Qantas takes no prisoners in its cost war

For the past 18 months there has been a sense of inevitability about the announcement Qantas made today that it will close its Avalon heavy maintenance facility at the cost of about 300 engineering jobs.

The logic that led to the closure of the group’s heavy maintenance facility at Tullamarine and earlier job-shedding at Avalon in May last year hasn’t changed since then. As Qantas’ ageing fleet of Boeing 747s has been progressively retired, the heavy maintenance infrastructure supporting the fleet has become steadily less productive.

As Qantas said today, less than a decade ago it had 36 Boeing 747s in its fleet that were maintained at Avalon. Today, there are 15. Within three years that figure will be reduced to 10 as the group continues its fleet renewal program.

The newer Airbus aircraft and the Boing 787s that Qantas is introducing to the fleet (over which it has 50 options and purchase rights) require far less maintenance. Qantas says the maintenance requirement can be almost halved, which would mean that the Avalon facility would be idle nearly half the year.

Apart from the wastefulness of maintaining a badly under-utilised facility, Qantas can’t afford that luxury. It is only modestly profitable in a very volatile industry. Its international operations, while improving, are still bleeding at the rate of almost $250 million a year and its cost base for heavy maintenance has been as much as 30 per cent higher than its competitors.

The employees at Avalon did make a desperate effort to preserve their jobs, offering to take up to three months unpaid leave. But that wouldn’t have addressed the fundamental problem: that there isn’t a sufficient volume of work to sustain the facility.

Qantas maintains and has expanded its heavy maintenance facility in Brisbane for the rest of its fleet and will continue to undertake heavy maintenance on more than 110 aircraft at the facility, But there is no certainty that maintenance of the dwindling 747 fleet will be shifted there. Indeed, it is probable that it won’t.

Qantas’ Lyell Strambi didn’t dissemble today, saying he would now assess where work on the 747s would be done. Qantas would look at specialist 747 maintenance providers, including those in Germany, Singapore Hong Kong, the UK and the US. There would be obvious cost benefits in shifting the work to a third-party service provider with scale.

Qantas has survived and remained consistently profitable over the past decade or so, despite losing nearly half its international market share to new competitors with newer and lower-cost fleets operating from hubs that give them substantial scale and schedule advantages.

More recently, Virgin Australia has mounted an assault on the core of its stability and its dominance of the full-fare domestic market. Virgin’s John Borghetti continues to maintain pressure on his old employer with the repositioning of Virgin, the relaunch of a Virgin-controlled Tiger and the continuing increase in the capacity that his group is pushing into the domestic market.

Qantas has responded to all the threats to its stability by continually attacking its cost base, by successfully launching and expanding Jetstar, by building its frequent flyer program and by taking some very tough decisions about a shrinking international network that was quite recently losing nearly $500 million a year, including entering the promising partnership with Emirates.

Those decisions, including the overhaul of its heavy maintenance facilities that included the actions taken last year, contributed an estimated $428 million of benefit to the group’s underlying earnings before interest and tax last year. Qantas would have lost more than $200 million without the changes to its cost base. Qantas is targeting $300 million of gains from the restructuring program this year.

However difficult decisions like the closure of the Avalon facility might be, Qantas’ Alan Joyce and his team are going to have to continue to make them if Qantas is to maintain some semblance of financial stability – let alone generate anything approaching a respectable return on the capital tied up in its businesses.