Qantas posts loss, cancels Dreamliner orders to cut costs

SYDNEY Thu Aug 23, 2012 3:24pm IST

A Qantas A380 from Los Angeles lands at Kingsford Smith international airport in Sydney August 23, 2012. REUTERS/Daniel Munoz

A Qantas A380 from Los Angeles lands at Kingsford Smith international airport in Sydney August 23, 2012.

Credit: Reuters/Daniel Munoz

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SYDNEY (Reuters) - Australia's struggling flagship carrier Qantas Airways cancelled orders for 35 Boeing Dreamliner jets to further cut costs after posting a full-year net loss for the first time in 17 years due to its bleeding international division.

Qantas (QAN.AX) shares jumped to their highest in more than two months as investors welcomed moves by the airline to slash costs following a year troubled by a record fuel bill, rising competition and a labour union that has opposed the carrier's spending cuts.

The airline, which had earlier flagged a net loss, reported a shortfall of A$244 million in the 12 months ended June 30.

Chief Executive Alan Joyce declined to give any guidance for earnings in the current year, citing ongoing volatility, but said the airline remained committed to reaching break-even in its international business in financial 2015.

"Given lower growth requirements in this uncertain global context," Qantas is cancelling orders to buy 35 Boeing 787-9s, Joyce said.

The cancellation would result in an unspecified "reduction in our forward capital expenditure commitments," the CEO said, noting that the aircraft are worth a total of $8.5 billion at list prices.

"There is not a lot of flexibility left in the Qantas balance sheet and with their operating performance they have not many options left to conserve capital other than by delaying or cancelling orders and staying with a older fleet, " said David Liu, head of research at fund manager ATI Asset Management, which exited all its Qantas holdings over the past two months.

"Most of the cancelled aircraft were meant for the overseas routes and with the trading environment for their international operations, it is not surprising," Liu said.

Qantas has a current fleet size of 308 aircraft.

Options and purchase rights for another 50 Boeing 787-9 aircraft would be brought forward by two years to 2016, Joyce said. The moves mean a two-year delay in the delivery of the carrier's first 787-9s.

The cancellation is a major blow for Seattle-based Boeing (BA.N), which said in a statement that it stood by Qantas as a "long-standing and valued Boeing customer."

Qantas will still take delivery of 15 Boeing 787-8s, the smaller variant of the wide-body, twin-engine jet, for its Jetstar subsidiary towards the second half of 2013, Joyce said.

TURNAROUND PLAN

Qantas on Thursday posted a second-half underlying loss before tax of A$107 million, compared with a A$135 million profit a year earlier. That beat expectations of a A$128.4 million loss, according to Reuters calculations.

Qantas, which has embarked on a five-year turnaround strategy announced last year, is separating its loss-making international business from its profitable domestic unit, eliminating loss-making routes, axing 2,800 jobs and slashing capital spending over two years by A$700 million.

The cost-cutting measures have been opposed by unions and the airline is emerging from a bruising industrial dispute that led to the grounding of its entire fleet for close to two days last year.

But investors had been looking for signs that Qantas is managing its costs, particularly the fuel bill, which the carrier had warned would be its highest ever in the 2011/12 financial year.

The bill came in at A$4.3 billion, up 18 percent on the previous year. Qantas forecast underlying fuel costs for the first half of 2012/13 at A$2.3 billion, suggesting the potential for another record year of losses.

"There's no silver bullet, there's no easy fix, there's no exit here that's going to solve it," Joyce told reporters. "But we are committed to it."

Joyce added he believed the airline had reached an "inflexion point" and the changes implemented should result in improvement.

Shares in Qantas rose 6 percent to A$1.24 at 0140 GMT.

The airline is the worst performing stock in the sector this year among 36 large- and mid-cap airlines globally, with its shares down 20 percent, Thomson Reuters StarMine data shows.

WORKING ON PARTNERSHIPS

Joyce, who confirmed earlier this week he would not receive a bonus this year, said Thursday that the airline "continues to work on building up partnerships."

Qantas has been seeking alliances with other carriers in the region to overcome its disadvantage as a so-called "end-of-line" carrier. Qantas, nicknamed the Flying Kangaroo, has to spend more on fuel than other airlines in Asia to carry passengers on inter-continental routes as its aircraft are based in Australia.

But, so far, talks to revive Qantas' ailing international business by floating a new Asian premium airline joint venture have gone nowhere.

Qantas ended discussions with Malaysian Airline (MASM.KL) in March and instead said it would set up a regional low-cost carrier in the increasingly overcrowded low-frills market with China Eastern Airlines (600115.SS).

The carrier said last month that it was in talks with several airlines, including Emirates, on a potential alliance. A tie-up with Emirates would give Qantas access to greater numbers of passengers from Emirates's hub in the Middle East.

At the same time, Qantas is facing increasing competition on domestic routes from Virgin Australia (VAH.AX), which is benefiting from alliances with Middle East airline Etihad, Singapore Airlines (SIAL.SI), Air New Zealand (AIR.NZ) and Delta (DAL.N).

Thursday's earnings are the last to be posted by Qantas in its current form. The airline splits its domestic and international operations into separate reporting units at the start of the 2012/13 financial year. (Reporting By Jane Wardell Additional reporting by Narayanan Somasundarum in Sydney and William Rigby in Seattle; Editing by Ryan Woo)

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