ignore the apologists, this is a terrible Qantas result
No amount of third party apologies for this morning’s announcement of the dismal financial performance of Qantas for the half year to 31 December can change the force of the figures.
The statutory Qantas net profit after tax for the period has fallen to $42 million, a decline of 83% compared to the corresponding previous half year of $ 241 million, or down to a fraction more than eight times the soaring $5 million pay package of
The Australian’s most influential CEO of the year, Alan Joyce.
Never in the 90 year history of the airline has the disparity between executive reward and performance been more at variance.
By its favored metric of underlying profit before tax, the corresponding fall was from $417 million to $202 million, a 52% decline.
For ordinary shareholders the disaster is compounded by a pathetic share price and an extension of the dividend drought into its third year.
Perhaps this disaster, papered over by an assortment of public apologists this afternoon as something essential for the future health of the carrier, (which is about as silly a statement as it is possible to make) explains why Joyce seemed subdued in comparison to some of his recent performances in defence of a five year plan to return it to profitability within as little as three years.
This calls for reducing the size of the full service brand and launching a premium narrow body venture operating as a Malaysia flag carrier in order to fund a reinvestment in the full service long haul operation with the consent, of course, of the majority Malaysia ownership of the enterprise, who will be on top, very on top.
In fact this venture, for which Red Q was seriously proposed as a trendy brand name, appears to be all but dead, judging from Joyce’s commentary today.
He said negotiations were continuing with Malaysia partners to jointly launch a new brand ‘targeting’ premium travellers in Asia but that Qantas wanted a capital light structure in which it paid as little as possible for the fleet.
The point is that Kuala Lumpur is far less relevant to its premium traveller ambitions that its Singapore hub, where Qantas bases its Jetstar Asia franchise, which is the prime competitor to Malaysia’s Air Asia franchise, which in turn is seen as a partner in the premium carrier venture and happens to claim title to a significant shareholding in Malaysia Airlines through its founder Tony Fernandes.
To summarise, Joyce is still trying to set up a premium Asia flag carrier in Malaysia in conjunction with Jetstar’s most capable competitor for next to nothing in return for an earning stream he previously said would save long haul Qantas, which he further reduced today with the retirement of two more 747-400s and the cutting of routes between Singapore and Mumbai and Auckland and Los Angeles as reported
in earlier coverage of today’s half yearly results.
In terms of job cuts, the news of 500 positions rendered structurally redundant from today is but a down payment.
Many of these additional as yet unannounced job losses are expected to arise from a consultative review into the consolidation of three heavy maintenance bases (Avalon 660 jobs) Melbourne Airport (400) and Brisbane (400) to determine whether they will become one or two such bases.
It would be astonishing if the Queensland government failed to behave as it has always behaved in attraction new airline industry investments, by launching a bidding war should Victoria wish to engage in one, to consolidated all Qantas heavy maintenance at Brisbane Airport. Indeed I think I heard an opening bid of $26 million in the background today! Can a deal be done before the Queensland state elections on 24 March? It seems awfully tight. $260 million might get the conversation going.
Joyce made the telling point that modern jets, like those Qantas is no longer acquiring as rapidly as intended, need a lesser investment in heavy maintenance than older designs. However he glossed over the process by which Australian engineering and maintenance standards are being harmonized downwards into world’s best practice in terms of our national regulations. World’s best practice is nothing more or less than the absolute minimum required to conform to international regulations. The regulatory reform process, which sets out to achieve admirable and desirable outcomes, also sets up spending on higher than minimum standards for a fall.
There are two issues here. Standards, and processes. The upgrading of processes as a foil for reducing the level of excellence is a sensitive issue in the US, not just in Australia.
Today’s announcement refers to reducing capital expenditure by around $700 million a year, which Joyce several weeks ago identified as the gap between around $1.7 billion in annual cash flows and a need to spend $2.5 billion a year on new fuel efficient fleet.
Perversely, part of that $700 reduction is flagged today as a consequence of deferring some new jet deliveries whose superior fuel efficiency and reduced maintenance requirements is the most important thing Qantas can do to reduce its costs.
The Qantas half yearly results assign a cost of $194 million to last year’s industrial disputes and the subsequent grounding of the airline, or locking out of its customers.
This figure could be argued as the ideological levy of the Leigh Clifford chaired Qantas on its shareholders and customers. The dispute with the licensed engineers, pilots and ground handlers led to court protected industrial action in part because of the inability of management to engage in timely negotiations. That action was eventually terminated by Fair Work Australia, the same body that allowed it, which has so far by mutual consent, approved a settlement for the licensed engineers that is totally unremarkable and could have been agreed almost a year ago.
Joyce said that none of the job losses that would result from reducing capital expenditure by $700 million a year would go offshore. They would instead disappear.
He also vowed that the greater part of heavy aircraft maintenance of Qantas jets would remain in Australia, while noting that when the much delayed Boeing 787 Dreamliners begin to arrive, they will not require any heavy maintenance for 12 years. Or so Boeing says.
It is separately understood that all the 50 Dreamliners on order will be based offshore, unless the carrier chooses to change course and use them as urgent replacements for domestic 767s which have become a major headache for the Qantas in terms of reliability and the costs of aged airframe maintenance.
What does this mean for Qantas customers? Fuller domestic jets, and even fewer international options than now in terms of flying in Qantas jets rather than mid-trip changes to other foreign carriers.
What does it mean for Qantas employees? Continued fears of substantial job losses.
What does it mean for Qantas shareholders? No sign of dividends, and every sign of a share price, which despite a 6% spike this afternoon, is way short of its listing price in 1995 dollars, and wallowing in its most prolonged state of depression since privatization