Bloomberg News

Qantas CEO Star Dims as Emirates Tie-Up Fails to Stem Losses (2)

February 28, 2014

Qantas CEO Alan Joyce

Alan Joyce, chief executive officer of Qantas Airways Ltd., adjusts his glasses while speaking during a news conference in Sydney on Feb. 27, 2014. Photographer: Brendon Thorne/Bloomberg

Qantas Airways Ltd. (QAN) Chief Executive Officer Alan Joyce promised last year that an alliance with Emirates would prove a “turning point” for the 93-year-old carrier. It isn’t working out.

Losses in Qantas’s international unit hit A$262 million ($234 million) in the six months ended December, the carrier said yesterday, wider than those over the preceding 12 months. Joyce yesterday abandoned a goal to turn the division profitable by next year, meaning the earliest the Sydney-based company is estimated to post a profit is in 2016.

Irish-born Joyce, 47, is cutting 5,000 jobs, canceling or deferring 50 plane deliveries, freezing pay and ending some overseas routes as he struggles to turn Qantas around. Success with this strategy is key for him to win the support he’s sought from Prime Minister Tony Abbott’s government as three foreign airlines help boost finances at Virgin Australia Holdings Ltd. (VAH)

“The overall strategy of retreating from the international market is not a viable long-term strategy,” Oliver Lamb, director of Pacific Aviation Consulting, said by phone from Sydney yesterday. “If Qantas retreats from markets such that their passengers no longer have a choice, customers are going to vote with their feet.”

Market Value

Virgin Australia today posted a first-half net loss of A$84 million, compared with the A$235 million loss reported yesterday by Qantas for the same period. Revenue at the smaller carrier climbed 6.4 percent to a record A$2.24 billion, compared to a 4.1 percent decline to A$7.9 billion at Qantas.

The “Flying Kangaroo,” as the iconic brand is called, has made A$466 million in net income since Joyce took over in 2008, according to data compiled by Bloomberg. Australia’s biggest airline, which posted 18 consecutive annual profits up to 2011, won’t make another until 2016, according to the average of seven analyst estimates compiled by Bloomberg.

Under Joyce, Qantas’s market value reached A$6.84 billion in October 2009, dropping to A$2.54 billion at the close of trading yesterday. A single dividend, of 6 Australian cents per share, was declared alongside a $500 million equity raising at his first annual results in February 2009.

Qantas rose 0.9 percent to A$1.165 at the close of trading in Sydney, after dropping 9.1 percent yesterday. The stock has fallen 50 percent since Joyce took over on Nov. 28, 2008.

“There hasn’t been any clear plan put forward to actually start growing the airline,” Nathan Safe, president of the Australian and International Pilots Association, said by phone yesterday. “It’s a sign of the times -- a sign of us having given up competing internationally.”

Unacceptable Performance

Joyce, whose first flight was a business-class ticket from Dublin to Chicago as a graduate trainee at Aer Lingus Group Plc (AERL), took over as chief executive in the midst of the global financial crisis in November 2008. Three years later, he announced plans to address the losses at the international unit by setting up a premium carrier based at an Asian hub, only to drop it 13 months later in favor of an alliance with Emirates.

Profitability goals won’t be met because of high fuel prices, movements in the Australian dollar, and a “deluge of capacity” that carriers including China Southern Airlines Co. and Etihad Airways PJSC have put onto routes into Australia, Joyce told a media conference in Sydney yesterday.

“The performance by our airline is unacceptable,” he said adding he’ll cut his own pay by 36 percent this year. “And the current situation is unsustainable.”

Losses on Qantas’s long-haul routes, which it started flying in 1935 with a 12 1/2-day trip between London and Brisbane, had previously been supportable because of its position in Australia’s domestic aviation market. Qantas was the only nationwide full-service carrier for a decade up to 2011.

Government Backing

That’s been threatened by Virgin -- whose shareholders now include Singapore Airlines Ltd. (SIA), Etihad and Air New Zealand (AIR) Ltd. -- prompting Joyce to seek support from Australia’s government.

“Qantas is entitled, we believe, to question the motives of an apparently loss-leading strategy by our domestic competitor,” Joyce said yesterday. Virgin is “funded by three of our largest international competitors, each backed by their home government.”

Prime Minister Abbott, who’s told Qantas to “put its house in order” six times over the past three months, yesterday told the country’s parliament that the carrier “does need this government’s help”.

Debt Guarantee

That wouldn’t mean Qantas would be entitled to its own debt guarantee, he said. The carrier had asked the government for a standby facility, transport minister Warren Truss was quoted as saying in a Feb. 19 interview in the Australian Financial Review newspaper.

“What we do for one business, in fairness, we have to make available to all businesses,” Abbott said, adding that the opposition should instead support a change to a 1992 law governing foreign investment in Qantas.

Joyce isn’t waiting. Under the plans announced yesterday, capital spending will be cut to the lowest level since 1998 and Qantas will defer orders for eight Airbus Group NV (AIR) A380s and three Boeing Co. (BA:US) 787-8 Dreamliners. It will retire six 747s early and halt the expansion of Jetstar Asia, its Singapore-based low-cost carrier.

A solution is also needed to fix the bleeding international operations, whose performance was worse than expected, said David Fraser, an analyst with BBY Ltd. in Sydney.

“The market is pretty depressed,” he said.

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

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net Frank Longid


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