Losing altitude - the downing of Howard & Costello

Other costs such as maintenance are also available at deep discounts in the Third World, and a movement of such functions say from high wage Sydney's MacAirport to Bangkok’s brand new, but troubled Suvarnabhumi Airport could save Qantas not only millions in (the variable) labour costs of aircraft engineers, but will allow hectares of prime Sydney realty to be sold off. A win-win for the airline.

But alas not for those shareholders who left money on the table when they accepted the private equity bid. Or the airline employees, unless of course you’re from rural Thailand and just secured a (relatively high paying) job at Suvarnabhumi. You’d swear all your Buddahs have come at once.

Of course the real bonanza will be when Qantas mainline divests itself of as many low margin routes as possible and allows those services to be provided by third parties, and in so doing, freeing up the Qantas fleet for even higher yielding traffic. And at the same time, pretending to offer low yielding services. It’s a bit like General-Motors Holden selling Belgian made Opel Astras and Vectras and rebadging them as “Holden” and claiming to be selling “Australian” cars.

In order to squeeze costs, conventional wisdom holds that Qantas will hive off many routes to its low cost subsidiary, Jetstar, but that is only part of the picture. Qantas would be actively considering offloading services to its Singaporean subsidiary, JetstarAsia and perhaps some long haul routes (both existing and planned) will be outsourced to other One World Alliance partners.

This could save the airline big money as well as give the public the incorrect impression that Qantas is offering new destinations, when in fact all it’s doing is buying scores of seats on another carrier.

For instance, the latest recruit to One World (the global alliance of which Qantas is a member) is a true beacon of modernity and paragon of technical excellence: Royal Jordanian Airlines (RJ). RJ could fly Australians from say, Jakarta, Indonesia to that bastion of religious tolerance, Riyadh, Saudi Arabia with Jetstar carting Australians from Sydney to Jakarta. While a check of the airline ticket may not reveal the fact that while on such flights you would not set foot on a Qantas jet; you most certainly would have paid a premium for a ticket issued by Qantas.

In fact such outsourcing to dubious carriers (for instance, the flag carriers of Burma, Bangladesh and Pakistan) to service a myriad of destinations looks more and more plausible given the yawning gap in membership by carriers from West Asia and South East Asia in the One World constellation.

Many aviation observers attribute the success of Asian airlines (for example, Singapore Airlines) to their lower wage costs compared to airlines in advanced economies. The argument assumes that as advanced economies strangle airlines with local labour laws and overly indulge in occupational health and safety regulations, Asian carriers operating in societies with far less onerous labour conditions, gives the Asian carriers a distinct advantage.

Singapore Airlines’ top management has always argued that low labour costs are but a part of the advantage enjoyed by the airline. The real story, according to Singapore Airlines is the productivity of the labour force.

Rigas Doganis in The Airline Business in the 21st Century shows that Asian carriers generally had higher output per $1,000 of labour costs, suggesting that low wage rates plays a role but - as other Asian carriers performed poorly compared to Singapore Airlines - it is clear that workers’ productivity plays a bigger role. Thai International for instance offers low wage rates and has low productivity rates among its staff.

Scenario 2

Trimming fat from Qantas and then on-selling it to a mega carrier group.

As the public relations battle continues - in the effort to convince all shareholders just how generous the private equity offer really is - for investors on the other side of the Pacific, the long-awaited consolidation of the airline industry is heating up, with United Airlines holding talks with Continental Airlines about a possible merger. This follows US Airways making a hostile bid for Delta Air Lines last November.