SYDNEY (Reuters) - Qantas Airways Ltd (QAN.AX) is axing 15 percent of its workforce, slashing spending and selling gas-guzzling older planes after stiff competition at home and overseas pushed the Australian flag carrier deep into the red in the first half.
In the most radical surgery at the airline since it was privatized two decades ago, Qantas plans to cut costs by A$2 billion ($1.8 billion) over the next three years. It hopes the shakeup will convince the Australian government Qantas is worthy of the state assistance it says it desperately needs.
Bruised by high fuel costs, a strong Australian dollar, increasing international competition and a domestic price war with arch-rival Virgin Australia Holdings (VAH.AX), the national flag carrier saw its debt relegated to junk status by rating agency Standard & Poor’s in December. Qantas is now asking the government for a debt guarantee, which would give it access to cheaper capital.
The so-called ‘Flying Kangaroo’ also wants the government to change a law dating back to Qantas’s privatization that restricts how much money foreign investors can put into the carrier. Qantas claims Virgin Australia’s unfettered access to foreign capital has given it an unfair advantage.
“We will cut where we can in order to invest where we must,” Chief Executive Alan Joyce told a news conference after the company reported what was only its second first-half loss since privatization in 1995. “We will be a far leaner Qantas Group.”
Speaking in parliament after the results were announced, Prime Minister Tony Abbott offered encouragement without concrete proposals.
“We want to ensure that Qantas is not competing against its rivals with a ball and chain around its leg,” Abbott said.
While Joyce said discussions were continuing with the government, Abbott appeared to shy away from a debt guarantee, saying that would need to be offered to all airlines if it was given to Qantas.
The government is drafting changes to the Qantas Sale Act to lift the current 49 percent foreign ownership limit, as well as alter restrictions on smaller shareholdings for foreign airlines. But that move will likely be blocked by opposition in the Upper House of parliament, preventing it from becoming law.
CEO Joyce said the 5,000 job cuts, which have already drawn threats of strike action from trade unions, would be across the company, with pilots and cabin crew in the firing line. A wage and bonus freeze for executives will be extended across the entire company.
Shares in Qantas, which have plummeted around 80 percent from a high of A$6.03 in December 2007, were down 8 percent at A$1.17 at 0430 GMT.
“The government guaranteeing Qantas financially is the most sensitive question now in terms of market valuation,” said Peter Esho, chief market analyst at Invast Financial Services. “The share price is unlikely to rise significantly until this is announced and any rally might see sellers until this is quantified.”
Qantas’s underlying loss before tax - viewed by analysts as the best measure of its performance - was A$252 million ($226 million) for the six months ended December 31. That was in line with the A$250 million to A$300 million loss the airline warned last month it would report.
In the same period a year earlier, Qantas made a profit of A$220 million, helped by a compensation payout for late delivery of Boeing Co’s (BA.N) Dreamliner jets.
The A$262 million loss in Qantas’ international division was greater than analysts anticipated, raising concern that an alliance it signed last year with ambitious Gulf carrier Emirates is not yet paying off. Meanwhile, Jetstar, its low-cost Asian airline, has suspended the planned expansion of its business.
At home, Qantas did make a profit of A$57 million - but that was just a quarter of the A$218 million it made the previous year.
Qantas complains that Virgin Australia retains the international traffic rights and benefits of an Australian-designated carrier even though it is effectively foreign-owned - its major shareholders are Middle Eastern carrier Etihad, Singapore Airlines (SIAL.SI) and Air New Zealand (AIR.NZ).
That access to foreign funding has allowed Virgin Australia to undercut Qantas on fares and increase capacity in an already overcrowded domestic market, even while making a loss itself.
Virgin Australia has said it expects to post a first-half loss of A$49 million before tax, excluding large losses from Tigerair Australia and other one-off restructuring costs, when it reports its earnings on Friday.
By contrast, Air New Zealand, which owns just over a quarter of Virgin, reported a 40 percent rise in first-half profit to NZ$140 million as passenger numbers grew.
Another option for Qantas could be to sell its Frequent Flyer loyalty program. With almost 10 million members, analysts estimate the business is worth as much as A$3 billion - more than the airline’s current A$2.7 billion market value.
Among cost-cutting measures, Joyce said Qantas would defer receipt of the final three Boeing (BA.N) 787 Dreamliner jets it ordered for budget arm Jetstar, as well as the eight remaining Airbus (AIR.PA) A380s it has on order. The moves are part of a plan to either defer or sell a total of 50 aircraft.
The airline has also agreed to sell a lease it owns at Brisbane airport, raising A$112 million in cash.
Net capital investment will be reduced to an average of A$800 million per annum over the next two financial years, a total reduction of A$1 billion over the same period.
But Joyce said the company would continue to invest to protect its competitive advantage, and defended those moves in the domestic market.
($1 = 1.1159 Australian dollars)
Reporting by Jane Wardell and Lincoln Feast; Editing by Kenneth Maxwell