Qantas’s A$252 million ($226 million) pre-tax half-year loss came as no surprise; what did were the lacklustre performances of Qantas Domestic and Jetstar.
It was the underperforming Qantas International business that hit the airline the worst, with the segment recording an earnings before interest and tax (EBIT) loss of A$262 million. That was hardly a surprise, given that international operations have long been a drag on the carrier. This part of the company has also undergone the biggest changes over the past year, with a major restructuring of its network to accommodate the nearly one-year-old Emirates alliance.
As a result of the loss, Qantas chief executive Alan Joyce admits that it will miss its plan for the international business to break even in 2015 – a target that would have triggered investment in the new Boeing 787-9s that it desperately needs to stay competitive with its Asian competitors.
“Unfortunately, the exchange rate, the high fuel price, the changes in capacity that's been added by our competitors have... impacted that business quite significantly and the business will not be producing a profit as we had originally planned,” says Joyce.
Yet, the airline remains confident that the changes made over the past year to its international business, and the plan to draw down its Boeing 747 fleet, will drive it forward.
“We are very, very confident that as we move forward we're going to see that new reshaped Asian network drive benefits for us, along with the cost reductions that we're focused on,” says chief financial officer Gareth Evans.
While Qantas International has had a long history of red ink, this was tolerable when the other businesses were highly profitable. The results for this half-year, however, show that the cash cows of Jetstar and Qantas Domestic have started drying up under the pressure of fierce competition, both at home and abroad.
Qantas Domestic’s underlying EBIT slumped 74% to A$57 million. As it has done in recent months, the airline blamed competitor Virgin Australia’s expansion, as well as a weakening domestic economy driven by a softer resources sector for a decline in yield.
Despite his rhetoric about the amount of capacity entering the market, Joyce remains wedded to the 65% “line in the sand” mantra of his predecessor, and is planning to add 3-4% more capacity to the domestic market over the next half-year.
Joyce makes it absolutely clear that upping the capacity ante is about keeping the pressure on Virgin.
“We haven't added as much capacity as our competitors have over the last few years,” he says. “They're absolutely implying the position of adding capacity, even though they are losing a significant amount of money and their strategy is loss making.”
Budget unit Jetstar also entered the red for the first time since it was established in 2004, reporting an EBIT loss of A$16 million. While Qantas was at great pains to point out that its domestic business remained profitable, the group was dragged down by its underperforming Asian operations.
Jetstar’s record in Asia is a touchy subject among Qantas’s senior executives, unions and analysts. Singapore based Jetstar Asia, which launched only a few months after the Australian operation, has had a patchy financial record, while Vietnam based Jetstar Pacific, which relaunched in 2008, has consistently been in in the red.
Both carriers have been adversely effected by growing competition in Southeast Asia, as competitors such as Tigerair, AirAsia and VietJet Air jostle for position in the region.
Added to that, its 30% owned carrier Jetstar Japan remains in cash-burning startup mode, and has encountered difficulty trying to scale up its operations from regulatory authorities. Jetstar Hong Kong, in which Qantas holds 33%, remains in limbo as it waits to see if authorities there will grant it an air operator’s certificate.
For all the red ink it has generated, Qantas is keeping faith in Jetstar’s pan-Asia play.
“The prospects for Jetstar in Asia are a major opportunity that we continue to believe in, but we need to make the right decisions in accord with current market circumstances and our balance sheet,” Joyce says.
That will see Jetstar Asia’s growth plans for this year put on ice, while growth is also likely to slow at the other operations.
On a more positive note, the Qantas Loyalty business remained a bright spot, with its EBIT rising by 7% to A$146 million. For now, talk of selling a stake in the strong performing business has abated, with most analysts pointing out that such a move could harm the carrier’s long-term profitability.
Qantas's big interim loss has raised a number of questions about the two key strategies that Joyce has chosen – the domestic line in the sand and pan-Asia expansion – with some unions and politicians calling for him to join the 5,000 employees that will be made redundant.
Joyce is resisting those calls, telling reporters that he is “fully committed” to leading the airline through its A$2 billion cost cutting programme.
“We have the board, the management fully behind the plan going forward and fully committed to turning this business around,” he says.
“We must, and we are, making the hard but necessary decisions that will protect this great company and ensure its return to a profitable and sustainable future.”
For Qantas’s long-suffering investors, that return to profitability can’t come soon enough.