Qantas expects deeper losses

QANTAS is expecting deeper losses for its international operations but domestic operations will hold sway for the financial year ending 30 June 2012. As a result, the group’s profits could drop by as much as 90 per cent from A$550 million (US$548 million) to A$50 million.

Loss for Qantas International may be higher than A$450 million compared with A$210 million in 2010/11. This is attributed to the worsening global economic conditions that has led to lower demand for air travel, referring particularly to the UK and Europe market, higher jet fuel prices resulting in the airline incurring its “highest ever jet fuel bill”, and the hefty cost of industrial action of A$100 million. While the domestic market is likely to show improved profits, increased capacity has also resulted in reduced yields.

This should not come as a surprise following regional rivals Singapore Airlines’ report of a dismal year and Cathay Pacific Airways’ expectations of similar downhill performances. It looks like the majority of airlines are rocking in the same turbulent waters, keeping in line with the International Air Transport Association (Iata)’s reduced forecast of profits for the industry. The challenge would be in how each one would ride out the storm.

For Qantas, the expected poor results might give it more impetus to press forward with its 5-year transformation plan announced by CEO Alan Joyce in August last year, particularly so if they help soften the stance of hard-core opposition at home to the plan that has generated fear among locals that Australian jobs would be lost. Expansion into Asia could be accelerated with new energy.

Mr Joyce has already announced the split of international and domestic operations into independent units, each to be headed by its own executive management. (See Qantas separates international and domestic operations, May 26, 2012). He said the initiative “will bring further rigour to our business.”

The plan also includes withdrawing from loss making routes, reducing capital investment and restructuring Qantas engineering. Mr Joyce said: “We are also attacking costs and allocating aircraft and capital efficiently. Over $300 million in annual benefits have been identified from the changes we are making and we will continue to seek improvements in all parts of the business.” He added that Qantas would “continue to practice disciplined financial management.” The airline aims to bring total capital expenditure down to A$1.9 billion for the next two years.

Mr Joyce was hopeful that Qantas International would return to profitability in 2014.

However, ratings agency Standard & Poor has put Qantas under review for a possible downgrade that has led to its shares falling below A$1 for the first time. The lower rating would make debt funding for the airline’s growth and expansion plans more costly. Analysts may not doubt Qantas’ eventual recovery, but the struggle may be longer than anticipated by Mr Joyce.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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