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A critical analysis of Qantas Airways Limited

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A critical analysis of Qantas Airways Limited

Due date:

31st May, 2004

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A critical analysis of Qantas Airways Limited




Section 1.1 Executive Summary_________________________________

Section 1.2 Introduction_______________________________________

Section 1.3 The Structure of Qantas Airways Limited________________

Figure 1.1

Qantass Organisational Chart_________________________

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__________________________________


Section 1.8 Conclusion________________________________________


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Section 1.9 References________________________________________



Executive Summary

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The purpose of this report is to analyse the organisational characteristics of Qantas Airways 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 the company 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, differentiated product to prevent competitors from stealing their market. Porter believes that Qantas has a differentiation strategy. Because they have the necessary skills and resources, this strategy will allow them to succeed. Qantas uses a balanced scorecard approach to assess its organisational effectiveness. This balanced scorecard is outlined in the report, and shows that there is a tendency towards financial goals and objectives. Nevertheless, Qantass balanced scorecard is fairy strong and accounts for development 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 of resources, and the need for lower formalisation and lower complexity in the departments that are responsible 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 this shared resource unit in a way which encourages creativity. It is also recommended that Qantas places emphasis on the achievement of impressive on-time performance to compete with its rival, Virgin Blue.



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Qantas was founded in the Queensland outback in 1920. Originally registered as Queensland 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 be extremely 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 to succeed 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 an organisations environment and strategic direction, will ultimately determine their survival (Ferguson 2004).


The Structure of Qantas Airways Limited

As a large organisation with 34,000 full-time staff, Qantas has a complex structure, with several self-managed departments. In August 2003, Qantas underwent a structural reorganisation to 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, which demonstrate horizontal differentiation, and the hierarchy of staff working within these divisions show the vertical differentiation of the organisation. As following strictly enforced procedures helps to manage the many risks involved with air travel, formalisation is high within divisions. Extensive rules, 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 of decision-making, as there is a heightened need to respond rapidly to changing conditions (Kohler 2002). It is not possible for one person to grasp the full nature of the challenges facing Qantas, so each department is responsible for responding to their challenges individually, and this allows for speedy and informed decisions to be made by those who understand the issue. Decentralisation also 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). The divisional structure leads to high accountability for end results, as each internal department operates like a separate business, with its own performance goals and targets. Also, departmental performance is not based on managements subjective assessment of staff and criteria-related measures, but instead is based on financial performance, a much more clear and objective measure.

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 top management at Qantas from being involved with the day-to-day operations, and allows them to concentrate on long-term planning and strategic decision-making, which is imperative in their dynamic environment (Robbins & Barnwell 2002). The six wholly-owned Qantas subsidiaries share a support centre, which reduces the duplication of resources. The support centre provides IT, human resources and financial services to 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 Qantas Holidays (Qantas Airways Limited 2004). However, there are weaknesses of Qantass divisional structure. Throughout the other autonomous divisions, there is extensive duplication of activities, which leads to higher operating costs and inefficiency. Divisional forms also tend to discourage communication between the divisions and conflict can occur. In an attempt to minimise this conflict, all divisions share Qantass strategic interests and are headed towards similar goals (Bernardi 2003). Another disadvantage of the divisional structure is that the specialisation that exists within departments makes it difficult for top 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 with each 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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Qantass Strategy and its Influence 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 of Qantass 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 the adoption of behaviours and allocation of resources, which are necessary for the organisation to achieve these goals and objectives. Chandler believes that as companies grow, their structure needs to grow with them, moving from a simple, to a functional, to a divisional structure, if they are to remain efficient, and that if an organisation assumes a new strategy, they require a new or updated structure if the larger company is to operate effectively (Robbins & Barnwell 2002). Raymond Miles and Charles Snow (1978) identified four strategic organisational types based on the speed of the market and product changes. According to their theory, Qantas has adopted a defender strategy. Miles and Snow state that defenders seek stability by offering a limited range of products or services directed at a narrow target market. To prevent competitors from stealing their market, defenders strive aggressively to produce a high quality differentiated product, or to offer competitive pricing. Defenders focus on the reduction of operating costs and the improvement of efficiency, rather than scanning the environment for new areas of opportunity. Structural characteristics of defending firms are high formalisation and high centralisation, and extensive division of labour (Robbins & Barnwell 2002). In Qantass case, their target market, the Australian public (particularly professionals) is not equivalent to the narrow target market outlined in the defender model. Also, the defender strategy is usually adopted by companies who perceive their environment as stable, and the airline industry has an extremely challenging and dynamic environment. Although Qantas does focus on improved efficiency and lowering operating costs, in comparison with the Miles and Snow model, Qantas is continually looking for new opportunities to grow and diversify their business. Lastly, Qantas uses a decentralised structure rather than the centralised model outlined by this model (Fysh 1970; Qantas calls for level playing field 2004).
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Qantass long-term strategy is to 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 new markets nationally and internationally (Qantas Annual Report 2003). Chief Executive Officer, Geoff Dixon, is implementing Qantass strategy in several ways. A main focus is on reducing operating costs through a project called Sustainable Future, which sets out guidelines to reduce operating costs by $1 billion over the next two years (Qantas Airways Limited 2004).

Qantas has recently introduced Jetstar, their low-cost domestic airline subsidiary, to respond to the growing demand for discounted air travel, and to ensure Virgin Blue doesnt secure too much market share. Jetstars introduction will also help to avert potential competitors from entering the Australian market (A smart move by Qantas 2004). History has shown that the Australian domestic market is too small to support three mainline flight carriers. However, as a duopoly, the Australian domestic market is an attractive target for newcomers and existing international competitors. Qantas has attempted to solve this problem by creating Jetstar, which as a wholly-owned subsidiary ultimately produces profit for Qantas. In effect this keeps the Australian market as an economic duopoly, however the extra business that is currently attracting overseas competitors can be targeted by Jetstar (Marsh 2004). If consumer trends continue to move towards lower airfares, Qantass long-term strategy is for Jetstar to become their main domestic brand, leaving the international market to Qantas, the prestigious brand of the flying kangaroo (Miraudo 2004). Other key elements involved with achieving Qantass goal to maintain their position as the leading Australian domestic carrier are upgrading and expanding the fleet to improve efficiency, maintaining a flexible and diversified network, maintaining current alliances and seeking mutually beneficial relationships with other quality airlines, improving the profitability of the Qantas Flight Catering, Qantas Holidays and Qantas Freight businesses, maintaining financial strength and investing in product and customer service initiatives (Qantas Annual Report 2003). A proposed beneficial relationship is Qantass alliance with Air New Zealand, which would enable both carriers to better utilise their resources and to compete more effectively. This alliance was rejected by the Australian Competition Tribunal in May, 2004, but the decision has been appealed 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 US airline, which will assist Qantas to grow and prosper (Hunter 2004). In line with its overall growth strategy, Qantas has recently expanded its offering of domestic flight routes to include Sydney to Broome, Perth to Cairns, Perth to Canberra and Melbourne to Ayers Rock. Added international flights from Sydney to Mumbai, and Sydney to Shanghai will be operating by the end of the year (Bray 2004). Qantas is also in the process of setting 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 move some ops offshore- CEO 2004; Harcourt 2004a; Qantas in low-cost launch 2004). Part of Qantass broader strategy is to simplify its operations. Measures are being taken to implement this 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 of communication (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). In response to other changing demands, Qantas also plans to move to all-economy seating on some routes, and a fleet of new aircraft is scheduled to be completed by the end of 2005 (Qantas builds up domestic fleet 2004). Michael Porter argues that for an organisation to successfully perform, it must select a strategy that will give its organisation a competitive advantage. Porter states that three business strategies exist cost leadership, differentiation and focus and organisations should choose the strategy that best facilitates their strengths (Robbins & Barnwell 2002). When a company sets out to be the low-cost producer in its industry, it assumes a cost leadership strategy. Success with this strategy 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 Blues market share using price. Jetstar has the economies of scale and supplier agreements provided by Qantas, which give the company a financial advantage over another newcomer to the industry. For Jetstar to succeed, their service needs to be comparable to that of Virgin Blue so they are accepted by consumers, and their focus needs to be on efficiency. In February 2004, Jetstar was praised for being free of wage and costing structures, and for their focus on minimising expenditure, which meant that the only costs that couldnt be squeezed were those pertaining to safety. This suggests that Jetstar will survive, utilising a cost leadership strategy (A smart move by Qantas 2004). A differentiation strategy is where an organisation seeks to be unique in its industry in ways that are widely valued by customers. It involves emphasising an attribute that makes the firm different from its rivals and it significant enough to justify a premium price. To complement Jetstars cost leadership strategy, Qantas has adopted a differentiation strategy. Qantas aims the majority of its services to corporate travellers and differs from Virgin Blue by offering value-added bonuses such as complimentary food and alcohol, extensive personal service and Qantas frequent flyer points, and incentives such as Qantas Club membership. In the domestic market, Qantas also offers low-price internet fares known as red-e deals for price conscious travellers. Internationally, Qantas differentiates itself from its competitors by offering premium service. In September 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 food and wine, premium quality noise-cancellation headsets and luxury amenity kits (Qantas Airways Company View 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 reputation for 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, product development and marketing, and that subjective, intuitive measures should be used rather than quantitative measures. For an organisation with a differentiation strategy to succeed, there needs to be employee benefits which attract highly skilled professionals and creative people to become employees of the company. Porter states 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 does not adhere to Porters guidelines. However, Porters theory is not entirely applicable at Qantas, as it does not make allowances for the strict regulations that govern the airline industry. Low formalisation is not possible in such an industry. Also, in a large company such as Qantas, high complexity, especially in terms of horizontal differentiation, is inevitable. However, Porters theory could be applied to the departments which are most active in facilitating differentiation. For instance, the research and design, marketing, and product development departments could be structured simply, with minimal rules and guidelines, in order to encourage the creation of unique ideas and products.


The Organisational Effectiveness of Qantas

At Qantas, organisational effectiveness is measured in several ways. Overall company growth is measured by the accumulation of new assets (eg. new aircraft) and provision of new services (eg. flight routes). For shareholders, organisational performance is calculated through several economic measures, which are then compared to results from previous years to determine improvement or deterioration. These economic measures are the number of passengers carried, revenue passenger kilometres (the number of paying passengers multiplied by the number of kilometres flown), available seat kilometres (total number of seats available multiplies by the number of kilometres flown), revenue seat factor (percentage of total seat capacity utilised by paying customers), and the number of aircraft in service. Other financial measures used to assess Qantass 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, revenue passenger kilometres per employee, available seat kilometres per employee, and the average amount 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 each company. Operating efficiency is measured using on-time performance data. Virgin Blue prides itself 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 could use to weaken Virgin Blues reputation and confidence. These aspects of organisational effectiveness can be measured using a balanced scorecard approach, 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 and innovation perspective are shown in figure 1.2.

Financial Perspective Goals Improve profitability to create shareholder value Reduce operating costs Maintain position as Australias leading airline Measures Improve performance on economic and organisational productivity measures Reduce operating costs by $1 billion over 2 years by implementing the Sustainable Future project. Upgrade and expand fleet to improve efficiency, maintain current alliances, and improve the profitability of the 6 Qantas subsidiaries

Goals Improve on-time performance


Identify & eliminate causes for delay, and empower every pilot and crew member to be responsible for punctual departures Provide new services for customers and Employ those with superior market expand range of flight routes trend analysis skills, and continually research to find areas of opportunity

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Internal Business Perspective Measures Goals Research consumer demands, and respond to changes in these demands Promote low-cost flights and advertise Jetstar to strengthen its public image. Compete with Virgins prices to offer value to customers, and to increase % of travellers choosing air transport Innovation and Learning Perspective Goals Measures Continual growth and diversification of Ongoing market analysis nationally and the business internationally, to find new areas of opportunity. Accumulation of new assets, and employment of technical experts to develop and improve aircraft features. Protect the prestige and Form new mutually-beneficial alliances reputation of Qantas to increase efficiency and competitive effectiveness. Maintain a flexible and diversified network. Respond to changing needs of customers Strengthen the Jetstar brand in response to a growing need for discounted air travel

This balanced scorecard model is fairly strong. The organisational goals have a trend towards promoting profitability, and there are no contradicting objectives. The measures are clearly defined, allowing simple conclusions to be drawn about whether the goals have been achieved. In a large company such as Qantas, the balanced scorecard approach to organisational effectiveness 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 in mind.

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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 better integration is needed to increase efficiency. Qantas should establish several shared resources units, to minimise the duplication of tasks within the different departments. This would help to reduce 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 should have high centralisation. However, decentralisation facilitates speedy action because information doesnt need to be passed through the vertical hierarchy. As Qantas needs to respond to rapidly changing conditions, decentralisation of authority is more appropriate. Porters theory states that as a differentiating firm, Qantas should have low complexity and low formalisation. To respond to this idea, Qantas should restructure the departments that are mainly responsible for creating unique ideas and developing new products and services, and reduce their formalisation. This will facilitate ingenious idea development, not standardising employee behaviour increases variability and thus, creativity (Robbins & Barnwell 2002).



Firstly, Qantass should better integrate their structure, to increase efficiency. Qantas should establish a shared resources unit which services the entire company, to minimise the duplication of tasks within the different departments. This would help to reduce Qantass operating costs and make them more competitive. The shared resource unit should provide research and design, product development, marketing and administration services. Having a shared marketing team may also help to identify different areas of the market to place each Qantas subsidiary, which would 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, product development and marketing staff in the shared resource centre should have a structure and path of communication between them which has low formalisation and low complexity. Lastly, Qantas should place emphasis on the achievement of impressive on-time performance 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 it into their marketing ideas.



Qantas Airways Limited has a divisional structure, which helps the company to respond to its rapidly-changing environment. As a large company with over 34,000 employees, it has a complex structure with 11 horizontal divisions and vertical differentiation. Safety requirements and the risks involved with the airline industry force Qantas to have a high level of formalisation throughout the company. Decision-making is decentralised to allow the company to respond quickly to changes and challenges. However, the divisional structure of Qantas leads to duplication of 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 gain market share. Qantas has recently introduced Jetstar to assist in this battle. Qantas uses differentiation to place its services as more superior than its competitors, and has established a cost leadership strategy for Jetstar to attract the low-cost market. Qantass long-term strategy is to 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 new markets nationally and internationally. A current focus is on reducing operating costs, recognised as 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 balanced scorecard is fairly strong and takes all areas of the business into account, with a focus on profitability. To improve their effectiveness, Qantas should arrange the structure of their shared research and design, product development and marketing department to enable for creativity and innovative 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 also focus on improving and maintaining their on-time performance as a way to threaten Virgin Blue.



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

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

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