Peer through the dark clouds gathered around Qantas Airways, and there may be the glimpse of a brighter future.
Although the headline loss of A$244 million ($254 million) it revealed on 23 August is undoubtedly bad, a closer look at its results suggests Australia's flag carrier will survive - albeit as a rather different company from the one we see now.
The laggard is the international business, which reported an earnings before interest and tax (EBIT) loss of approximately A$450 million in the year to 30 June. This is clearly not sustainable and the challenge is to both cut costs and increase revenues.
Short-term measures to improve its performance include suspending services such as Bangkok and Hong Kong to London, Singapore to Mumbai, and Auckland to Los Angeles.
Plans are also afoot for closer cooperation with its Oneworld alliance partners. After getting antitrust immunity for a joint business agreement with American Airlines, it is connecting to the US domestic market via the latter's hub at Dallas-Fort Worth. The long-standing relationship with British Airways is being strengthened via new additions to the network, and South America is a new market via LAN's hub in Santiago.
Changes to the fleet are underway as well. The reduction in services allows it to retire six Boeing 747-400s earlier than expected. To reduce capital expenditure, the delivery of some Airbus A380s has been deferred, alongside the cancellation of its order for 35 787-9s.
Upgrades to the cabins of nine remaining 747-400s to the A380's standard are underway, while 12 A380s are also being reconfigured to adjust the seat mix between the four classes. This will better match its fleet and product to demand, says Qantas.
Newer aircraft reduce the need for maintenance, and Qantas has closed a Melbourne heavy maintenance base and a Sydney component maintenance division. It has also streamlined the engineering practices by implementing a "maintenance on demand" programme. An Adelaide catering facility will be shut in 2013, and those in Cairns and Riverside will be sold.
"These initiatives are expected to contribute around $300 million in annual benefits once fully implemented," says Qantas.
Bigger strategic decisions, however, lie ahead. It is simply impossible to be profitable on every long-haul route, especially as an end-of-the-line carrier that faces intense competition on almost every sector. It is also no longer viable to operate its own aircraft on every part of its network. Talks are underway with Emirates on a possible partnership, but that will only cover services to Europe and will not be enough to stem every loss.
Qantas executives point out that Asia is the high-growth market in which the airline needs to expand its presence. It needs to focus on routes where there is growing demand for full-service carriers, and hubs where it can obtain the traffic to feed into its network. Unfortunately, Australia has neither.
Plans for an all-business class carrier operating Airbus A320s and based in either Singapore or Kuala Lumpur were ditched earlier this year. Some executives say that a full-service carrier, a Qantas Asia as it were, may make sense. Finding a base for that, especially when it would compete with the home carrier, will be the tougher challenge. Without this, however, the future remains bleak for Qantas International.
That, however, is not the case for Qantas as a whole. What the financials show is that the rest of Qantas is, actually, very profitable. In the Australian domestic market, Qantas - which operates Boeing 767s and 737s - and its low-cost arm, Jetstar, combined had an EBIT of more than A$600 million. Qantas Frequent Flyer's EBIT rose 14% to A$231 million, although Qantas Freight EBIT fell by A$17 million to A$41 million.
The group's star performer, however, is Jetstar. Its overall EBIT rose around 20% to A$203 million for the year. Its ancillary revenues rose by 27% while its costs were at a record low, says Qantas. Its overall capacity was increased by 14% - a result of a 7% increase in domestic capacity, 12% rise in international capacity and Singapore-based Jetstar Asia's growth of 38%. Its load factor, meanwhile, rose by 1.4 percentage points to 79.2%. Qantas says that Jetstar "continues to hold a clear leadership position in the price-sensitive market" within Australia.
"Jetstar's strong domestic results highlight the benefits of the Qantas Group's two complementary flying brands and Jetstar's strong competitive position in the Australian market," says Qantas. "The successful execution of the strategy is evidenced by Qantas and Jetstar continuing to be the two most profitable Australian domestic networks, maintaining the Group's profit-maximising 65% market share."
Unlike Qantas, the Jetstar brand has been successful in branching out into Asia. Apart from Jetstar Asia, which offers both short-haul and long-haul services, there is also Jetstar Pacific in Vietnam, Jetstar Japan as a joint venture with fellow Oneworld member Japan Airlines, and the proposed Jetstar Hong Kong as part of joint venture with China Eastern Airlines.
"Each of these investments draws on Jetstar's well-established brand, world-class ancillary revenue model and strong local partners," adds Qantas. "Jetstar's international network will leverage the growth of these Jetstar branded airlines to provide traffic flow between Australia and Asia and reinforce the group's strong competitive position in the leisure travel markets across Asia-Pacific."
Qantas chief executive Alan Joyce adds: "We are now progressively embedding the Jetstar brand and the two-airline model in Asia. Jetstar is already the largest low-cost carrier in Asia-Pacific measured by revenue."
For some time, the indication has been that Jetstar will be the growth engine for the Qantas Group. It will receive 15 Boeing 787-8s, despite the cancellation of the -9s for its full-service sister carrier. The company has given a clear signal of its priorities by allocating capital to Jetstar instead of Qantas International.
Jetstar is getting more Airbus A320s, and eventually A320neos, for all of the franchises around the region. This will ensure that these airlines are able to increase their capacity in a market segment where there remains plenty of growth opportunity. New aircraft will also help to reduce costs, allowing them to maximise profitability.
While the Qantas brand is more recognised, it is increasingly Jetstar that makes the money and will continue to receive the greater investment from the company unless there is some seismic shock to the system. Earlier this year, Qantas reorganised its corporate structure and created separate domestic and international business units with their own chief executives. They will report their financials separately for the first time in early 2013, when the company publishes its half-year results.
That will put the problems at Qantas in clearer perspective than ever before, and potentially help shape the future of the company. It will also make it clear that unless the international business turns itself around, Qantas is likely to become a very different company.
And if the latest numbers are any guide, that may not be a bad thing after all.