Qantas records $235m loss on falling revenue

CEO Alan Joyce attributed the result to “some of the toughest conditions Qantas has ever seen” including “a giant wave of international airline capacity” since 2009 which he said is more than double the global increase over the same period.

Joyce also pin-pointed the Qantas Sale Act as a causal factor of the airline’s woes. “The Australian domestic market has been distorted by current Australian aviation policy, which allows Virgin Australia to be majority-owned by three foreign government-backed airlines and yet retain access to Australian bilateral flying rights,” he said. “Late last year, these three foreign-airline shareholders invested more than $300 million in Virgin Australia at a time when, as Virgin Australia reported to the ASX on 6 February, it was losing money. That capital injection has supported continued domestic capacity growth by Virgin Australia despite its growing losses.”

A breakdown of the airline’s results saw Qantas Domestic report an underlying EBIT of $57 million, down from $218 million in the first half of FY2013, a figure the airline attributes to “competitor capacity growth in the domestic market” which it said “continued to outpace Qantas Group capacity growth.” It also blamed the drop on “a softening resources market, corporate account pricing pressure, and fuel and foreign exchange impacts.”

Qantas International reported an underlying EBIT loss of $262 million, compared to a loss of $91 million in the first half of FY13. The airline said “the trend of intense competitor capacity growth in the Australian international market” which is “well above the global average” resulted in “particularly strong yield pressure for Qantas’ Asian and European markets,” and also highlighted higher fuel prices because of the softer Australian dollar.

Jetstar also swung into the red, recording an underlying EBIT loss of $16 million, well down from an underlying EBIT profit of $128 million in the same period last year.

The airline attributed Jetstar’s performance to “competitive pressure on yields” in South East Asia, a $29 million share of associate losses, as well as fuel price and foreign exchange impacts, although it added that the airline’s Australian operations remained profitable.

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On the plus side, the airline said it believes the “fundamentals of Jetstar’s low-cost carrier model remain strong” on the back of improvements in unit costs and ancillary revenues, that “customer advocacy is at record levels,”, and that the “introduction of the B787-8 into Jetstar’s long-haul network is delivering cost and customer service benefits.”

Also positive was the performance of the Qantas Loyalty division which logged a record underlying EBIT of $146 million, up from $137 million in the first half FY13. Qantas says the Loyalty business “continues to perform very strongly,” with billings and awards redemptions up, and “record customer advocacy.” It said there are currently 9.8 million Qantas Frequent Flyer members, and that it has a target of 10 million for the full year.

Qantas Freight also remained in profit, reported an underlying EBIT of $11 million which was half that recorded in the same period last year, which the airline attributed to “reduced capacity, consolidation and a weak global cargo market.”

The overall financial position of the airline remains strong, with liquidity of $3 billion comprising $2.4 billion in cash and $630 million in undrawn debt facilities as at December 31, and no major unsecured debt due to mature before April 2015.

The airline said about 30 per cent of its aircraft fleet is debt-free, and that it had added 31 new unencumbered aircraft since FY10 and with 20 mid-life aircraft due to become debt-free in FY14. It said the Group’s average passenger fleet age is currently 7.6 years, the youngest it has been in 20 years.

Qantas says the overall outlook for the Group remains “very challenging and volatile,” which it says is due to continuing “soft underlying domestic demand,” and depressed “domestic and international yields and loads.” It says the Group’s capacity is expected to increase by three to 3.5 per cent in the second half, while underlying fuel costs are expected to be approximately $4.6 billion in FY14.

The airline said that it was not possible to provide further profit guidance at this time “due to major transformation being undertaken by Qantas, the high degree of volatility and uncertainty in the competitive environment, global economic conditions, fuel prices and foreign exchange rates.”

“Qantas has been undertaking its biggest ever transformation over the past four years, cutting comparable unit costs by 19 per cent over four years, but this is not enough for the circumstances we face now,” Joyce said. “With structural economic changes being exacerbated by the uneven playing field in domestic aviation, we must now take actions that are unprecedented in scope and depth. We will accelerate our Qantas Transformation program to achieve $2 billion in cost reductions by FY17. Hard decisions will be necessary to overcome the challenges we face and build a stronger business.”