Pilots' deal to put dent in Qantas bottom line
The international pilots union has nutted out these numbers, suggesting that this would have been $20 million higher but for the productivity gains made as part of the FWA agreement.
Qantas doesn't necessarily agree with this assessment, but nor was it happy to offer an alternative.
According to the union, the airline's gains from the proposed agreement include scheduling changes and some redundancy provisions.
And there appears to be a very real chance that international pilot redundancies will be on the cards - in part because of the decision to quit Frankfurt as a destination and in part a reduction in some routes such as Adelaide to Singapore.
The latest changes are part of a wider push by Qantas to improve the profitability of its international mainline division, which lost $450 million last year.
The latest element to this is the Emirates tie-up, which should get final approval from the Australian Competition and Consumer Commission over the next couple of months.
Despite the positive medium-term gains that are due to be unleashed from these measures, some analysts have been busy reducing their profit estimates for Qantas' current half-year.
In part this is due to the softening yields from the international business, mainly around Jetstar.
But the majority of the analysts' concerns stem from continued soft domestic conditions. The bottom line is that Qantas (and Virgin) will have to wear some pain from the local capacity war before the situation begins to improve in any meaningful way.
Investors looking for any bounce in earnings in the second half to June 30 will be disappointed. The environment remains tough.
Qantas boss Alan Joyce has been prepared to take some financial pain to invest in the long-term future of the airline.
Qantas' focus in the FWA case was clearly stated as being around the right to manage its own business. In this regard, it can notch up a victory.
"Had the union been successful with its claims, including the so-called job security claims, it would have meant that over time Qantas would not be financially viable," the airline said.
But the pilots appear to have scored a salary gain in the process.
They will get a 4.5 per cent pay increase from January 1 last year, which will be backdated, and an additional 3 per cent in January 2013 and another 3 per cent in January 2014.
(The pilots had sought an 18-month backdate which FWA did not award.)
The short-term issue for both domestic airlines is that this capacity war has been more damaging than analysts had originally thought. And it has been exacerbated by Tiger moving back to being fully operational.
While there is an expectation that the worst is over, the hangover will be longer lasting.
Qantas has managed to retain its line in the sand of 65 per cent domestic market share during this contest but Virgin has increased its market share of the higher-margin business market.
The real winners have been the travelling public, which has enjoyed major fare reductions.
Given the final FWA negotiated deal with the international pilots will not be sealed for another couple of weeks, the cost of the backdated salary increases may not go through the Qantas accounts until the current half, which means they will not need to be called out by the company as affecting the first-half period that it will soon report.
Qantas has given no second-half guidance and may not do so when it reports first-half earnings in a few weeks.
The guidance Qantas has announced for the first half to December 2012 is expected to hold, as it was issued only in November.
Any concerns around Qantas will be focused on the half to June 2013. The salary bill and the prolonged price war will have a continued downward push on earnings, despite initial gains from the Emirates tie-up beginning to filter through.
At this stage, most investors and analysts are prepared to support Qantas' longer-term strategy of fixing the long-haul mainline business, despite possible disappointment in this year's earnings performance.
Joyce will give an update on the performance and market conditions when he reports the first-half profits but he won't be couching it around hard estimates for the second half.
Meanwhile the threat from former chief executive Geoff Dixon and his investment partners appears to have eased, allowing Joyce and the Qantas board more time to pursue the airline's turnaround strategy.
Frequently Asked Questions about this Article…
The proposed Fair Work Australia (FWA) deal with international pilots is expected to raise Qantas' salary bill by about $45 million for the current financial year. The pilots' union says that figure would have been roughly $20 million higher if not for productivity gains built into the agreement.
Under the negotiated deal, international pilots will receive a 4.5% pay rise backdated to January 1 last year, plus further increases of 3% in January 2013 and 3% in January 2014. The union had sought a longer backdate (18 months), which FWA did not award.
Yes — the union says the agreement includes scheduling changes and redundancy provisions, and the article notes a real chance of international pilot redundancies. That risk is linked to Qantas withdrawing Frankfurt as a destination and cutting some routes such as Adelaide to Singapore.
The deal is one part of a broader push to fix Qantas' international mainline business, which lost $450 million last year. While the pilots secured pay gains, Qantas hopes productivity changes, route adjustments and the Emirates tie‑up will help restore international profitability over the medium term.
Qantas' partnership with Emirates is expected to provide medium‑term benefits for its long‑haul operations. The article says the tie‑up should get final approval from the Australian Competition and Consumer Commission (ACCC) over the next couple of months.
Analysts have trimmed estimates partly because international yields have softened, especially at Jetstar, and largely because of weak domestic conditions. The prolonged domestic capacity war — exacerbated by Tiger becoming fully operational — is dragging on margins and near‑term earnings.
Possibly not. Because the final negotiated deal won't be sealed for a couple of weeks, the cost of the backdated increases may not be posted to Qantas' accounts until the current half, which could mean they won't be shown as affecting the immediate first‑half period the company will soon report.
Investors should expect a tough near term: the second half to June 30 is unlikely to show an earnings bounce due to the salary bill impact and the ongoing price war on domestic routes. However, management is pressing a longer‑term turnaround for long‑haul operations, and many investors and analysts are prepared to back that strategy despite potential short‑term disappointment.
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