A Critical Analysis of Qantas Airways Limited

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Due date: 31st May, 2004

ical analysis of Qantas Airways Limited http://www.coursework.info/document/8/3/9/93800/9

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Contents

TOPIC PAGE

Section 1.1 Executive Summary_________________________________ 2

Section 1.2 Introduction_______________________________________ 3

Section 1.3 The Structure of Qantas Airways Limited________________ 3

Figure 1.1 Qantass Organisational Chart_________________________ 4

Section 1.4 Qantass Strategy & its Influence on Structure____________ 5

Section 1.5 The Organisational Effectiveness of Qantas______________ 8

Figure 1.2 Balanced Scorecard of Qantas Airways Limited___________ 9

Section 1.6 Critical Analysis of Current Issues & Possible Solutions_____ 10

Section 1.7 Recommendations__________________________________ 11

Section 1.8 Conclusion________________________________________ 12


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Section 1.9 References________________________________________ 13

1.1 Executive Summary


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The purpose of this report is to analyse the organisational characteristics of QantasAirways Limited. The divisional structure of Qantas is assessed and compared to relevant theories.Qantas has a constantly-changing, dynamic environment, and its divisional structure helps thecompany to respond to this environment effectively.

Qantass strategy is also defined and theoretically analysed. According to Miles and Snow(1978), Qantas has adopted a defender strategy, striving to produce a quality, differentiatedproduct to prevent competitors from stealing their market. Porter believes that Qantas has adifferentiation strategy. Because they have the necessary skills and resources, this strategy willallow them to succeed.

Qantas uses a balanced scorecard approach to assess its organisational effectiveness. Thisbalanced scorecard is outlined in the report, and shows that there is a tendency towards financialgoals and objectives. Nevertheless, Qantass balanced scorecard is fairy strong and accounts fordevelopment of all areas of the business. Qantass goals are reasonable and are clearly defined.

Structural issues are identified and discussed, including the need for better integration ofresources, and the need for lower formalisation and lower complexity in the departments that areresponsible for innovation and product development.

Recommendations are made to Qantas, including the creation of a shared resources unit,and the structuring of the research and design, product development and marketing section of thisshared resource unit in a way which encourages creativity. It is also recommended that Qantasplaces emphasis on the achievement of impressive on-time performance to compete with its rival,

Virgin Blue.

1.2 Introduction


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Qantas was founded in the Queensland outback in 1920. Originally registered asQueensland and Northern Territory Aerial Services Limited, Qantas today is the leading airline in

Australia, operating in both the domestic and international sectors. Qantas has proven to beextremely resilient this year, despite the risk of terrorism, increased competition and other threats,but it is imperative for the organisation to focus on efficiency and competitiveness if Qantas is tosucceed in the long term (Hunter 2004).

Organisational structure and strategy are paramount in the facilitation of the success of

any business, as choosing an organisational structure and design type which complements anorganisations environment and strategic direction, will ultimately determine their survival(Ferguson 2004).

1.3 The Structure of Qantas Airways Lim ited

As a large organisation with 34,000 full-time staff, Qantas has a complex structure, withseveral self-managed departments. In August 2003, Qantas underwent a structural reorganisationto enable the company to better manage constant change, and drive current and future initiatives(Qantas Airways Limited 2004). There are now 11 divisions in the Qantas structure, whichdemonstrate horizontal differentiation, and the hierarchy of staff working within these divisionsshow the vertical differentiation of the organisation. As following strictly enforced procedures helpsto manage the many risks involved with air travel, formalisation is high within divisions. Extensiverules, policies and procedures are established and must be adhered to by all staff, which retains

Qantass high quality of safety, and assists the organisation in operating efficiently.

The highly uncertain environment of the airline industry leads to the decentralisation ofdecision-making, as there is a heightened need to respond rapidly to changing conditions (Kohler2002). It is not possible for one person to grasp the full nature of the challenges facing Qantas, soeach department is responsible for responding to their challenges individually, and this allows forspeedy and informed decisions to be made by those who understand the issue. Decentralisationalso acts as a motivator for employees by allowing them to actively participate in decision-making,and helps lower-level staff improve their decision-making skills (Hunt 1992).

Qantas has an organic, divisional structure, which has an emphasis on lateral rather than

vertical communication, and is most appropriate for their turbulent environment (Daft 1998). Thedivisional structure leads to high accountability for end results, as each internal departmentoperates like a separate business, with its own performance goals and targets. Also, departmentalperformance is not based on managements subjective assessment of staff and criteria-relatedmeasures, but instead is based on financial performance, a much more clear and objectivemeasure.

As each division is autonomous, it can be sold off or outsourced with minimal effect to the


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entire organisation if it is not meeting targets. Having self-managed divisions also frees the topmanagement at Qantas from being involved with the day-to-day operations, and allows them toconcentrate on long-term planning and strategic decision-making, which is imperative in theirdynamic environment (Robbins & Barnwell 2002).

The six wholly-owned Qantas subsidiaries share a support centre, which reduces theduplication of resources. The support centre provides IT, human resources and financial servicesto the six companies owned by Qantas, namely Qantas Link, Australian Airlines, the new arrival

Jetstar (Qantass low-cost domestic carrier), Qantas Flight Catering, Qantas Freight and QantasHolidays (Qantas Airways Limited 2004).

However, there are weaknesses of Qantass divisional structure. Throughout the otherautonomous divisions, there is extensive duplication of activities, which leads to higher operatingcosts and inefficiency. Divisional forms also tend to discourage communication between thedivisions and conflict can occur. In an attempt to minimise this conflict, all divisions share Qantassstrategic interests and are headed towards similar goals (Bernardi 2003). Another disadvantage ofthe divisional structure is that the specialisation that exists within departments makes it difficult fortop management to transfer staff to different divisions, and in the case where divisions are

competing for similar markets, as is the case with Jetstar and Qantas, they may compete witheach other and therefore create their own competition (Robbins & Barnwell 2002).

The divisional structure of Qantas Airways Limited is shown in Figure 1.1

Figure 1.1 Qantass Organisational Structure


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1.4 Qantass Strategy and its In fluence on Structure

Strategy is one of the fundamental influences on the way organisations are managed.Qantass strategy affects the way the business is structured, and the recent reorganisation ofQantass structure was made to allow for new initiatives to prosper and succeed. According to

Alfred Chandler (1962), strategy is the determination of long-term goals and objectives, and theadoption of behaviours and allocation of resources, which are necessary for the organisation toachieve these goals and objectives. Chandler believes that as companies grow, their structureneeds to grow with them, moving from a simple, to a functional, to a divisional structure, if theyare to remain efficient, and that if an organisation assumes a new strategy, they require a new orupdated structure if the larger company is to operate effectively (Robbins & Barnwell 2002).

Raymond Miles and Charles Snow (1978) identified four strategic organisational typesbased on the speed of the market and product changes. According to their theory, Qantas hasadopted a defender strategy. Miles and Snow state that defenders seek stability by offering alimited range of products or services directed at a narrow target market. To prevent competitorsfrom stealing their market, defenders strive aggressively to produce a high quality differentiatedproduct, or to offer competitive pricing. Defenders focus on the reduction of operating costs andthe improvement of efficiency, rather than scanning the environment for new areas of opportunity.

Structural characteristics of defending firms are high formalisation and high centralisation, andextensive division of labour (Robbins & Barnwell 2002).

In Qantass case, their target market, the Australian public (particularly professionals) is notequivalent to the narrow target market outlined in the defender model. Also, the defender strategyis usually adopted by companies who perceive their environment as stable, and the airline industryhas an extremely challenging and dynamic environment. Although Qantas does focus on improvedefficiency and lowering operating costs, in comparison with the Miles and Snow model, Qantas iscontinually looking for new opportunities to grow and diversify their business. Lastly, Qantas usesa decentralised structure rather than the centralised model outlined by this model (Fysh 1970;Qantas calls for level playing field2004).


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Qantass long-term strategy is to improve its profitability to create substantial shareholdervalue, to maintain its position as Australias leading domestic carrier, and to continue to grow anddiversify the business into new markets nationally and internationally (Qantas Annual Report2003). Chief Executive Officer, Geoff Dixon, is implementing Qantass strategy in several ways. Amain focus is on reducing operating costs through a project called Sustainable Future, which setsout guidelines to reduce operating costs by $1 billion over the next two years (Qantas AirwaysLimited 2004).

Qantas has recently introduced Jetstar, their low-cost domestic airline subsidiary, torespond to the growing demand for discounted air travel, and to ensure Virgin Blue doesnt securetoo much market share. Jetstars introduction will also help to avert potential competitors fromentering the Australian market (A smart move by Qantas2004).

History has shown that the Australian domestic market is too small to support threemainline flight carriers. However, as a duopoly, the Australian domestic market is an attractivetarget for newcomers and existing international competitors. Qantas has attempted to solve thisproblem by creating Jetstar, which as a wholly-owned subsidiary ultimately produces profit forQantas. In effect this keeps the Australian market as an economic duopoly, however the extrabusiness that is currently attracting overseas competitors can be targeted by Jetstar (Marsh2004).

If consumer trends continue to move towards lower airfares, Qantass long-term strategy isfor Jetstar to become their main domestic brand, leaving the international market to Qantas, theprestigious brand of the flying kangaroo (Miraudo 2004).

Other key elements involved with achieving Qantass goal to maintain their position as theleading Australian domestic carrier are upgrading and expanding the fleet to improve efficiency,

maintaining a flexible and diversified network, maintaining current alliances and seeking mutuallybeneficial relationships with other quality airlines, improving the profitability of the Qantas FlightCatering, Qantas Holidays and Qantas Freight businesses, maintaining financial strength andinvesting in product and customer service initiatives (Qantas Annual Report 2003).

A proposed beneficial relationship is Qantass alliance with Air New Zealand, which wouldenable both carriers to better utilise their resources and to compete more effectively. This alliancewas rejected by the Australian Competition Tribunal in May, 2004, but the decision has beenappealed by the airlines and will be reassessed later on this year (Koutsoukis 2004; Shelley 2004).Geoff Dixon has also spoken of plans to form a globally focused partnership with an Asian or USairline, which will assist Qantas to grow and prosper (Hunter 2004).

In line with its overall growth strategy, Qantas has recently expanded its offering ofdomestic flight routes to include Sydney to Broome, Perth to Cairns, Perth to Canberra andMelbourne to Ayers Rock. Added international flights from Sydney to Mumbai, and Sydney toShanghai will be operating by the end of the year (Bray 2004). Qantas is also in the process ofsetting up a new intra-Asia low-cost airline, which will commence operation at the end of the year.Qantas will own just under 50% of the new Singapore-based airline (Australian Qantas may movesome ops offshore- CEO2004; Harcourt 2004a; Qantas in low-cost launch2004).

Part of Qantass broader strategy is to simplify its operations. Measures are being taken to implementthis strategy. In April 2003, Qantas simplified their fare structure, reducing the available fare types from 11 to


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just 5, and the reorganisation of Qantas in August 2003 simplified many staff procedures and passages ofcommunication (Boyle 2003).

Lastly, in response to the increasing need of their customers for flexibility, all Qantas tickets are now

transferable to another date for a $27.50 fee, including even the deeply reduced tickets (Harcourt 2004b). Inresponse to other changing demands, Qantas also plans to move to all-economy seating on some routes, and afleet of new aircraft is scheduled to be completed by the end of 2005 (Qantas builds up domestic f leet2004).

Michael Porter argues that for an organisation to successfully perform, it must select astrategy that will give its organisation a competitive advantage. Porter states that three businessstrategies exist cost leadership, differentiation and focus and organisations should choose thestrategy that best facilitates their strengths (Robbins & Barnwell 2002). When a company sets outto be the low-cost producer in its industry, it assumes a cost leadership strategy. Success with thisstrategy usually requires the efficiency of operations, economies of scale, technological innovation,low-cost labour and preferential supplier agreements. Virgin Blue used a cost leadership strategy

to break into the Australian market and is now seen as the low-cost provider in the industry(Harcourt 2004b).

Jetstar will also implement a cost leadership strategy and will compete for Virgin Bluesmarket share using price. Jetstar has the economies of scale and supplier agreements provided byQantas, which give the company a financial advantage over another newcomer to the industry. ForJetstar to succeed, their service needs to be comparable to that of Virgin Blue so they areaccepted by consumers, and their focus needs to be on efficiency. In February 2004, Jetstar waspraised for being free of wage and costing structures, and for their focus on minimisingexpenditure, which meant that the only costs that couldnt be squeezed were those pertaining tosafety. This suggests that Jetstar will survive, utilising a cost leadership strategy (A smart move by

Qantas2004).

A differentiation strategy is where an organisation seeks to be unique in its industry in ways that arewidely valued by customers. It involves emphasising an attribute that makes the firm different from its rivalsand it significant enough to justify a premium price. To complement Jetstars cost leadership strategy, Qantashas adopted a differentiation strategy. Qantas aims the majority of its services to corporate travellers anddiffers from Virgin Blue by offering value-added bonuses such as complimentary food and alcohol, extensivepersonal service and Qantas frequent flyer points, and incentives such as Qantas Club membership. In thedomestic market, Qantas also offers low-price internet fares known as red-e deals for price conscioustravellers. Internationally, Qantas differentiates itself from its competitors by offering premium service. InSeptember 2003, Qantas launched its new International Business Class, which features skybed cocoon-style

sleeper seats, a self-service bar for drinks and snacks, specially-trained, dedicated flight attendants, new foodand wine, premium quality noise-cancellation headsets and luxury amenity kits (Qantas Airways CompanyView 2004).

For an organisation with a differentiation strategy to succeed, it requires many skills and resources,including strong marketing and research capabilities, creativity, product engineering, a corporate reputationfor quality, long tradition in the industry and strong cooperation skills. Structurally, Porter believes that a


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differentiating firm should have strong coordination among functions in research and development, productdevelopment and marketing, and that subjective, intuitive measures should be used rather than quantitativemeasures. For an organisation with a differentiation strategy to succeed, there needs to be employee benefitswhich attract highly skilled professionals and creative people to become employees of the company. Porterstates that a differentiation strategic-type organisation needs structure that has a high degree of flexibility,which can be achieved through low complexity, low formalisation and decentralised decision-making(Robbins & Barnwell 2002).

Although Qantas holds a differentiation strategy, its high complexity, high formalisation structure doesnot adhere to Porters guidelines. However, Porters theory is not entirely applicable at Qantas, as it does notmake allowances for the strict regulations that govern the airline industry. Low formalisation is not possible insuch an industry. Also, in a large company such as Qantas, high complexity, especially in terms of horizontaldifferentiation, is inevitable.

However, Porters theory could be applied to the departments which are most active in facilitatingdifferentiation. For instance, the research and design, marketing, and product development departments couldbe structured simply, with minimal rules and guidelines, in order to encourage the creation of unique ideas andproducts.

1.5 The Organisational Effectiveness of Qantas

At Qantas, organisational effectiveness is measured in several ways. Overall companygrowth is measured by the accumulation of new assets (eg. new aircraft) and provision of newservices (eg. flight routes). For shareholders, organisational performance is calculated throughseveral economic measures, which are then compared to results from previous years to determineimprovement or deterioration. These economic measures are the number of passengers carried,revenue passenger kilometres (the number of paying passengers multiplied by the number ofkilometres flown), available seat kilometres (total number of seats available multiplies by thenumber of kilometres flown), revenue seat factor (percentage of total seat capacity utilised bypaying customers), and the number of aircraft in service. Other financial measures used to assessQantass effectiveness are the return on total revenue, return on total assets and return on equity

(Qantas Annual Report 2003).

Organisational productivity is measured by the number of full-time employees, revenuepassenger kilometres per employee, available seat kilometres per employee, and the averageamount of aircraft utilisation per day (Qantas Annual Report 2003).


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For the six Qantas subsidiaries, effectiveness is based on the financial profit or loss of eachcompany. Operating efficiency is measured using on-time performance data. Virgin Blue pridesitself very highly on its proportion of flights that arrive on schedule, however in January this year,Qantas performed better than Virgin Blue (Harcourt 2004b). Perhaps this is a tool Qantas coulduse to weaken Virgin Blues reputation and confidence.

These aspects of organisational effectiveness can be measured using a balanced scorecardapproach, which identifies and weighs up the demands on the organisation against its capabilities.

The demands and capabilities of Qantas from a financial, customer, internal business andinnovation perspective are shown in figure 1.2.

Financial Perspective

Goals Measures

Improve profitability to createshareholder value

Improve performance on economic andorganisational productivity measures

Reduce operating costs Reduce operating costs by $1 billionover 2 years by implementing the

Sustainable Future project.Maintain position as Australias leadingairline

Upgrade and expand fleet to improveefficiency, maintain current alliances,and improve the profitability of the 6Qantas subsidiaries

Goals Measures

Improve on-time performance Identify & eliminate causes for delay,and empower every pilot and crewmember to be responsible for punctualdepartures

Provide new services for customers andexpand range of flight routes

Employ those with superior markettrend analysis skills, and continuallyresearch to find areas of opportunity


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Int ernal Business Perspective

Goals Measures

Respond to changing needs of

customers

Research consumer demands, and

respond to changes in these demandsStrengthen the Jetstar brand inresponse to a growing need fordiscounted air travel

Promote low-cost flights and advertiseJetstar to strengthen its public image.Compete with Virgins prices to offervalue to customers, and to increase %of travellers choosing air transport

Innovation and Learning Perspective

Goals Measures

Continual growth and diversification ofthe business

Ongoing market analysis nationally andinternationally, to find new areas of

opportunity. Accumulation of newassets, and employment of technicalexperts to develop and improve aircraftfeatures.

Protect the prestige andreputation of Qantas

Form new mutually-beneficial alliancesto increase efficiency and competitiveeffectiveness. Maintain a flexible anddiversified network.

This balanced scorecard model is fairly strong. The organisational goals have a trendtowards promoting profitability, and there are no contradicting objectives. The measures areclearly defined, allowing simple conclusions to be drawn about whether the goals have beenachieved.

In a large company such as Qantas, the balanced scorecard approach to organisationaleffectiveness may not easily allow for all goals to be accounted for. Within the separate divisions,

smaller, more manageable goals also need to be set, keeping the overall company objectives inmind.


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1.6 Critical Analysis of Qantass Current Issues & Possible Solutions

Qantass divisional structure is well-matched to their dynamic environment, however betterintegration is needed to increase efficiency. Qantas should establish several shared resourcesunits, to minimise the duplication of tasks within the different departments. This would help toreduce Qantass operating costs and make them more competitive with their main rival, Virgin

Blue.

Miles and Snow believe that as an organisation with a defender strategy, Qantas shouldhave high centralisation. However, decentralisation facilitates speedy action because informationdoesnt need to be passed through the vertical hierarchy. As Qantas needs to respond to rapidlychanging conditions, decentralisation of authority is more appropriate.

Porters theory states that as a differentiating firm, Qantas should have low complexity andlow formalisation. To respond to this idea, Qantas should restructure the departments that aremainly responsible for creating unique ideas and developing new products and services, andreduce their formalisation. This will facilitate ingenious idea development, not standardisingemployee behaviour increases variability and thus, creativity (Robbins & Barnwell 2002).

1.7 Recommendations

Firstly, Qantass should better integrate their structure, to increase efficiency. Qantas shouldestablish a shared resources unit which services the entire company, to minimise the duplication oftasks within the different departments. This would help to reduce Qantass operating costs andmake them more competitive. The shared resource unit should provide research and design,product development, marketing and administration services. Having a shared marketing teammay also help to identify different areas of the market to place each Qantas subsidiary, whichwould help to minimise the competition between the companies for the same market, or at least


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identify where problems lie.

Secondly, to allow for creativity and innovation, the research and design, productdevelopment and marketing staff in the shared resource centre should have a structure and pathof communication between them which has low formalisation and low complexity.

Lastly, Qantas should place emphasis on the achievement of impressive on-timeperformance as a way to compete with Virgin Blue. The on-time results from January 2003 show

that Qantas have the ability to perform extremely well, so they should focus on this and work itinto their marketing ideas.

1.8 Conclusion

Qantas Airways Limited has a divisional structure, which helps the company to respond toits rapidly-changing environment. As a large company with over 34,000 employees, it has acomplex structure with 11 horizontal divisions and vertical differentiation. Safety requirements andthe risks involved with the airline industry force Qantas to have a high level of formalisationthroughout the company. Decision-making is decentralised to allow the company to respondquickly to changes and challenges. However, the divisional structure of Qantas leads to duplicationof activities. It is recommended that Qantas establish a shared resource departments to minimise

this inefficiency.

Qantas has a defender strategy and fights against its competitor, Virgin Blue, to gainmarket share. Qantas has recently introduced Jetstar to assist in this battle. Qantas usesdifferentiation to place its services as more superior than its competitors, and has established acost leadership strategy for Jetstar to attract the low-cost market. Qantass long-term strategy isto improve its profitability to create substantial shareholder value, to maintain its position as

Australias leading domestic carrier, and to continue to grow and diversify the business into newmarkets nationally and internationally. A current focus is on reducing operating costs, recognisedas an attribute of the defender strategy.


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Qantas uses a balanced scorecard approach to assess its organisational effectiveness,which weighs up the demands on the organisation against their capabilities. Qantass balancedscorecard is fairly strong and takes all areas of the business into account, with a focus onprofitability.

To improve their effectiveness, Qantas should arrange the structure of their sharedresearch and design, product development and marketing department to enable for creativity andinnovative ideas, and should analyse the market to identify places of positioning for each Qantas

subsidiary, to eliminate competing for the same market where possible. Lastly, Qantas should alsofocus on improving and maintaining their on-time performance as a way to threaten Virgin Blue.

1.9 References

A smart move by Qantas 2004, Canberra Times, 27 February.

Australian Qantas may move some ops offshore: CEO, Dow Jones


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International News, vol. 14, no. 38.

Bernardi, S 2003, Airline alliance would benefit NZ tourism witness, New

Zealand Press, 20 August.

Boyle, J 2003, Qantas makes fare structure simple and flexible,Australian

Financial Review, 15 April, p. 3.

meeting, Financial Times, 24 February, p. 13.

Daft, R.L 1998, Organization theory and design(6th ed.), South Western

College Publishing, United States.

Ferguson, A 2004, Dixons new path, Business Review Weekly, 4 March.

Fysh, H 1970, Wings to the world: The story of Qantas, Angus & Roberson,

Sydney.

Harcourt, T 2004a, Qantas poses Asian puzzle, Australian Financial Review,

25 March, p. 30.

Harcourt, T 2004b, Qantas to decide on cost cuts,Australian Financial

Review, 30 May, p. 14.

Hunt, J 1992, Managing people at work(3rd ed.), London, McGraw Hill.


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claims share restrictions tilt level playing field, The Canberra Times,

27 May.

Kohler, A 2002, Qantas flies high despite downturn in the aviation industry,

Inside Business, viewed 3 April 2004, http://www.abc.net.inside

Business/content/2002/s658098.html

deal, The Age, 27 May, p. 4.

Marsh, V 2004, High stakes for a low-cost debut: Airlines, Financial Times,

30 May, p. 8.

Miraudo, N 2004, Passengers grab cheap air fares, Sunday Times (Perth),

30 May, p.31.

Qantas Airways: Company view, Datamonitor Company Profiles, 17 May.


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Qantas Airways Limited 2003,Annual Report, viewed 2 May, http://qantas.

com.au/info/about/investors

Qantas Airways Limited 2004, viewed 2 May 2004, http://www.qantas.com.

au/info/about/index

Qantas calls for level playing field 2004, Herald Sun, 27 May.

Qantas in low-cost launch 2004, The Christchurch Press, 7 April, p. 11.

Robbins, S.P & Barnwell, N 2002, Organisastion theory: Concepts and cases

(4th ed.), Pearson Education, Frenchs Forest NSW.

Shelley, P 2004, Qantas-Air New Zealand alliance: ATEC submission,

Australian Transport Export Council, viewed 3 April 2004, http://www.

atec.net.au/Qantas_Submission.asp


A Critical Analysis of Qantas Airways Limited

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