Qantas on bumpy ride in uncertain climate

Qantas will consider radical options including partial sales of Jetstar and its frequent-flyer program to raise funds to keep its dominant position in the domestic market over arch rival Virgin Australia.
By · 6 Dec 2013
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6 Dec 2013
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Qantas will consider radical options including partial sales of Jetstar and its frequent-flyer program to raise funds to keep its dominant position in the domestic market over arch rival Virgin Australia.

Following a shock profit downgrade, credit ratings agency Moody’s delivered a further blow to the beleaugured airline on Thursday night when it warned that it is considering downgrading its all-important investment grade credit rating to junk status.

Analysts also scrambled to slash their forecasts of full year earnings, with Merrill Lynch tipping a loss of up to $868 million.

The airline will axe at least 1000 jobs across it businesses over the next year, and strip out an extra $2 billion in costs over the next three years, to defend its 65 per cent share of the domestic market.

After spending recent weeks lobbying the federal government for financial assistance, Qantas warned it would slump to a first-half loss of up to $300 million due to high fuel prices and intense competition on domestic and international routes cutting into its revenues.

Qantas shares slumped as much as 17 per cent to 99.5¢ – just shy of an all-time low of 96¢ reached last year – following the earnings warning. They closed down 13.5¢ at $1.07.

In a move that ups the pressure on the government to intervene, the airline will consider partial sales of businesses including Jetstar and the Frequent Flyer division as part of a wide-ranging structural review.

The airline would not name the most likely options but possible courses of action also include sell-downs of its investments in Asia. They include Jetstar Asia in Singapore and Jetstar Japan.

‘‘All options are on the table. We are not ruling anything in or anything out,’’ Qantas boss Alan Joyce said.

It will also seek to reduce spending with its largest 100 suppliers and will reconsider its route network.

Qantas remains in negotiations with four airports including Sydney and Melbourne to relinquish long-term leases on terminals, which has been estimated at raising up to $1 billion.

But Mr Joyce insisted Qantas would stick with its troubled premium international operations, which provides an important feed of passengers onto its domestic operations.

The profit warning was triggered by a significant deterioration in yields and passenger loads on planes across its international and domestic networks in November.

Qantas now expects to report an underlying loss before tax of between $250 million and $300 million for the six months to December. It was well below market expectations of a $74 million loss.

It will be the first time the airline has recorded a loss in the first half – typically its strongest – since it was privatised in the 1990s.

‘‘We have a price war. It hurts both participants [Qantas and Virgin] and they have to find a point of truce,’’ Macquarie Equities analyst Ian Myles said. ‘‘It is a tough industry and [Virgin boss John] Borghetti knows where the profits are in Qantas and he is going

after them – he is certainly succeeding.’’

Qantas’ yields have now reached the low levels the airline experienced during the global financial crisis in 2008.

Renewing his attack on his arch rival, Mr Joyce said there had been ‘‘unprecedented distortion of the Australian domestic market’’ with Virgin’s strategy to seek major ownership from state-backed airlines Air New Zealand, Etihad and Singapore Airlines.

‘‘We cannot and we will not stand still in these extraordinary circumstances,’’ he said.

Despite the ‘‘immense’’ challenges, Mr Joyce has refused to walk away from its strategy of maintaining a 65 per cent market share domestically, saying it was one of the only items not up for consideration.

Qantas has been aggressively lobbying the government to provide financial assistance. The options canvassed have ranged from the government guaranteeing Qantas’ debt or the purchase of a small stake.

Mr Joyce said the structural review was running separately to its talks with the government.

He informed the Treasurer Joe Hockey and Transport Minister Warren Truss of the structural review and profit warning shortly after Qantas informed the market on Thursday morning.
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