The rumours and speculation are reaching fever pitch ahead of tomorrow’s Qantas half-yearly results announcement where the embattled airline group is planning to reveal how it will strip $2 billion in costs out of its business over the next three years and raise cash through asset sales.
Job cuts in the range of 3,000 to 5,000, early retirement of the 767 and older 747s, the sale and leaseback of terminals, withdrawing from London, outsourcing ground handling, the partial float of the frequent flyer scheme, even cuts at hitherto poster-child Jetstar – all have been flagged as possible options.
The need for action will be highlighted by the $250-300 million first half loss expected to be announced tomorrow, a dramatic swing into the red. By comparison, for the same six-month period last financial year Qantas posted a pre-tax operating profit (excluding $125 million in compensation payments from Boeing for late 787 deliveries) of about $100 million. And that’s after a $91 million operating loss from international operations.
International is evidently still hurting, and assuming Jetstar and Qantas Frequent Flyer are still performing well, that means most of the new losses are being felt in the domestic business. And that is largely thanks to the capacity battles of the last 18 months or so, as the Qantas Group has moved to reinforce its so-called 65 per cent domestic marketshare ‘line in the sand’.
Resurgent (but also loss-making) competitor Virgin Australia has been adding capacity to the domestic market as a function of adding the frequency it needs to be a serious player in the profitable corporate market. Virgin has never publicly set its own domestic marketshare target, but it has been adding capacity to reach the frequency levels it feels it needs to serve its growing corporate customer base.
The end result of that is the Qantas Group (both Qantas mainline and Jetstar) has been adding 200 seats into the domestic market for every 100 seats that Virgin has added. Consequently there are more seats in the domestic market than there is demand, so tickets prices and hence yield – or profit margins – are down and aeroplanes are flying around with more empty seats.
The latest available traffic stats for show Qantas domestic’s revenue load factor (the percentage of seats filled by fare paying passengers) was 76.7 per cent in November 2013, down 3.2 points from November 2012. And what the figures don’t show is the yield on those 76.7 per cent of seats that are full. It’s the same story at Jetstar – domestic revenue seat factor down 2.2 points from 85.4 to 83.1 per cent.
Interestingly too, the Qantas Group’s capacity growth has increasingly come from Jetstar and QantasLink. The November figures show Jetstar has increased available seat kilometres – capacity – by 3.8 per cent for the July-November 2013 period (compared to the same months in 2012), and QantasLink capacity was up 6.9 per cent. Qantas mainline domestic capacity was in fact down for the period, by 1.5 per cent.
Across the fence at Virgin, for November 2013 its revenue load factor was 77.6 per cent, down from 78.6 per cent. And Virgin has continued to add capacity, up 4.4 per cent for the July-November period. (Tigerair, too, has added significant capacity, but off a much smaller base.)
The upshot of increased capacity and lower load factors is well summed up by financial writer and analyst Stephen Bartholomeusz, writing on businessspecator.com.au:
“It is an indication of how irrational the settings within the industry have become: with a domestic profit pool estimated at between $500 million and $1 billion a year depending on the state of the economy, the duopolists [the Qantas and Virgin groups] are likely to lose around $300 million between them in a six-month period.”
So both airline groups are bleeding in the all-important domestic market. Qantas knew it was hurting, but it knew that Virgin was hurting too. It seems Qantas management assumed it could out-last Virgin Australia, and so the Qantas Group could wear some short-term pain for the long-term gain of beating back the Virgin Australia challenge.
Instead, Virgin was able to call on its major backers – Etihad, Singapore Airlines and Air New Zealand – for a cash injection via last November’s equity raising. That turned the tables on Qantas. Virgin was losing money, yes, but it had access to capital to sustain those losses, and suddenly Qantas’s own losses were unsustainable.
What followed, of course, was Qantas’s controversial public campaign to change the Qantas Sale Act (so it too could better access foreign capital), its calls for federal government assistance, and its December flagging of looming massive financial losses and the need to restructure – the results of which are due to be revealed tomorrow.
As Thursday has approached there has been frenzied speculation in the mainstream media about what those cuts will be – most sensationally the 5,000 job cuts figure.
Yesterday Qantas said in a statement it wouldn’t comment on that speculation. Instead, it noted: “We have said that we will be making some tough decisions in order to achieve $2 billion in cost savings over the next three years, which is a consequence of an unprecedented set of market conditions now facing Qantas.”
The 5,000 jobs figure likely means one of two things: an exaggerated rumour run wild, or Qantas is planning massive structural change.
Five thousand jobs is not far off 15 per cent of the entire Qantas Group’s workforce. The ABC is today quoting academic Peter Wells as forecasting 5,000 job cuts would result in savings of $600 million a year: “At an average staff cost of $115,000 per staff member, 5,000 staff, 5,000 times 115,000 is going to give you $600 million in terms of savings there alone,” he said.
But Qantas can’t lose 5,000 positions without either shutting down large sections of its operations, or outsourcing many functions. So is widescale further outsourcing, such as of maintenance, catering and ground handling, on the cards?
The earlier retirement of the 767s, meanwhile, suggests Qantas might be walking away from the 65 per cent capacity line-in-the-sand. The 767s are used almost exclusively on domestic flights. They were due to be phased out by mid-2015 anyway, as Jetstar rolled over A330s to Qantas as it takes delivery of more 787s. But an expedited retirement does suggest cutting domestic capacity.
Earlier retirement of 747-400s also suggests further international cuts. The rumour is that the last of the RR-powered 747-400s will be retired early, leaving just the six 747-400ERs (used for DFW and Santiago flights) in the fleet. That suggests further re-jigging of the international network – will, for example, Qantas drop its Sydney-Johannesburg services after last week walking away from its codesharing partnership with South African Airways, and instead channel Jo’burg passengers via Dubai with Emirates?
Speaking of Dubai, more speculation surrounds Qantas dropping its Dubai-London flights and leaving Emirates to carry all its European passengers beyond Dubai. That could fit with the early retirement of more 747-400s, as the freed up A380 capacity could be used on current 747 routes. But it seems remarkable that Qantas has found itself in a position where it would have to drop its flagship London services in favour of codesharing.
And it will be fascinating, and instructive, to see how Jetstar fares. Does early retirement of the 767s mean A330s will be transferred from Jetstar to Qantas faster than previously planned, suggesting weakness in Jetstar’s international operations. What of Jetstar’s Asian franchises? Jetstar Hong Kong has been a financial sink-hole without operating a single flight. The long-term potential gains of a pan-Asia Jetstar network of airlines, to date at least, is being offset by the short-term start-up financial pain. And with much Qantas Group domestic capacity growth coming from Jetstar, will we also see less Jetstar domestic Australian flying?
The rumours of the last week have raised plenty of questions.
But more questions have been largely unasked, and seem unlikely to be answered tomorrow. What of the impact on morale to Qantas staff, facing yet more uncertainty. And how does flagging morale affect customer service?
Hopefully tomorrow will bring at least some certainty for staff.
But what tomorrow won’t do is repair Qantas’s tarnished brand reputation of the last few months.
The message of doom and gloom, staff cuts, financial pain and a backfiring tug at Australians’ patriotic heartstrings have all left a cost that can’t be so easily counted.
