Second-half loss tip for Qantas

[Wirraway]

Thurs "Melbourne Age"

Second-half loss tip for Qantas
July 17 2003
By Geoffrey Thomas
Perth

Qantas is believed to have plunged deep into the red in the six months to June 30, analysts said yesterday, as SARS and the Iraq war took a greater than expected toll on the airline.

Qantas is now expected to post a second-half net loss of about $34 million, compared with forecasts made just two months ago of a profit of up to $25 million.

Analysts say this will leave the airline with a full-year profit of about $317 million, compared with the record $352.5 million reported for the six months to December 31 and the $422 million of the previous year.

Qantas said in May that full-year profit would be 20-30 per cent below market expectations, prompting analysts to cut their forecasts to about $350 million.

But some have since said it would do better, with revised forecasts up to $380 million.

There is a growing belief among some Qantas followers that next month's announcement will be accompanied by news of a restructuring in a bid to cut costs in response to fierce competition on domestic and overseas routes.

Others say chief executive Geoff Dixon may hold off on any restructuring until the Australian Competition and Consumer Commission and the New Zealand Commerce Commission announce their decision at the end of September on the planned $NZ550 million ($A490 million) equity link between Qantas and Air NZ.

It is thought that Mr Dixon believes the cost cuts are necessary due to the start-up of Virgin Blue, a substantial increase in trans-Tasman competition from Emirates, falling costs for the international rivals of Qantas and a big fleet-renewal program.

JP Morgan Hong Kong analyst Peter Negline said Qantas faced a difficult transformation.

"History tells us Mr Dixon is happy to roll with the punches and is unlikely to shy away from hard decisions as Qantas reinvents itself."

Analysts say Mr Dixon is in a bind with a fleet that is one of the oldest in the region, a legacy of previous chief James Strong, who baulked at buying aircraft.

Fuel prices are still high and some elements of the fleet, such as the 20-year-old 767-200 and 747-300, are fuel guzzlers.

But withdrawing them from the domestic fleet has a downside as Virgin Blue takes delivery of the thrifty 737-800.

Mr Negline said Qantas did have new planes on order but had to order another 90 for delivery over the next 10 years to keep up with the competition.

Virgin Blue has 28 per cent of the domestic market, from 18 per cent a year ago. Qantas has said it will defend its 68 per cent share, sparking speculation of a fare war.

Qantas has already shed 2800 staff.

-West Australian

==========================================

[Torres]

"Virgin Blue has 28 per cent of the domestic market, from 18 per cent a year ago. Qantas has said it will defend its 68 per cent share, sparking speculation of a fare war."

And therein lies the problem for a carrier which equipped for 80%+ of the domestic market when Ansett collapsed..........

[Wheeler]

Not just a bit of negative spin then? No hidden Geoff agendas in any of that at all!

(What happened to the $500 mill profit and the most profitable airline in the world?) See http://www.crikey.com.au/business/index.html

E.g. And Crikey had barely drawn breath with Tassie fill-in Tim Cox on the Sally Loane ABC Sydney program this morning, when Qantas spindoctor Michael Sharp was on the airwaves talking up the "crisis" yet again.

Yep, real bad news about SARS being over when you are trying to talk up a crisis.


Do us all a favour!

[Three Bars]

For a totally different spin on all the doom and gloom, here is a lighter response to the AFR and BRW articles (from the Margin Call column in The Australian):

Ground Control to Dicko

TO the airline that cried wolf. No! The wolf that cried poor. No! The wolf in kangaroo's clothing.

You have just got to give it to Dicko of Qantas. He is good.

There's the lad, his resolute visage, furrowed of brow, splashed puce upon the front cover of BRW. The headline: "Exclusive interview -- Can Qantas Survive? CEO Geoff Dixon Says the Airline's Future is Not Guaranteed".

It'd bring a tear to a glass eye, it would. The world's most profitable airline, veritably on the edge of extinction.

What with SARS, Iraq and that dreaded thing called competition, it's been a bit rough in the second half and Qantas will only make $500 million this year.

BRW contends the survival of the airline is "still a matter of intense debate ". Yeah, sure. We'll give you the tip, it's going gangbusters.

In fact Dicko and the crew have downsized so much they now have to upsize again. According to an internal memo: "There is a shortage of CFA's in BP226". It goes on, but to paraphrase, the Qantas first-class roster is some 90 hosties short, or 18,000 hours.

Elsewhere, load factors are running hot. All this moaning is really about busting the unions, getting rid of the foreign ownership cap and jagging the green light for the Air New Zealand tie-up. Sheer PR.

As to survival, it might be handy if Qantas uses the right grease on its Boeing brakes. The inside tip about why the brakes on those two 747s (one of which resulted in an emergency evacuation) were set aflame recently was because the axle grease was not sufficiently temperature resistant.

As to profits, there will be a hit in the vicinity of $90 million for the reconfiguration of the four A330s which Qantas bought from Airbus. The galleys are being reworked so the A330s can fly international routes.

In light of SARS, and this preposterously political scaremongering from Qantas, we had a chat to Cathay Pacific yesterday. Cathay has not sacked a single worker since September 11 -- and casts no doubt over its own survival.


Amazing really! A journalist who seems to have some pretty good inside info and a reasonable grip on the issues.

[Cap10 Caveman]

Very interesting read, thanks for that Three Bars! :ok:

[geoffrey thomas]

AS we consider Qantas' future perhaps we should reacll some recent history.
In 1966 Pan Am a record profit!
TWA use to make good profits!
So did Eastern, Western and the list goes on---over 200 airlines large and small have disappeared or merged since 1979.
Geoff Dixon is right Qantas' future is not guaranteed just as Ansett's wasn't.
Like it or not Qantas must compete against all commers most of whom have significantly lower labour costs--right or wrong.
That is the reality.
If the Government continues to allow more and more airlines access to Qantas routes then the airline will come under more and more cost pressure.
The reality is that passengers will change airlines for $50 on a $2000 fare.
GT

[longjohn]

Qantas used to thrive in an environment where it had the upper hand.

Its main competitor, Ansett had higher costs, an older fleet and was crippled by a lack of direction. With this type of competition it is no wonder that QF grew stronger, larger and more profitable domestically.

Internationally, QF claims it has always had to compete with up to 38 airlines. However, with the Emirates putting on the screws for Sydney landing rights, QF's political lobbying has finally come out of the closet. It would appear that QF have been very skillful in politically manipulating a commercially succesful outcome.

The current push by Virgin to force government departments into low cost is a good example of how QF have enjoyed hidden advantages. Whilst the cynical would say it is just another cocky push by snot nose Branson to get more bums on seats, whether they want to be there or not, a more circumspect veiw would see it as a sign to QF that the hidden protections are going to come down and the future is about competing on a level playing field.

Qantas are a great airline, and great airlines are an endangered species these days. Unfortunately for Dixon, most of the unions and staff refuse to believe Qantas is anything but invincable.

As a refugee of the former Blue team, I see some worrying parrallels. One can only hope that Dixon and Co can effect succesful change before it is too late.

Jetconnect & similar strategies are not solving the problem, they worsen it, as they not only threaten pay levels, but jobs themselves. QF need to take the bull by the horns and takle costs in all areas. Australian Airlines is a good example of this.

Sections of the media, no doubt fed by the unions are seeking to make light of the recent claims by Dixon regarding QF's fragility. This is a dangerous game to play, the unions want to remember the effect on membership that AN;s collapse had, traditional, airlines have a far greater than average level of membership.

Forcing QF to go down the Jetconnect path does nothing for membership either. All this of course is a little hypocritical when the same unions punishing QF are making deals for less at Virginblue simply to keep their feet in the door.

Yes it is highly unlikely QF will suffer the same fate as many other established airlines, however, if it's staff wish to work for a prosperous airline with a good futire, they will need to remove thier heads from the sand and have a look around.

[Snowballs]

Ansett didn't see the writing on the wall, Qantas now facing the same problems.

The Age 18th August 2003

Qantas must remake its frills into a cushion against discount airlines

Stephen Bartholomeuz

The chief executive of Qantas Geoff Dixon, is being characterised as a scaremonger, cynically raising questions about the airline’s future to coerce employees into painful concessions. He is, and he isn’t.
There is little doubt that Dixon’s recent string of public references to the matter of the airlines survival has an immediate purpose. With extensive job-shedding planned as part of a cost reduction program aimed at taking $1 billion a year of costs out of the operation within two years, he needs to soften union resistance.
The cynics would say, and are saying, that as chief of one of the world’s most profitable airlines, with $2 billion of cash in the bank, Dixon is talking up the survival issue to take advantage of the difficult environment for international airlines and boost already strong earnings.
The problem with such a view is that although the airline’s profitability is a rare achievement in the industry, the earnings are not all that strong, and indeed they have been weakening at a time when Qantas faces a $13 billion-plus capital expenditure program to renew an ageing fleet.
The effects of September 11, the war in Iraq and the SARS virus — all of which have been factors in the $US30 billion ($A45.7 billion) of losses incurred by the global industry since 2001 — could be dismissed as aberrations. International traffic is recovering and Qantas dues have its dominant domestic position to fall back on.
The airline’s real problem is not its near-term capacity for making a profit.
The collapse of Ansett secured the immediate future of Qantas, and domestic dominance has bought it time to contemplate a far greater and more threatening challenge that does, indeed, pose a threat to its survival. However, the grace period that Ansett’s failure provided, would be measured in years, not decades.
Even without the series of events that released torrents of red ink throughout the industry in the past two years, there would still be a debate about the long term future of Qantas, and that debate has taken on greater clarity and urgency because of Virgin Blue’s success.
The airlines in trouble, in an industry that is chronically unprofitable, are full-service carriers such as Qantas.
In the United Stares, more than half the big airlines operating 20 years ago have disappeared, including Pan Am and TWA, two former giants of the global industry. United is in Chapter 11 bankruptcy protection and American has only narrowly escaped that fate after extensive employee concessions.
The full-service carriers have high fixed costs, immensely complicated business structures, and lots of legacy expenses and practices. That makes them extremely sensitive to relatively small shifts in volume and yield. It has also left them exposed to the emergence of a very different type of competitor, the proliferating value-based airlines such as Virgin Blue that emulate the strategies pioneered by Southwest Airlines in the US.
Those no-frills discount airlines have great cost advantages — Virgin Blue’s operating costs are 20 per cent lower than those at Qantas — and are taking volume from the full-service carriers
The response of the incumbents has been fairly consistent. They have all been trying to slash costs to become more competitive. Yet there doesn’t seem to be a single instance of any substance of a full-service airline arresting the erosion of its business by a value-based carrier.
Virgin Blue, also helped by the demise of Ansett, has gone from an eight-plane start-up three years ago to a 31-plane operator with 30 per cent of the domestic marker. Next month, the first of 10 extra planes will come into service. Some of those planes won’t be deployed on the domestic routes, Virgin Blue recently gained approval to fly to New Zealand, Fiji and Vanuatu.
To the extent that the planes fly elsewhere, it provides little, if any, relief for Qantas, It spreads the competitive pressure throughout the region and gives Virgin Blue a wider playing field on which to exert the leverage provided by its superior cost structure.
If left unchecked, Virgin Blue will erode and ultimately decimate the core Qantas franchises. Dixon’s cost-cutting plans may have near-term consequences for the bottom line but one suspects they are more about trying to narrow the competitive gap and slow the rate of erosion while Qantas develops strategies for reinventing itself.
The Qantas airline Jetconnect (formerly Qantas New Zealand) will enable Dixon, if he chooses, to bring a New Zealand no-frills cost structure to bear on Virgin Blue on the trans-Tasman and Australian domestic routes.
That threat, and the receding prospect of the Qantas/Air New Zealand alliance being cleared by regulators, has caused Virgin Blue to accelerate plans to fly to and within NZ. It had previously avoided committing itself to flying the NZ routes to ensure that its entry did not alleviate the regulators concern about competition policy.
The problem for Dixon and the reason his fears for the long-term survival of Qantas cannot be dismissed out of hand as purely a public relations and industrial relations stunt, is that the future involves value-based airlines. Virgin Blue and the Qantas no-frills offering will undermine the fragile economics of conventional services.
If Qantas s to survive and prosper in the long term, Dixon has to reinvent it as something that doesn’t exist now — a full-service airline that can successfully compete with discount operators

[pullock]

When people talk about full service airlines and discount airlines, I am beginning to contemplate the difference.

As they try to reduce costs, the so called full service airlines reduce their customer service to levels that are near that of the no frills airlines, and still charge like they did when they provided quality service!!

How is that a competant stratergy?

Full service now means getting a cardboard box handed to you by an FA who knows all too well that what she is handing out is an insult to passengers!!

I always flew Ansett as my preferred airline back in the days of the duopoly because their food and service was better than the competition. Then one day they changed both, almost overnight the a rse dropped out of their service and their food portions were reduced to rubble. Their ticket prices remained the same.
I never flew Ansett again, wrote to them and told them why, and the rest is history. I bet there were thousands like me.

I see QF making the same error here, but in a much worse manner. If QF were to go the opposite way, supplying the best of service at a higher yet competitive price to Virgin, they would get that thing called customer loyalty back. I wish they could see that.

In the airline game food and service are cheap to provide, and they are part of the overall product for a "full service" carrier. Save money by limiting un-necessary capital expenditure (they talk about it but still spend like there's no tomorrow), dont add that extra layer of middle management, whose only desire is to add an extra layer beneath them, instead make an investment instead in pleasing the customers with a well rounded value for money product that they will want to go back for again and again............there's my two cents worth yet again:yuk:

[Wheeler]

Presume all you doom and gloom merchants will flog off your shares then? (Having said that I guess a few of you already did!) Looking at how they are going it seems the negative spin is not working.

Here's a tip - Buy.

[Sabo]

Flight cut backs were made on the weak sectors. Flights to Europe and the US have had high load factors. SARS is fading. Doom and gloom from the top goes on to keep the troops in line, and obviously the press are taking the bait. Re expansion has started(A330's back on). There will be a second half profit.

[fartsock]

GT,

Looking for a job with fairfax are you ???

Ben Sandilands should know better as well.

I guess you both are just Journos though, fool any of us for believing anything that any of you have to say would be truthful, accurate or unbiased