Qantas cut its full year profit forecast by up to 80%, from around $500 million to between $100 million and $200 million in an update yesterday that also lifted the number of employee cuts to close to 4,000 in the past eight months.
The shares dropped as much as 11% yesterday before settling down and closing up 2%, or 4 cents at $2 as investors generally welcomed the deep cuts as being necessary.
So steep is the drop in business that the airline will fall into losses this half. The pre-tax loss this half could be around $190 million on paper, but in fact could be closer to $340 million.
That’s because of an accounting trick revealed by the airline yesterday in its briefings on the announcement.
There are restructuring costs of $150 million caused by the latest job losses and capacity cuts involving the withdrawal of 10 jets or nearly 5% of the Qantas fleet.
That will be offset by booking $150 million in the "marketing share" of the sale to third parties of Qantas frequent flyer points instead of deferring the costs and profits of such sales until the rewards have actually been taken.
Chief financial officer Colin Storrie said Qantas had decided to do this from January 1 because "other airlines do it."
Seeing Qantas earned $288 million in the first half pre-tax, therefore if it earns $100 million pre tax for the year, the loss this half it will be losing not just $188 million of that $288 million, but $338 million if it hadn’t decided to take a forward benefit of $150 million from the sale of loyalty points to non-flyers to replace the same amount in restructuring costs.
The job cuts, equivalent to about 5% of the current workforce, are the deepest since CEO Alan Joyce replaced Geoff Dixon five months ago.
The airline is getting rid of 1,000 management positions, has cut over 1500 jobs previously from its operations and that of Jetstar, especially in Tasmania.
Adding in the earlier cuts and more than 12% of the airline’s staff have been punted, or are going.
In its announcement Qantas revealed plans to delay taking delivery of 4 Airbus SAS A380.
The postponing of delivery is in response to a global drop in premium travel in the past eight months since Lehman Brothers fell over last September. 12 Boeing 737-800 planes are being delayed as well.
In the six months ended December, it had a pretax profit of $288 million. CEO Joyce confirmed the airline will have a loss this half.
Qantas warned of capacity and route cuts, job losses, the continuation of the freeze on new spending and other cost trimming moves.
Business levels, especially in premium services continue to fall and price cutting by rivals is slashing revenue.
It is also in discussions with Boeing to delay the delivery of its first batch of its 787 Dreamliner aircraft, which are running two years late for Jetstar.
There’re signs of further delays as Boeing cuts its profit forecasts and output plans and takes an axe to its staffing levels in the US.
Qantas will slash up to 1750 jobs, ground 10 aircraft and defer delivery of the A380s and other aircraft in a desperate attempt to steer its way through the worst aviation downturn in years.
The airline has revised its pre-tax profit guidance downwards from about $500 million to between $100 million and $200 million for the full year.
The forecast is subject to no further changes in market condition, fuel prices and volatility in hedge accounting.
It will also cut capital spending by at least $800 million next financial year.
Qantas’s chief executive, Alan Joyce, said in yesterday’s statement that the airline’s international services and freight operations were bearing the brunt of the decline in economic conditions.
"Qantas Airlines’ international services and Qantas Freight were bearing the brunt of the decline in economic conditions, with a lesser impact on Qantas domestic services, while Jetstar, the Qantas Frequent Flyer business and QantasLink were continuing to perform well.
“Market conditions have deteriorated, especially in our international business.
"We are experiencing significantly lower demand, particularly in premium classes, and considerable price pressures with extensive sales and discounting by all carriers –in some cases leading to fare reductions of up to 50 per cent”, Mr Joyce said.
"We have no choice but to lower our profit forecast and make major changes to ensure Qantas can weather the current commercial environment,” he said.
"Qantas revenues have come under severe pressure, so it would be irresponsible to rely solely on stimulating demand through attractive pricing given the potential for unprecedented reductions in yield.”
"We will ground additional aircraft and defer some aircraft orders, as well as maintaining a freeze on further capital expenditure,” Mr Joyce said.
Qantas has the largest firm order, for 65 Boeing Dreamliner aircraft, of any airline and has purchase rights for another 50. That’s clearly unsustainable now and will have to be dramatically scaled back.
Jetstar was to receive the group’s first Dreamliner. Delivery had been delayed until at least next year.
Qantas also confirmed this month that it will inject $66 million into its superannuation scheme over the next three year to cover a shortfall caused by the meltdown in financial markets.
The airline recently raised $526 million through an institutional placement and retail share purchase in an effort to
