australia decision, said that Mr Daff, Jetconnect's then chief executive officer, does nothing significant and that his ignorance concerning Jetconnect's financial affairs was staggering. In other words, all of the key decision were being made by Qantas. Would you agree with that characterisation by Senior Deputy President Drake?
Mr Joyce : I would not. We are in a position such that some of the significant decisions relating to Jetconnect are made by the local management, such as on recruitment, where the maintenance is done and the management of the AOC. Paul Daff was the AOC holder. That is a significant responsibility for any airline. Bruce and I have at different stages held that. I would not classify his role as insignificant. Having the AOC responsibility is a very significant element of responsibility and Mr Daff held that.
Senator XENOPHON: Deputy President Drake said that finance are in someone else's hands and that someone is an employee of Qantas. Is that correct?
Mr Joyce : The financing and the reporting of that, as we talked about, is quite complex. There are components of it that are done by a local finance team and there are components of it that obviously, because it relates to a trans-Tasman operation, are done by our finance team. There is a local component and a component that is done for the group.
Mr Buchanan : There is probably a confusion about what a wet lease provider does. But Jetconnect is a standalone business with its own AOC. The confusion might arise when you are talking about commercial aspects or where the aircraft fly. Obviously, the person contracting with the wet lease will decide those. Different responsibilities fall on different organisations. Not understanding how a wet lease provider works creates that confusion about what that person should know about.
Mr Joyce : In fairness to Paul, we talked to Paul afterwards and he knew a lot of the answers to the questions. But sometimes people, when they are in front of groups like yours, have stage fright. I have had stage fright a few times here. You can freeze up and not say what you know.
Senator XENOPHON: Mr Joyce, where is Mr Daff now?
Mr Joyce : Mr Daff is working with Jetstar Asia.
Senator XENOPHON: In what capacity?
Mr Joyce : As the acting CEO of Jetstar Asia.
Senator XENOPHON: You are saying that the finding about his ignorance concerning Jetconnect's financial affairs being staggering was down to stage fright?
Mr Joyce : I do not discuss individuals, because I do not think that it is appropriate. But I will say that Paul Daff is an unbelievably capable individual in our organisation.
Senator XENOPHON: I will not follow this any further.
Mr Joyce : He did get this role in Jetstar Asia because Bruce, the management team and I think highly of him. People can have issues; they can make mistakes. That was not the Paul Daff that we know. Those comments are unfortunate. It is not the Paul Daff I know. Paul Daff is a very capable and he managed Jetconnect very well.
Senator XENOPHON: I was only referring to part of the judgment. On 18 July 2011, the Sydney Morning Herald reported you as saying that—and I was staggered by this figure, so if it is wrong please correct the record—the company is aiming to maintain a 20 per cent share of the Asia-Pacific low-cost carry market and might need to have as much as 400 aircraft by 2020. Is that right?
Mr Buchanan : That is straight mathematics. What we said was that to maintain a 20 per cent market share you would need 400 aircraft if the growth in China and Japan were to continue at their current rates. That is straight mathematics. We estimate that there will be around 2,000 aircraft required in the Asia-Pacific to satisfy the low-cost carry demand. What we are seeing now is North Asia—which is China, Korea and Japan—opening up, having previously been closed to low-cost carriers. We are going to see large growth in those markets.
Senator XENOPHON: So that reference was not inaccurate, then?
Mr Buchanan : No.
Senator XENOPHON: In terms of the Qantas Sale Act and the whole issue of subsidiaries—and Mr Johnson referred to this on the last occasion—there is nothing in the Qantas Sale Act that would prevent international routes being flown by Jetstar, for instance, and Qantas becoming a largely domestic carrier. There is nothing in the act that would prohibit that.
Mr Joyce : There is no prohibition in the act against all of our international routes being replaced by Emirates or United one day. The market will dictate who flies internationally and who will survive. I will tell you our intentions. I hope that someday Jetstar can be very big, because that would be great for Australia and the group, because these aircraft would be flying all over Asia. We want Qantas to be in the same position. I want to turn around the international business so that Qantas can have the same growth opportunities that Jetstar has. I absolutely believe that you cannot lock into legislation restrictions on Qantas to somehow ensure that Qantas stays in the race, because it will not happen. If you put those restrictions in place, Senator, all you will be ensuring is the absolute demise of Qantas. It has to be commercial, it has to be flexible and it has to adapt. That is the only way you can ensure what you are saying never happens and it is not our intention. We absolutely want to scrape around to be flying to every continent around the world, but we have to have a commercial entity.
Senator XENOPHON: Can I put it to you in these terms: your predecessor, Geoff Dixon, said back in 2005 to Alan Kohler that Jetstar, compared to Qantas, is about 20 per cent of the size. Clearly that is not the case now, and that is now a criticism. Are you able to say with some certainty that in five years' time or 10 years' time how big the Qantas livery, the red kangaroo, will be compared to, say, Jetstar or other subsidiaries?
Mr Joyce : I have to say that I complete disagree with the premise of the your question. The premise of your question is that there is something wrong with Jetstar being bigger than we expected.
Senator XENOPHON: No, I am not; I am just suggesting. Geoff Dixon made a prediction back in 2005. What do you see the future of Qantas itself, the brand, compared to, say, Jetstar or other subsidiaries?
Mr Joyce : In relation to Geoff Dixon's prediction, which I did see, he was only talking about at the time—because I know exactly what the 23 refers to. It refers to the first set of aircraft—
Senator XENOPHON: The 20 per cent was in an interview.
Mr Joyce : Geoff Dixon, in his mind, when he was CEO of the Qantas group, would have thought Jetstar had a huge potential and, if we could deliver on it, it would be great. He would be overjoyed at the success that Jetstar has today, because I think that is great for the Qantas group. I am hopeful, to answer your question directly, Senator, that the proportions remain the same and that both carriers are grown by double digit in terms of the ASKs over the next decade, because then we have succeeded. It could be the possibility that Jetstar continues to outpace Qantas in growth but our aim and what we are trying to do with the business is get Qantas in a position where it can grow again. Where it is today, nobody in their right minds would put any more capital into Qantas International. That is what all of the analysts and all of the shareholders would be saying. We have to turn it around and we have a plan to turn it around so that we can put in more capital and grow the international business.
Senator XENOPHON: You are confident you can turn it around in the next three years?
Mr Joyce : Our target is to get to a break even in three years and to get to the return on the cost of capital in five. That is what we are aiming for.
Senator XENOPHON: Jetstar Asia has taken eight years and it is, basically, just breaking even now, isn't it?
Mr Joyce : There is a very big difference between a start-up and an established carrier. Qantas International has been operating since 1935. As you know, anybody involved in a start-up business knows that you need to give it some time.
Mr Buchanan : I think it is worth reflecting once again and putting back a few facts around the Jetstar businesses in Asia, which feeds into that statistic. For equity investment of less than $200 million the Qantas group has bought itself a 20 per cent market share in the low-cost carrier market throughout Asia. What that is doing for Australia is giving us the scale to be able to continue to grow and build regional aviation in places like Darwin and Cairns that can be viable. It has given us the IP and revenue flows that are coming back for the franchise fees by exporting the knowledge and IP into the markets in Asia.
Where are we placed? We have an opportunity now to continue to participate in the North Asian freeing up of the market, which puts Qantas at a massive opportunity. We have done it with very, very little capital. We have created a huge option for the Qantas shareholders and we have done it through Australian workers, who have actually built this really strong brand, have built the knowledge and the IP and have done a tremendous job in taking us to where we are.
Senator XENOPHON: I hear you, Mr Buchanan. AIPA makes the point in their supplementary submission raises potential immigration issues in terms of foreign crew being used on domestic flights. Have you had any communications with the Department of Immigration and Citizenship on this issue? Is that something that is being looked at in addition to the restructuring of rosters? I think you have said that you were going to provide the roster to the committee but that still has not arrived.
Mr Buchanan : There has not been any discussion with the department of immigration, which I am aware of, on the visa issue. We have had discussions with the Fair Work Ombudsman on that particular issue about cabin crew. The visas they operate on in Australia effectively allow them to stay here for 30 days when they are operating as international crew in and out of Australia.
Senator XENOPHON: You are confident you comply with Australian immigration laws?
Mr Buchanan : We think so, yes.
Senator XENOPHON: You think so? You have assessed it?
Mr Buchanan : We are confident that we are complying with Australian immigration laws.
Senator XENOPHON: You obviously got advice about your compliance?
Mr Joyce : We are confident in our advice.
Senator XENOPHON: The roster: will you be able to provide that to us?
Mr Buchanan : That is something we can give you. The issue is that we need to be conscious that we are not disclosing personal information. If you are after summary statistics, which we have tried to provide in terms of the average hours—
Senator XENOPHON: That was the idea of it, not any personal information, of course.
Mr Buchanan : I can give you a summary now. The Melbourne international crew do average shift lengths of 10.4 hours. For the average Bangkok crew it is 10.6 hours. They are almost identical in terms of hours worked. They work slightly less than three days a week.
Senator XENOPHON: But the conditions and fatigue are a little bit different, aren't they, for international crew?
Mr Buchanan : No, the management of fatigue is identical. There is no difference—
Senator XENOPHON: But they can be rostered on further hours, though.
Mr Buchanan : The rostering rules are exactly identical for both. I think we have to separate the employment rules from an individual entity, which will be common practice and they will be providing employees to lots of different carriers in the various markets, compared to the rostering rules which are identical whether you are employed in Australia or employed in Thailand or in New Zealand or in Singapore—they are no different. Our crew work very hard. Working shift work and multiple time zones is tough. They are working around 10½-hour shifts, so it is longer shifts, but the quid pro quo for that is that they work slightly less than three days a week, so there are ample opportunities for a rest. That is the quid pro quo with working as cabin crew. There is also six weeks annual leave and there are a variety of other conditions—
Senator XENOPHON: It has been fixed now with the new rosters, basically, hasn't it? With the new roster arrangements you have actually sorted out those anomalies?
Mr Buchanan : There have been no changes to the rostering practice in terms of fatigue or duty limits. The only thing that we have changed is a very slight thing that affects a very tiny percentage of our rostering, and that is when they are doing concentrated tag flying. It does not change the actual hours of work or the types of flying patterns that they are doing; it just changes the number of times they go in and out of Australia.
Senator XENOPHON: Which affects rests.
Senator HEFFERNAN: Am I too old to apply?
Mr Joyce : Chair, before we have to go, can I correct one thing. I just made a mistake on a date. Senator Abetz asked me about the engineer expiry date and I think I said 31 December 2015. My maths did not quite work there. It is 31 December 2014 because it is a three-year agreement. I would just like to correct that.
CHAIR: Thank you, Mr Joyce. On behalf of the committee, can I thank you very much, Mr Joyce and your team, for turning up today.
Just one thing before I say the final farewells. There may be some misconception, but I have not met a member of parliament, a union member, a union leader or a Qantas employee who is anti-Qantas. We are all fully supportive of Qantas. There is nothing better than getting on the red tailed aeroplane to head back to Australia.
Mr Joyce : Thanks, Senator.
CHAIR: We may differ on some of your employment issues, so let's hope you fix up the outstanding problems with some of your workforce. We wish you all the best. On behalf of the committee, that concludes today's hearing.
Committee adjourned at 12:02