Bloomberg News

Qantas Jumps Most in Almost 6 Months on Cost Cuts: Sydney Mover

February 20, 2012

Feb. 16 (Bloomberg) -- Qantas Airways Ltd., Australia’s largest carrier, climbed the most in almost six months in Sydney trading after announcing A$700 million ($747 million) in spending cuts and an increase in first-half sales.

The airline surged 6.1 percent to A$1.655 at the close of trading, the biggest gain since Aug. 23. It was the biggest percentage gainer on the benchmark S&P/ASX 200 Index, which fell 1.7 percent.

Chief Executive Officer Alan Joyce announced plans today to cut 500 jobs and slow fleet growth through June 2013 as Qantas contends with competition from Middle East airlines and higher fuel prices. The airline also posted a 6 percent increase in first-half sales even after grounding its main fleet for two days because of labor disputes.

“They are doing their best to manage the business in a difficult time for airlines,” said Peter Esho, a market analyst at City Index in Sydney. “The underlying earnings remain good for them, especially when you consider all the fuel rises and other issues.”

Net income fell 83 percent to A$42 million in the six months ended December, Qantas said in a statement. That missed the A$111 million median estimate of four analysts surveyed by Bloomberg News. Sales totaled A$8 billion.

Fuel expenses jumped by A$444 million in the half, and the carrier booked A$194 million in costs related to labor disputes with unions representing pilots, baggage handlers and engineers.

‘We Must Change’

Qantas, which didn’t provide a full-year forecast, will cut staff as it restructures maintenance and catering divisions. The job losses may go higher than 500, with more than 2,000 people employed at facilities under review. A final decision is expected before the end of April, Qantas said.

“The highly competitive markets and tough global economy in which we operate mean that we must change,” Joyce said on a conference call. The carrier “cannot sustain three heavy maintenance bases” and will concentrate operations in one or two facilities, he said.

First-half earnings before interest and tax at the Qantas- branded airline, which includes domestic and international services, fell 60 percent to A$66 million.

Budget arm Jetstar posted a 3 percent increase in profit to A$147 million. The unit is set to open a Japan venture later this year following operations in Vietnam and Singapore.

Southeast Asia Carrier

Qantas is planning to form a premium carrier based in Southeast Asia to help bolster international operations that are losing A$200 million a year. The carrier is still in discussions about the plan, Joyce said.

“We are looking at ways of doing that without expending significant amounts of money or aircraft,” he said. He didn’t say whom the carrier is talking to or when an agreement may be announced.

Qantas’s market share on international routes has fallen to about 20 percent as government-backed Emirates Airline and Qatar Airways Ltd. use hubs in the Persian Gulf to offer connections between Australia and Europe.

The Australian carrier last year announced cuts to its overseas network, including the end of flights to London via Bangkok and Hong Kong. It will scrap flights from Singapore to Mumbai and services between Auckland and Los Angeles, it said today. It still flies to London and Frankfurt via Singapore.

Qantas cut planned capital spending this year and next to A$4.6 billion, A$700 million less than it previously expected. The reduced outlay follows delays in receiving on-order Boeing Co. 787-800 jets and a scaling back of plans to add seats on domestic routes. Qantas, including Jetstar, has about 65 percent of Australia’s domestic market.

Joyce wants cash flow to match capital spending to reduce the risk of losing Qantas’s investment-grade credit rating. Moody’s Investors Service last month lowered the carrier to Baa3, the lowest investment grade.

Qantas and Southwest Airlines Co., the largest discount carrier in the U.S., are the only two airlines with investment- grade ratings from both Moody’s and Standard & Poor’s.

--With assistance from Lena Lee in Singapore. Editors: Neil Denslow, Frank Longid

To contact the reporters on this story: Robert Fenner in Melbourne at rfenner@bloomberg.net; David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net


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