Australian airline Qantas plans to cut 500 jobs and reduce capital spending by AUD$700 million (USD$749 million) over two years after a bitter industrial dispute and high fuel bills halved its first-half fiscal profit.
Chief executive Alan Joyce said the 13 percent cut in capital expenditure would come from early retirement of aircraft, withdrawal from some routes and cost controls in the airline’s engineering, maintenance, ground handling and catering units.
The cuts were designed to protect profitability and an investment grade credit rating at Qantas, which suffers from a higher cost base than its Asian peers, he said.
Markets welcomed the cost and capex cut plan, while underlying profit before tax of AUD$202 million (USD$217 million) still beat analysts expectations and helped push Qantas shares up 5 percent, their highest in a week.
“The cut in capex now reduces the risk of an equity raising,” said David Liu, Head of Research at ATI Asset Management.
ABILITY TO CHANGE
Qantas employs over 90 percent of its 32,500 employees in Australia, and union fears that it will send jobs offshore helped spark last year’s bruising industrial battle that led to the grounding of its entire fleet and prompted intervention by Australia’s industrial umpire.
“Today Qantas Engineering services costs are at least 30 percent higher than those of our competitors. And we have the ability to change,” Joyce said in a statement.
He said Qantas would review its heavy maintenance operations in Australia, given the introduction of new aircraft such as A380 superjumbos and Boeing 787s was lowering the age of its fleet. The review was expected to conclude in 60 days and could lead to more job cuts.
The airline also planned to consolidate some engineering, ground and maintenance operations at its Sydney hub, and was in talks to sell some catering units.
Joyce said the cut in capital expenditure to a total of AUD$4.6 billion for 2011/12 and 2012/2013, from AUD$5.3 billion projected earlier, would come partly by adopting a capital-light model for a planned Asian premium airline.
The proposal is Joyce’s answer to turn around an international operation that is losing AUD$200 million a year by setting up an Asian-based airline. Joyce said the airline was still in talks with potential partners.
The Asia plan was a factor in last year’s industrial action, which Qantas said cost it more than AUD$650 million, along with the grounding of the fleet and high fuel bills.
The Australian and International Pilots Association said in a statement ahead of Qantas earnings that investors should be wary of the proposition that a low-yielding, cut-throat, low-cost model could replace a high-yielding, premium traffic model and provide a better return.
Qantas has not had a good run in recent times. Besides trouble with employees, its flagship A380 fleet has suffered wing cracks due to design and manufacturing flaws.
Last month, ratings agency Moody’s cut its rating on the airline by one notch, citing pressure from high fuel prices, strong competition and a difficult operating environment.
Qantas is not alone in its struggles. Earlier this month, Singapore Airlines said it expected to see a further deterioration in its business as it struggles with sluggish demand and rising fuel costs.