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Turbulent times as Qantas drops $2.8bn

Aug 28, 2014

Qantas has suffered a massive $2.8 billion loss in the wake of the airline’s profit-draining battle with rival Virgin and another poor performance from its international division.

The airline posted a net loss of $2.84 billion for the year to June 30, compared to a $1 million profit a year ago.

The result included a $2.6 billion writedown to the value of its ageing international fleet.

Excluding the writedown and other one-off costs, Qantas made an underlying pre-tax loss of $646 million, compared to a $186 million profit a year ago.

Chief executive Alan Joyce described the result as “confronting”, but said the massive loss represented the year that is past.

“We have now come through the worst,” he said in a statement on Thursday.

“With our accelerated Qantas transformation program we are already emerging as a leaner, more focused and more sustainable Qantas group.”

Meanwhile, the airline has ruled out selling or floating its profitable frequent flyer business, Qantas Loyalty, in order to fund its turnaround.

“After careful consideration, our judgment was that Qantas Loyalty continued to offer major profitable growth opportunities, and there was insufficient justification for a partial sale,” Joyce said.

Qantas has also decided to separate its domestic and international arms, creating a new corporate entity for the Qantas International.

Joyce said the Qantas Sale Act, recently passed by the federal parliament, had paved the way for the structural separation.

“This will have no impact on the day-to-day operations, network or staffing at Qantas International,” he said.

The carrier has also announced it will write down its entire fleet of Boeing 747s and A380s, at a value of $2.6 billion.

The airline’s international division remained the biggest drag on the company, suffering an underlying loss of $497 million for the year, more than double the $246 million loss it posted a year ago.

Qantas attributed the result to increased competition from other carriers and record fuel costs.

Its discount carrier, Jetstar, made a $116 million loss after losses from its Asian operations offset profits from its Australian division.

Qantas domestic saw its underlying earnings slump from $365 million to $30 million as a result of a bruising capacity war with rival Virgin.

The airline has been increasing capacity in an effort to maintain its 65 per cent market share against a challenge from Virgin.

Critics were quick to lambast Qantas for the result, including former Prime Minister Malcolm Fraser, who took to Twitter to criticise Joyce soon after the results were released.

“Qantas chief Alan Joyce has many questions to answer. Board made foolish decisions, being eaten by Emirates,” he said in a tweet.

Qantas Loyalty was easily the most profitable part of the business, lifting underlying earnings from $260 million to $286 million during the year.

The airline’s frequent flyer program had 10.1 million members by June 30.

Fuel costs across the company’s operations climbed by more than $250 million to $4.5 billion, and Qantas expects them to remain around the same level during the first half of 2014/15.

Qantas ruled out any new Jetstar ventures in Asia while it tries to get itself back to profitability, but Joyce was confident of the future of its operations in Singapore and Japan.

“In the world’s fastest growing aviation market, this is a major long-term opportunity that we continue to believe in,” he said.

“No new Jetstar ventures will be established while the group is focused on transformation, but we know that substantial value exists across the Jetstar airlines and we will realise that value over time.”

In some positive news, Qantas will not be making job cuts beyond the 5,000 already announced as part of its $2 billion three-year restructuring plan.

Qantas has already axed 2,500 jobs, half of the total planned redundancies.

The airline took a $428 million hit during the year from costs linked to the redundancies and the restructure.

Joyce said Qantas would freeze capacity growth at the airline’s domestic operations for the first half of 2015, with the market at over capacity following the battle with Virgin.

The airline expects international competitors to increase capacity to and from Australia by around three per cent in the half.

“Over the coming year we anticipate continuing

Speculation around CEO Alan Joyce’s leadership spiked as calls for him to step down mounted after the first half results.

He told a press conference this morning: “There are always people out after my head. That hasn’t changed for a long time.”

Independent Senator Nick Xenophon wrote in an opinion piece for Fairfax that five years after Mr Joyce took over Qantas, he and his management team had “given the national icon the kiss of death”.

Australian Shareholders’ Association chairman Ian Curry said the Qantas board either needed to say it was “time for change” now or “back him for the next two or three years”.

“I think Alan Joyce has probably got to be accountable for the next year or two, but he certainly shouldn’t be getting any rewards for what’s been happening,” Mr Curry said.

The Australian Services Union (ASU), the largest union in Qantas and the airline industry in Australia, also weighed in.

“Today’s loss is the result of poor management and lack of Board direction which has taken Qantas from being one of the world’s most profitable airlines to being one of the least in just a few short years,” ASU Assistant National Secretary Linda White said/

“CEO Joyce and the Board continue to blame everyone else but themselves for this poor performance and it is time they shoulder the responsibility and resign – if they won’t do this then it is time for shareholders to tell them they are no longer required,” said Linda White.

“Thousands of long serving loyal Qantas staff have lost their jobs and there appears to be no plan for recovery, so there is a real risk that more Australian jobs will be lost and our Australian aviation industry will be damaged irreparably.

“A strategy which is about offshoring jobs, decreasing customer service and jeopardizing safety and blaming everyone other than themselves has not gone well so far and it is time for a fresh approach that a new CEO and Board can bring to Qantas. Qantas means too much to the Australian travelling public for the current poor management to continue.”

 

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