ANALYSIS: Can Qantas climb above its turbulence?

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Qantas will almost certainly reveal a record loss when it announces its full-year results on 28 August, meaning that most focus will be on chief executive Alan Joyce's plans to steer the airline out of trouble.

In a recent briefing note, Commonwealth Bank of Australia says that it expects to see Qantas record a pretax loss around A$825 million ($767 million), making it slightly more pessimistic than the analyst consensus of A$764 million. It expects that the result will be affected by non-cash writedowns on the accelerated retirement of some of its Boeing 767s and 747-400s.

Those writedowns aside, the airline’s operational result is likely to show the ongoing impact of strong competition across its domestic and international networks that have forced it to cut fares and yields to meet the market.

On the domestic front, however, there are signs that the market is beginning to turn. Qantas has already announced that during the next few months that capacity growth will be flat, while Joyce and chief financial officer Gareth Evans have softened their rhetoric over Qantas’s 65% “line in the sand” strategy.

On its part, rival Virgin Australia has already been pulling down capacity, with the exception of low-cost arm Tigerair Australia. Nevertheless, signs are that a détente may extend for some time as both carriers focus on rebuilding shareholder value.

By comparison, Qantas International remains in a challenging position. The ambition of breaking even by 2015, which was to have triggered orders for Boeing 787-9s for fleet and network growth, has vanished, as its market is squeezed by excess capacity and poor yielding fares. Added to that, there are doubts about the true benefit that Qantas is receiving from its Emirates alliance.

Despite retiring older aircraft and restructuring its network, most analysts expect that there are further cuts on the way for Qantas International. One suggestion is that more of the Asian network will be turned over to budget unit Jetstar, with the Qantas brand focused on the core US and London markets. Nevertheless, given that it has committed to fitting a new business class to the Airbus A330s that fly to Asia, that prospect appears unlikely.

Jetstar itself is also expected to be in the spotlight. In the first half, the domestic business was profitable, but its Asian operations dragged the segment into the red. Little appears to have changed since then, with Jetstar Japan still in growth phase, Jetstar Hong Kong now selling aircraft to remain viable, and Jetstar Pacific and Jetstar Asia both facing intense competition in Southeast Asia.

More broadly, investors will be paying close attention to Joyce’s and Evans’ update on the airline’s three year, A$2 billion cost cutting programme. CBA points out that investors will want to see “evidence these cost savings are being retained rather than passed-though to lower fares.”

Similarly, there will also be great focus on how Qantas plans to unlock further value from its assets. This could come through further sale and leaseback activity on its aircraft and terminals, but the biggest focus will be on a possible sale of part of its loyalty business.

Recently, some reports have claimed that Qantas management has shelved plans to sell a minority stake in the business through either a trade sale or initial public offering. Officially, the airline says that no decision has been made, and given the cashflow and profit that it generates, it would appear unlikely that selling the business would have a long-term benefit.

In Qantas’s favour is its solid cash position of around A$2 billion. Despite its ratings being downgraded to junk status late last year, it successfully completed two bond issues in May and June. Those issues raised a total of A$700 million, which was used to retire existing debt and extend its debt maturity profile.

Still, with so much red ink expected, the pressure is on Joyce to show that he is still the man to steer the airline to calmer skies.