Perspective – October 2012

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Ian McMahon

The challenge facing BCG

IF the appointment of former Qantas commercial chief Rob Gurney as the replacement for Peter Lacaze at the helm of JTG did not conclusively demonstrate that the airline is becoming restive about the value of its 29 per cent stake in the travel company, the appointment of Boston Consulting Group (BCG) to undertake a complete review of the business leaves no doubt.

BCG has extremely close links to Qantas, having prepared the business case for the formation of Jetstar.

Bruce Buchanan, the BCG executive who prepared that business case, went on to become Jetstar’s chief executive while other former BCG consultants in senior executive roles at the airline include Gregorio Manzanera, Dr Mathias de la Rosa and Chris Davies.

Incidentally, on the matter of Jetstar and the contention that its apparent profitability and Qantas’ reported losses are distorted by Qantas having to bear costs incurred by Jetstar, it was interesting to hear this confirmed on a recent edition of the ABC’s 7.30 program.

Former Qantas chief economist Tony Webber told reporter Greg Hoy: “Jetstar enjoys a number of services that they don’t actually pay for, such as the legal department, corporate communications, investor relations – all of those overheads, back office overheads.”

But back to JTG …

Clearly Qantas and the company’s other major shareholder, CVC, would like to see restructuring that will quickly translate into an improved bottom line and share price.

That would enable Qantas to show a financial return on merging the loss-making QBT and the marginally profitable Qantas Holidays into JTG; and it would enable CVC to salvage the Stella debt which it turned into JTG equity.

The big challenge for BCG is that JTG comprises two different business models.
There are the operations that earn money from the commissions they make on selling travel like Air Tickets, Qantas Holidays, QBT and Best Flights.

But a key slice of the company – the Jetset, Travelworld, Harvey World Travel and Travelscene American Express chains – has the sale of franchises as its core business.

It will be said that these chains produce more revenue from overrides paid by suppliers than from franchise fees.

But this misses the point that the overrides are only forth-coming as long as the core business of selling franchises is successful. Without franchisees selling preferred products the company does not have the sales volumes to attract the overrides.

The options available for improving the bottom line of the franchise business would seem to be to increase the price of franchises, to reduce the services provided to them (or at least the number of staff delivering those services) or to induce the franchises to sell more preferred products.

All of these options are fraught with the danger of alienating franchisees and undermining the core business. BCG’s challenge will be to achieve a quick boost to the bottom line without jeopardising the long term future.