Qantas dresses its wounds

Had it not been for last year's costly confrontation with three of its unions, today's Qantas result would have been regarded as impressive in the context in which airlines are now operating.

Instead, Qantas reported a savage decline in statutory earnings, from $241 million to $42 million for the half. On its preferred basis – underlying pre-tax earnings – profit fell $215 million to $202 million.

Given the $194 million cost of the industrial dispute that led to the shock grounding of the entire Qantas fleet, and fuel costs that were $444 million higher than for the previous corresponding period, the result was more than creditable, with revenue up six per cent, improvements in yields and unit costs and a five per cent improvement in cash flow.

That doesn't, however, mean that Alan Joyce and his board, having effectively put the more extreme industrial relations issues behind them, are back to a business-as-usual footing. The structural issues affecting Qantas and its international peers haven't disappeared.

Its international business is still losing market share and money as Middle Eastern and Asian carriers continue to pour capacity onto the routes into and out of Australia. With Europe staring at a lost decade or more in terms of growth, there is a rapid shift in industry focus towards Asia. The resources boom, and the woes elsewhere in the world, implies a semi-permanent high Australian dollar.

Qantas is also in the midst of a fleet renewal program that, while now more limited and operating to a timetable that has been continually lengthened, is seeing newer, more fuel-efficient and less maintenance-intensive aircraft flowing into the fleet and older generation planes being retired.

The need to reduce the level of haemorrhaging within its international business, and to become more competitive against newer carriers flying newer and more efficient fleets that have cost bases 30 per cent or more lower than its own, is driving some very tough decision-making within the group, which is determined to maintain its investment grade credit rating.

Today Alan Joyce announced plans to cut $700 million-plus from his capital expenditure over this financial year and next. Some of those savings will come from Boeing's continuing inability to deliver its 787-800s on schedule (Qantas won't get its first of the new planes until the middle of next year) but Qantas is also pulling back planned domestic capacity growth, has chopped two more routes from its international network, is retiring two more Boeing 747s and is displacing 747s with Airbus A330s on some international and domestic routes.

He also announced 500 job cuts and foreshadowed further losses. Most of them will be focused on the group's engineering and maintenance division, as Bill Shorten foreshadowed earlier in the week. Qantas currently has heavy maintenance facilities in Melbourne, at Avalon and in Brisbane and that ‘footprint' is now under a 60-day review.

Given the focus on retiring the 747s, Avalon, where they are generally maintained, is obviously at most risk. As the 767s and 737-400s are also retired, Brisbane and Melbourne will also lose work volumes, forcing some consolidation of the maintenance activities.

Joyce argues that the group's current maintenance capability and the $1.4 billion it spends on servicing its fleet has been over-taken by technology, with the new generation of plans requiring less maintenance and the maintenance that does occur using technologies that make current work practices redundant. He said today that the changes would not involve the ‘offshoring' of jobs, although Qantas has made it clear that the new A380s will be serviced offshore because of the cost and inefficiency of building a new facility to maintain a small fleet of the new aircraft.

Despite cutting back on its planned capital expenditures, Qantas will still spend up to $4.6 billion over this financial year and 2012-13, largely on new aircraft.

The group is also going to consolidate its catering facilities, deciding not to renew its Adelaide lease when it expires next year and considering the sale of one of its two Sydney centres, and is proposing to bring its workforce planning team, now spread around the nation's airports, into a single centre in Sydney.

There was little new news on Qantas' plans for an Asia-based premium carrier, other than a pledge by Joyce that it would be "capital-lite".

With the result itself, the impact of the industrial relations disputes – the prolonged, disruptive and damaging ‘bake them slowly' strategy employed by the unions and the grounding and the subsequent reparations made to customers – showed up in a $99 million dive in the profitability of the Qantas-branded operations, which nevertheless were still able to generate underlying earnings of $66 million.

Those operations also carry the weight of the loss-making international business. The withdrawal from the loss-making Sydney-Mumbai and Auckland-Los Angeles routes, following earlier reworkings of the international network, should have some positive impact on their performance in future.

Jetstar (up 3 per cent, or $4 million) and Qantas Frequent Flyer, whose earnings rose from a normalised $107 million to $119 million, helped provide a solid core to the result.

Joyce appears relatively optimistic about the outlook for the second half despite the continuing volatility in the external environment and an anticipated further $250 million increase in fuel costs.

With some fare increases and fuel surcharges that were announced this month, Qantas said its forward bookings indicated higher yields for the half despite a planned seven per cent increase in capacity.

There was, however, no explicit guidance because of "the high volatility and uncertainty in global economic conditions, fuel prices and exchange rates as well as the transformational change agenda underway."

Those sorts of conditions have been Qantas' normal operating environment for quite some time and today's response, with more structural change and job losses, reflects a constant throughout most of its post-privatisation history as it has struggled, relatively successfully, to survive in a dysfunctional industry.