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Qantas to Slash 5,000 Jobs Amid Price War With Virgin

By David Fickling
February 27, 2014 12:44 AM EST 12 Comments
A Qantas Plane Taxis on the Runway at Sydney Airport
A Qantas Plane Taxis on the Runway at Sydney Airport

Qantas Airways Ltd. (QAN), Australia’s biggest airline, will cut 5,000 jobs and defer new jets as Chief Executive Officer Alan Joyce steps up the case for government assistance after a A$252 million ($226 million) loss.

Qantas will sell or delay delivery of more than 50 planes from Airbus Group NV (AIR) and Boeing Co. (BA), eliminate one in seven employees by 2017, and freeze pay until the company returns to profit, the Sydney-based carrier said in a statement today. The stock fell the most in almost three months.

Joyce argues the 93-year-old airline can’t compete in a domestic fare war with Virgin Australia Holdings Ltd. (VAH), whose three biggest shareholders are state-controlled foreign airlines that he says want to weaken Qantas’s international business. The government may assist by lifting a cap on foreign ownership of Qantas and by offering a debt guarantee after the company was stripped of its investment-grade ratings.

“The government guaranteeing Qantas financially is the most sensitive question now in terms of market valuation and the share price is unlikely to rise until this is announced,” said Peter Esho, chief market analyst at Invast Financial Services Pty. in Sydney. “Qantas is shrinking as a business and its international success into Asia is still many years away, if ever.”

Net Loss

Qantas shares fell 9.1 percent to A$1.155 in Sydney, extending the declines in the past year to 26 percent. That lagged behind a 7.4 percent gain for the benchmark S&P/ASX 200 index in the same period.

The cost of protecting Qantas debt against non-payment through credit-default swaps increased to 235 basis points as of 11:05 a.m. in Sydney, according to Australia & New Zealand Banking Group Ltd. prices.

The company recorded a loss before taxes and one-time items of A$252 million in the six months ended Dec. 31. That compares with the average loss of A$277.5 million from four analyst estimates compiled by Bloomberg. The net loss was A$235 million for the period.

The results “highlight significant challenges” for the carrier, Moody’s Investors Service Senior Vice President Ian Lewis wrote in a credit opinion today.

“The extent of earnings reversal in the international side of Qantas’ operations” is a concern, wrote Lewis, who downgraded Qantas’s debt to junk Jan. 9. “This delay in recovery increases the pressure on the current negative outlook.”

Government Help

Any debt assistance offered to Qantas would need to be available to its competitors as well, Prime Minister Tony Abbott told Australia’s Parliament in Canberra today.

“What we do for one business, in fairness, we have to make available to all businesses,” he said. “Qantas does need this government’s help.”

Capital spending on planes and other equipment will be cut to A$800 million in each of the next two fiscal years, Qantas said. The airline will defer orders for eight A380 superjumbos, and three Boeing Dreamliners for its Jetstar unit. Some aircraft will be retired ahead of schedule.

The airline will also raise A$112 million selling its terminal lease at Brisbane airport, it said on its website.

The job cuts will leave Qantas with its smallest workforce in at least eight years, according to data compiled by Bloomberg.

Smallest Workforce

“It’s clear that the market Qantas operates in has changed, with structural economic shifts exacerbated by an uneven playing field in Australian aviation policy,” Joyce said in today’s statement. “We have met these challenges head on.”

Abbott’s government has said it wants to level the “playing field” for the national carrier and introduce legislation to change the Qantas Sale Act, which caps foreign ownership of the airline at 49 percent and stops it moving some operations offshore. Abbott may struggle to get any amendments through Australia’s Senate, where his coalition doesn’t hold a majority.

The government, which has called on Qantas to get its “house in order,” has indicated it may also guarantee the airline’s debt.

Qantas is “making as blatant a case as they can to the government that they need some sort of help,” Jeremy Hook, who helps manage about A$350 million as investment director of TMS Capital Pty. in Sydney, said by phone before today’s results. “Who’d want to invest in them? I don’t know a lot of people who would.”

Flying Kangaroo

Joyce, 47, the Irish-born son of a cleaner and cigarette factory worker, has struggled to restore the fortunes of the “Flying Kangaroo” since taking over the top job during the global financial crisis in November 2008.

He’s taken on trade unions by grounding Qantas’s global fleet; seen the carrier’s first A380 put out of action for 18 months after it suffered a mid-air engine explosion over Indonesia; and faced competition from Asian and Middle Eastern carriers on international routes.

A deal struck with Emirates in 2012 helped pare long-haul losses last year, as Joyce sought to make the international unit profitable by the year ending June 2015. That won’t now happen, he said today.

At home, he’s fighting Virgin Australia Chief Executive Officer John Borghetti, who’s added business-class seats, renovated lounges, taken control of a discount carrier and a rural airline, and set up a frequent-flier program in an attempt to break Qantas’s 65 percent share of Australia’s domestic market.

Weaken Qantas

Shareholders Air New Zealand (AIR) Ltd., Singapore Airlines (SIA) Ltd., and Etihad Airways PJSC have supported Borghetti’s ambitions with cash, buying into a stock sale that will reduce Virgin’s net debt by about A$350 million, according to a company presentation.

“The purpose of this sovereign foreign capital is to fund Virgin Australia’s strategy in the domestic market and weaken Qantas” so that its international operations are less competitive, Qantas said in a regulatory statement Dec. 5.

Joyce pledged at the time to cut at least 1,000 jobs from Qantas’s 33,265 workforce, trim A$2 billion in costs, review capital spending and look at ways to change the company’s structure to release more value for shareholders.

Yields Drop

First-half revenue at Qantas slipped 4.1 percent to A$7.9 billion and yield, a measure of ticket prices, dropped 3 percent to 10.10 Australian cents, beneath the previous decade low of 10.28 cents in 2009, the company said today.

Earnings before interest, tax and one-time items in the Qantas domestic business fell 74 percent to A$57 million from A$218 million a year earlier, while the loss on Qantas’s international routes deepened to A$262 million from a A$91 million loss previously.

Ebit at the Loyalty business which includes the carrier’s frequent-flier program rose 7 percent to A$146 million, while budget carrier Jetstar slid to a A$16 million loss from a A$128 million profit. The discount airline group will freeze some expansion in Asia.

The value of Qantas’s net debt and liabilities on aircraft leases climbed to A$5.33 billion, from A$4.85 billion a year earlier.

Joyce has fought with unions representing engineers, ground staff and pilots who opposed his plans to reduce local maintenance bases and funnel investment into subsidiaries based outside Australia.

Industrial action came to a head when Joyce grounded Qantas’s global fleet in October, 2011 in an attempt to force a resolution to the disputes. Qantas needs to have more flexible work practices and be cost competitive, Joyce told an August, 2011 investor call.

Qantas’s costs are too high, David Fraser, an analyst at BBY Ltd., wrote in a Jan. 17 note to clients. Non-fuel operating costs on Qantas’s domestic network are about 36 percent higher than those on Virgin’s competing flights, he wrote.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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