Qantas Loss Highlights Battle With Virgin in Australia

Photographer: Jeremy Piper/Bloomberg

A Qantas Airways Ltd. aircraft takes off from Sydney Airport in Sydney. Close

A Qantas Airways Ltd. aircraft takes off from Sydney Airport in Sydney.

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Photographer: Jeremy Piper/Bloomberg

A Qantas Airways Ltd. aircraft takes off from Sydney Airport in Sydney.

Qantas Airways Ltd. (QAN), Australia’s largest carrier, flagged a record first-half loss and 1,000 job cuts, sending its shares down the most in 18 months.

Rising fuel costs and a drop in domestic ticket prices will drive losses of between A$250 million ($226 million) and A$300 million before tax and one-time items in the six months ending Dec. 30, the Sydney-based company said in a regulatory statement today. The airline is aiming for A$2 billion of cost savings over the next three years.

The forecast prompted Moody’s Investors Service to place Qantas’s credit rating on review for a possible downgrade, underscoring the challenges Chief Executive Officer Alan Joyce faces amid a market share fight with second-ranked Virgin Australia Holdings Ltd. (VAH) A first-half loss may leave Qantas shareholders sitting on aggregate net losses over the five years since Joyce took over, compared with A$3.31 billion of profits posted in the previous five years.

“The model’s broken and they keep on doggedly doing the same thing,” Neil Hansford, chairman of consultants Strategic Aviation Solutions, said by phone from Salamander Bay, Australia. “It’s about time Joyce stopped complaining and actually got on with running the business.”

Photographer: Ian Waldie/Bloomberg

A woman talks on a mobile phone near a Virgin Australia Holdings Ltd. Boeing 737-800 aircraft at the domestic terminal of Sydney airport in Sydney Close

A woman talks on a mobile phone near a Virgin Australia Holdings Ltd. Boeing 737-800... Read More

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Photographer: Ian Waldie/Bloomberg

A woman talks on a mobile phone near a Virgin Australia Holdings Ltd. Boeing 737-800 aircraft at the domestic terminal of Sydney airport in Sydney

Joyce and Qantas’s board will have their pay cut and executives won’t take a bonus for the current financial year, the company said in its statement today. The shares plunged 11 percent to A$1.07 at the close of trade in Sydney. The benchmark S&P/ASX 200 Index fell 1.4 percent.

Fleet Grounded

Joyce, who set up the airline’s Jetstar budget unit in 2004 and assumed Qantas’s top job at the age of 42 in November 2008, has moved the carrier away from its background as a state-owned business with close ties to the U.K.

He grounded Qantas’s global fleet in 2011 in a dispute with labor unions and struck an alliance the next year with Emirates on international routes, ending a partnership with British Airways that dated back to 1935.

Inheriting a company that had enjoyed a monopoly of Australia’s full-service aviation market for seven years since the 2001 collapse of Ansett Holdings Ltd., he’s also fought to defend Qantas’s domestic market share as Virgin Australia chief executive John Borghetti has bought smaller rivals, added business-class seats and built airport lounges to compete for a share of the country’s corporate travel market.

“If Qantas was better managed and offered the public a decent service; it would not be in the financial mess it is currently claiming it is in,” Virgin Group founder and chairman Richard Branson wrote in a Dec. 3 blog post. The London-based investment group founded Virgin Australia in 2000 and has a 10 percent stake in the company. Any support for Qantas from Australia’s government would be “grossly unfair”, he said.

Capital Spending

Qantas will review capital spending that’s already been cut 37 percent below the company’s original plans and look for “structural changes that could potentially unlock sources of capital and value”, the company said in its statement today.

Asked if the structural changes could include a sale or spin-off of Jetstar or Qantas’s loyalty program, Joyce said in a conference call with journalists today that “nothing’s going to be ruled in or ruled out.”

Yields, a measure of ticket prices, will be 3.5 percent lower during the six months ending December than they were the previous year, according to today’s statement. That’s below Qantas’s previous forecast of a 2 percent to 3 percent drop made at their annual shareholder meeting Oct. 18.

Credit Rating

Analysts have cut their estimates of Qantas’s full-year net profit by about A$260 million since Virgin announced it had taken a A$90 million loan from its major shareholders Aug. 30.

Qantas will make a net loss of A$114 million in the year ending June 30, its second shortfall since the former government-owned carrier was part-privatized in 1993, according to the average of seven estimates compiled by Bloomberg.

“The loss is larger than expected,” David Liu, head of research at Sydney-based fund manager Above the Index Asset Management Pty., who helps oversee about A$400 million. “Qantas’s investment grade rating is clearly at risk now. Maybe the government needs to step in and assist.”

Moody’s, which rates the carrier Baa3, said today that the rating action reflected the “material downward pressure” on the airline’s credit metrics. Qantas, rated BBB- by Standard and Poor’s, is one of just two carriers, with Southwest Airlines Co., to be judged investment grade by more than one ratings company.

‘Challenging Conditions’

“In the absence of countermeasures, the challenging operating conditions may therefore result in Qantas’ credit profile no longer being consistent with the current ratings,” Moody’s said in a statement.

Joyce has e-mailed staff asking them to lobby politicians against a A$350 million capital raising announced by Virgin Australia Nov. 14. Australian Treasurer Joe Hockey said Nov. 28 the government could look at changing a law capping foreign investment in Qantas or provide direct taxpayer support.

The Virgin deal, which could see Air New Zealand Ltd., Singapore Airlines Ltd., and Etihad Airways PJSC increase their stakes in the carrier to as much as 70 percent, “is facilitating a flood of foreign government funds to prolong anti-competitive action aimed at weakening Qantas,” Qantas said in a statement today.

Free cash flow will be negative in the financial year to June 2014, Qantas said, a circumstance that Joyce had warned could cause the carrier to lose its investment-grade credit rating in testimony to a parliamentary hearing in February 2012.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Vipin V. Nair at vnair12@bloomberg.net

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