Qantas plans to cut costs by $2 billion over the next three years.

Thursday 27 February 2014 08.44
Qantas set to cut 15% of its workforce in effort to reduce costs
Qantas set to cut 15% of its workforce in effort to reduce costs

Qantas Airways is axing 15% of its workforce, slashing spending and selling older planes after stiff competition at home and overseas pushed the Australian flag carrier deep into the red in the first half.

In the most radical surgery at the airline since it was privatised two decades ago, Qantas plans to cut costs by $2 billion over the next three years.

It hopes the shakeup will convince the Australian government Qantas is worthy of the state assistance it says it desperately needs.

Bruised by high fuel costs, a strong Australian dollar, increasing international competition and a domestic price war with rival Virgin Australia Holdings, Qantas saw its debt relegated to junk status by rating agency Standard & Poor's in December. 

Qantas is now asking the government for a debt guarantee, which would give it access to cheaper capital.

The company also wants the government to change a law dating back to Qantas's privatisation that restricts how much money foreign investors can put into the carrier. Qantas claims Virgin Australia's unfettered access to foreign capital has given it an unfair advantage.

"We will cut where we can in order to invest where we must," chief executive Alan Joyce told a news conference after the company reported what was only its second first-half loss since privatisation in 1995. "We will be a far leaner Qantas Group."

Speaking in parliament after the results were announced, Prime Minister Tony Abbott offered encouragement without concrete proposals.

"We want to ensure that Qantas is not competing against its rivals with a ball and chain around its leg," Abbott said.

While Joyce said discussions were continuing with the government, Abbott appeared to shy away from a debt guarantee, saying that would need to be offered to all airlines if it was given to Qantas.

The government is drafting changes to the Qantas Sale Act to lift the current 49% foreign ownership limit, as well as alter restrictions on smaller shareholdings for foreign airlines. But that move will likely be blocked by opposition in the Upper House of parliament, preventing it from becoming law.

CEO Joyce said the 5,000 job cuts, which have already drawn threats of strike action from trade unions, would be across the company, with pilots and cabin crew in the firing line. A wage and bonus freeze for executives will be extended across the entire company.

Qantas's underlying loss before tax - viewed by analysts as the best measure of its performance - was $252m for the six months ended December 31. That was in line with the $250-$300m loss the airline warned last month it would report.

Qantas had made a profit of $220m the same time last year, helped by a compensation payout for late delivery of Boeing's Dreamliner jets.

The $262m loss in Qantas' international division was greater than analysts anticipated, raising concern that an alliance it signed last year with ambitious Gulf carrier Emirates is not yet paying off. Meanwhile, Jetstar, its low-cost Asian airline, has suspended the planned expansion of its business.

At home, Qantas did make a profit of $57m - but that was just a quarter of the $218m it made the previous year.

Qantas complains that Virgin Australia retains the international traffic rights and benefits of an Australian-designated carrier even though it is effectively foreign-owned - its major shareholders are Middle Eastern carrier Etihad, Singapore Airlines and Air New Zealand.

That access to foreign funding has allowed Virgin Australia to undercut Qantas on fares and increase capacity in an already overcrowded domestic market, even while making a loss itself.

Another option for Qantas could be to sell its Frequent Flyer loyalty programme. With almost 10 million members, analysts estimate the business is worth as much as $3 billion - more than the airline's current $2.7 billion market value.

Among cost-cutting measures, Joyce said Qantas would defer receipt of the final three Boeing 787 Dreamliner jets it ordered for budget arm Jetstar, as well as the eight remaining Airbus A380s it has on order. The moves are part of a plan to either defer or sell a total of 50 aircraft.

The airline has also agreed to sell a lease it owns at Brisbane airport, raising $112m in cash.