My advice to the new Qantas, Woolworths bosses

As John Mullen was preparing to take the chair of Qantas he watched two unrelated events take place that would be significant in his role.

The first was a generous Qantas frequent flyer offer which was akin to a share issue, and the second was the mustering of forces to trigger the retirement of Brad Banducci as Woolworths CEO.

Australia can be grateful a person of Mullen’s calibre has agreed to chair Qantas, which is a $20bn asset company which, at June 30, had corporate equity, including minorities, of only $10m. Current liabilities were in excess of current assets, and the Qantas board continues to compound the risk by buying back shares.

The Qantas ‘equity capital’ is supplied by its customers who book fares in advance, plus the structure of its frequent flyer program. When Qantas frequent flyers were this week offered extra points for bookings it was of course welcomed by customers and will help restore goodwill.

New Qantas chair John Mullen, during his time with Telstra. Picture: Aaron Francis

But, Qantas desperately needs those advanced bookings to provide ‘equity capital’ in the face of even more share buybacks.

One of the first decisions John Mullen will need to make is whether, long term, he is prepared to be chairman of a company with no equity capital, therefore extremely vulnerable if there’s a global downturn and advanced bookings fall.

As a conventional chief executive Brad Banducci was one of the best in the land and Woolworths shareholders were greatly enriched by his superb period of administration.

But, Banducci had difficulty mastering some of the new requirements of being a chief executive, including being able to handle grillings from Senate committees and the media. When Mullen was chairman of Telstra most of those activities were handled by his very professional chief executive Andy Penn.

At Qantas, this burden will need to be shared between CEO Vanessa Hudson and Mullen – and if ever the Senate cottons on to Qantas’s financing, then the grilling of Mullen will be intense.

Meanwhile, given Qantas’s importance to Australia, I thank Richard Goyder for realising he had to stand down — partly because he was linked to past mistakes and therefore couldn’t support Hudson.

Woolworths chairman Scott Perkins should have realised a grilling by the ABC might have exposed Banducci’s weaknesses and should have strongly urged him not to appear. Woolworths needs to hope its hastily appointed successor, Amanda Bardwell, has the required skills.

We need to recognise the brilliance of Banducci in transforming Woolworths and adding great value for shareholders

When Banducci became chief executive, Woolworths was struggling as it faced a rejuvenated Coles — owned by Wesfarmers — led by Ian McLeod who is one of the best supermarket retailers we have seen in Australia. Woolworths was being towelled in each reporting period, while Coles continued to gain ground.

Back in 2011, Woolworths acquired Cellarmasters and with Cellarmasters came Banducci, who then headed the Woolworths liquor business. To combat the brilliance of McLeod and the cultural hangover from the Masters hardware disaster, Banducci was put in charge of Woolworths food and later became group CEO.

Former Coles boss Ian McLeod. Picture: Mark Cranitch

Banducci’s experience in the rough and tumble of liquor retailing made him ideal for the task and he embraced the Woolworths tradition of investing in the best retail systems.

So while Wesfarmers and McLeod basked in immediate success, Woolworths stepped up its investment in supply chains. Two years into the Banducci reign, McLeod stepped down from Coles.

Being part of a conglomerate like Wesfarmers, capital investment in the Coles supply chain had to compete against other priorities and Coles did not match the Banducci investment in supply chain efficiency at this crucial time.

Gradually, Banducci turned Woolworths into an operation with lower costs than its main rival. Coles is now catching up, but tried to do it with a massive leap and as often happens there are problems in such exercises. Gradual is safer.

As Mullen prepares to take the chair at Qantas he will see remarkable similarities to Telstra. Both companies came out of Government ownership and had a cost structure which was far too high.

Telstra tackled this problem over a long period and when it embarked on the program the full extent of the looming changes were not understood.

Qantas started on the task when then-CEO Geoff Dixon established Jetstar. But Covid caused Qantas big losses and it still had a long way to go because costs were too high when compared with other international airlines.

During Covid, then-CEO Alan Joyce — with the backing of his chairman — decided to finally transform the company in one movement, rather than continuing a gradual process. There were mass retrenchments and a replacement by contractors. Later, those retrenchments were declared illegal.

When demand came rushing back post-Covid, the company was unprepared. Additionally, it was not ready for the consequences of a customer backlash which saw Goyder and Hudson struggle before the Senate committee.

Both Woolworths and Qantas had boards with personal views about the voice referendum and ignored the dangers posed in becoming players in racial issues facing the political system. Both backed the ALP rather than the Opposition and this stand antagonised the 60 per cent of their customer bases who voted No.

Stepping up: Woolworths Group has announced Amanda Bardwell as its new CEO, replacing Brad Banducci. Picture: Nikki Short

Qantas went quiet, but Woolworths doubled up and stopped selling Australia Day merchandise, propelling itself into more controversy and customer and political fury.

It was Banducci’s greatest single mistake and creates the danger of the Opposition and the Greens coming together to try and split Woolworths along with Coles.

This is not a prediction, but when a board’s personal views on racial matters are pitted against the views of the majority of their customers and a major political party then they are asking for trouble.

Finally, I would like to give advice first to John Mullen at Qantas and then Amanda Bardwell at Woolworths.

For Mullen: read the remarkable book by Elizabeth Fysh on the life of the first Qantas chairman, Fergus McMaster. It’s titled When Chairmen Were Patriots.

For Bardwell: be aware of my alert that non-stressed consumer demand in Victoria has slumped but is holding in other states, which has now been confirmed by the Morgan opinion polls.