Qantas is likely to survive -- just

Qantas is likely to survive, but only if it takes drastic action to staunch the red ink gushing from its international operations.

To understand Qantas, you must understand the origins of the airline industry. Qantas is known as a legacy airline. That is, it was owned by the Australian government and it was known as Australia's flag carrier. Other similar flag carriers were the UK's BOAC and KLM Royal Dutch Airlines. They were thought to be essential to national prestige. The de facto flag carrier for the US was Pan American World Airlines, better known as Pan Am. Pan Am was listed on the stock exchange. The US regulated the airline industry by granting rights to routes, both domestic and overseas. For many years, Pan Am was excluded  from flying internal US routes, which eventually killed it off.

Qantas. as the Australian flag carrier, was also denied domestic routes for many years. It had a fierce rivalry with Trans Australian Airlines (TAA), the government-owned domestic airline, which was eventually resolved when Qantas absorbed TAA. Qantas was privatised in March 1993.

Two things need to be said about legacy airlines. First, they often have intractable and expensive cost structures, as a result of their origins as protected state owned enterprises (SOEs). The protracted industrial battle Qantas has had to force its unions to face reality is reflected in other countries, including the US. Many US investors will not touch airline stocks because they are so heavily unionised. Legacy airlines' cost structures handicap them when competing against new entrants. Their workforces have proved resistant to change.

Second, until recently, the masses  weren't encouraged to fly. Airline travel was the preserve of the elite. Women passengers wore nice frocks and men dressed in a suit and tie. The disproportionate number of male stewards employed by Qantas, said to date from the time when the Qantas fleet had many flying boats, was a standing joke for Australians. Only when the airline industry was deregulated were people encouraged to fly. Service standards were often not high. Given a choice between between flying Qantas, as they were supposed to, and bending the rules and flying Singapore Airlines, some senior political figure invariably opted for SIA. I can still remember the kerfuffle when a 'meal' -- in fact, a box of sandwiches -- were introduced on east-west flights, an innovation which, we were told, would bankrupt to airline industry. In private, Qantas management admitted they could not match the service standards of the Asian airlines.

Qantas, all things considered, has done well. On domestic routes, it has seen off Ansett, Compass I and Compass II, Impulse and now looks set to give Virgin a hiding. Virgin needs to assure the most profitable Qantas customers, business travelers, that it has the services and facilities that make traveling more productive. Virgin has made the  sensible move of  preventing its cabin crew from referring to passengers as 'mate' unless they make request to be addressed as such. Being the cabin crews' 'mate' might appeal to a fly-in, fly-out tyre fitter but is unlikely to be acceptable to a CEO who is accustomed to a degree of deference. JetStar has found a niche, it doesn't pretend to be any more than it is -- as the no frills, low cost offshoot of Qantas..

Every economist abhors cross subsidisation. I think Qantas International is a good service, especially since Singapore Airlines selected me, apparently at random,  for an excess baggage fee of $250 when I was 5 kg overweight leaving Beijing the last time I was there. However, the rest of the company can't carry the Qantas international division, said to be bleeding $450 million a year. Somehow, they will have to turn it around. Sure, when it comes to Middle East airlines it isn't a level playing field, but the airline industry never was. And when you've been away for a while, it's still good to fly an airline 'that still calls Australia home.'