Lord of the flyers
Steve Creedy - December 17, 2005
As aerospace giants Boeing and Airbus ratcheted up their campaigns to sell Qantas their next-generation jets, they both spent heavily on billboards near Sydney Airport and newspaper ads to publicise their efforts.
But if those campaigns were designed to sway Qantas, they failed dismally, according to chief financial officer Peter Gregg.
"In fact, I wanted to put up my own billboard at the airport with a pencil and a sharpener and a line, 'Boeing and Airbus, sharpen your pencils'," he says.
Gregg had taken on the job of overseeing the airline's fleet strategy six months earlier and he was determined to keep the Flying Kangaroo one jump ahead of the plane manufacturers.
Qantas in the past had placed incremental orders for 10 or 20 planes and the blunt-talking Gregg believed this meant the airline was getting screwed.
But with $13 billion to spend on new planes - a major fleet upgrade - Gregg, with the backing of chief executive Geoff Dixon, engaged in a high-stakes game to squeeze a better deal out of whoever wanted Qantas's business.
The result, a massive order of 65 new Boeing 787s, will shape Qantas for years to come and has had a major effect on the fortunes of Boeing and Airbus in Australia.
Gregg told his newly hired head of strategy, former US-based Lend Lease executive Simon Hickey, that the manufacturers saw Qantas as easy pickings.
They didn't see the airline's business as a big deal, even though the smaller orders ultimately locked in the airline as a customer for a decade or more.
What was needed was an order that would sit up and make them notice.
"Simon bought the story straight away but I can tell you the rest of the organisation didn't," recalls Gregg.
"It was a headbutting exercise of pretty interesting extremes.
"In the end people started to realise that it was right.
"And then when we went to the manufacturers, the reaction was just astonishing."
Gregg discovered the manufacturers were not only prepared to fight on price but would make significant changes to the design of their planes to win Qantas's business.
"This is the advantage of buying a big fleet of aircraft. This is the sort of thing the manufacturers will do for you if they know you're going to commit to a large fleet."
Boeing Australia vice-president of sales Rick Westmoreland adds: "You could say Qantas helped us design this aircraft - they truly did.
"The importance of this deal (for Boeing) is we're launching the 787-9 based on the Qantas order." Six months later, Gregg was making a recommendation to his board after Airbus and Boeing had waged the hardest fought campaign in memory.
The decision, along with the airline's decision in 2000 to buy the double-decker Airbus A380s, is a key plank in Dixon's push to halt the slide in the Flying Kangaroo's share of the Australian in-bound and out-bound international market.
That order for Airbus had already undermined Boeing's dominance with the order for a dozen of its new double-decker A380s and 14 A330s.
It had also beaten Boeing to the punch by winning the contest to supply Qantas low-cost offshoot Jetstar with its single-aisle A320s.
If it was going to achieve its ambition of turning Qantas into an all-Airbus carrier, this would be a pivotal deal.
A resurgent Boeing was equally determined not to let its long-time customer fall further into the clutches of the Europeans.
It was poised to deliver its last aircraft to Qantas and losing this campaign would effectively mean losing the Flying Kangaroo.
But it had started development of its all-new, fuel-efficient 787 "Dreamliner" before Airbus, which had been playing catch-up with an aircraft known as the A350 and keenly wanted to maintain its lead. The two manufacturers had been close on price, with discounts rumoured to be up to 40 per cent, and on the technical evaluation of their planes.
But Boeing's more advanced program meant it could deliver planes to Qantas in 2008, two years before Airbus.
Gregg says the decision could have gone either way and probably would have gone to Airbus had it been made earlier.
"Boeing must have moved quite a few big boulders out of the way to suddenly give us access to the 787 far, far earlier than we ever expected we could get it.
"Without that, they would have been very hard pressed to have won the deal."
The fierce competition had nothing but upside for Qantas and, for the first time, the airline was able to build a case for rolling over similar-sized aircraft from one generation to the next.
A change in technology and a reduction in operating costs of up to 24 per cent meant Qantas could generate a better return from the new planes than it could from its written-down older aircraft.
But the long and arduous process had undergone a metamorphosis since it began about 12 months ago.
The original fleet conception was about Qantas's need to replace its ageing Boeing 767s and, eventually, its fleet of 747-400s with long-haul "hub busters". Ironically, it would decide to shelve the decision on ultra-long-range aircraft because neither manufacturer could offer a plane that would do what it wanted economically. The next generation of 300-seater aircraft - using lightweight materials, redesigned aerodynamics and more efficient engines to deliver fuel savings per seat of up to 25 per cent - were a different matter.
As the Boeing 787 was launched and the A350 firmed up, Qantas had also begun looking at starting up an international arm of Jetstar as part of wider strategy aimed at defending its market share into and out of Australia.
The new planes looked an ideal fit, particularly the bigger Boeing 787-9 and the A350-900.
But Qantas was not happy with the specifications and told both manufacturers it wanted major design changes so it could reach the west coast of the US and fly from Asian hubs such as Singapore to Europe. Boeing went back to add about 1000km to the range of its bigger plane.
"What that meant is that they were able to beef up the engines, improve the drag of the plane and put more fuel on board so it could fly further than what it was specified to fly when they started offering it to us," says Gregg.
About half of the B787, including the skin, is made of carbon fibre composites and Gregg has been curious about the effects on the space-age material of lightning.
787 program head Mike Bair heard of Gregg's interest and flew out armed with a series of panels made of composite and traditional aircraft aluminium.
Boeing had zapped the panels with simulated lightning so Gregg could see the composite was scorched, but intact.
Airbus was also prepared to make concessions, offering to alter its plane's skeletons to give Qantas extra cabin room.
Legendary salesman and Airbus chief operating officer John Leahy, renowned for both his ability to stitch a deal and breaking Boeing's stranglehold in Australasia, was also a regular visitor to Sydney in the closing stages of the campaign.
Qantas had a dedicated team of five working full-time on the process, sometimes putting in 24-hour days, for at least six months.
The airline modelled every flight of every plane for its entire life. "What we do is, we look at where we want to fly the plane, we look at the range it has to fly and the load we want to carry," says Gregg, who describes himself as a doubting Thomas who refuses to believe anything until convinced.
"There are certain ways in which Qantas wants to operate and that creates a cash-flow for that aircraft on that mission.
"And we did that for every one of the routes that we thought these planes would fly for all the years we thought they would fly on them. That came to $80 billion worth of cash flows."
When all the calculations were done, there was little between the planes in terms of cost or operating abilities.
It then came down to strategy, according to Gregg.
Qantas wanted to get Jetstar International up and running as quickly as possible and to give it the cost advantages of the best new technologies, including wider use of carbon fibre composites.
Ultimately, according to Gregg, the weight of both those arguments tipped the decision in favour of Boeing.
But there was to be one last twist in the tale: just before the Qantas board was about to make a decision on December 7, both manufacturers lowered their prices at the last minute and it was back to the models.
"The revised offers were significant - I would go as far as to say very significant - and we wanted to check all of that," says Gregg.
"But even after that, and we don't how they did it, they were still within a bee's knee of each other.
"So we would say that, for a week's delay, we got a better deal, but we still had the same issue of a decision and we were still laying the same factors on the table."
Although the question of ultra-long-range aircraft is now on hold, Gregg says hubs such as Singapore and Bangkok should be worried about the airline's ability to fly directly to far-flung parts of Asia.
"It's going to be far more attractive for Asian visitors to come direct to Australia, than transit through a hub like Hong Kong, Singapore, Bangkok or KL," he says.
"Hub-busting is about point-to-point - not just about long point-to-point, but intermediate point-to-point as well.
"And the beneficiaries will be the smaller (Australian) capital cities, which is where Jetstar is really targeted."
Gregg also expects the Dreamliner, which features increased passenger comfort - through higher cabin humidity and air pressure as well as features such as larger windows - to be popular with customers.
And he has a warning to the airline's competitors, who are set to face a Qantas-Jetstar combination armed with the latest planes.
"They should be afraid," he says. "They should be very afraid."
