ANALYSIS: Spending review could leave Qantas International in a fleet bind

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Qantas International could come under greater pressure if the airline further defers aircraft orders following a new capital expenditure review.

The review was announced as the Oneworld carrier forecast that it will report an underlying loss before tax for the first half of the 2014 financial year of up to A$300 million ($271 million) – a far cry from the A$223 underlying net profit it made over the same time last year.

The review is aimed at ensuring that Qantas can rebuild its cash position, with the stated aim of generating positive net free cash flow from the 2015 financial year.

The timing of that goal makes it likely that it will not exercise its options for Boeing 787-9s that will become available for delivery from 2016. Last year it renegotiated its 787 order to only 14 firm 787-8s (which are being delivered to Jetstar), cancelled the 35 787-9s it had on order, but left 50 options open. That too was part of a capital expenditure saving exercise.

Flightglobal’s Ascend Online database shows that those options are tentatively scheduled for delivery out to 2025.

Group chief executive Alan Joyce has firmly held the line that it will only exercise those options once the international business returns to profitability. That had been expected in 2015, but now looks like it may take much longer.

Ascend shows that Qantas also has eight Airbus A380s scheduled to be delivered between 2017 and 2021. Qantas has indicated that the two A380s due for delivery in 2017 could be pushed back further, while the additional six are timed for delivery as it retires its 747-400ERs.

Given that Lufthansa recently cancelled some of its A380 orders, Qantas could do the same.

Although deferring or cancelling aircraft purchases may be prudent from a financial perspective, it would certainly leave Qantas International in a bind. It needs the superior economics of the new aircraft to make its business more competitive and sustainable, but may not have the cash to buy them.

In the meantime, Qantas International continues to struggle, particularly in Asia where capacity to Singapore has increased by 40% and Hong Kong by 14% since it moved its hub for European flights to Dubai in April. There have been some signs that it has taken longer than expected for demand to meet the increased number of available seats.

Competition has also been fierce on those routes. Flightglobal’s FlightMaps Analytics shows that to Singapore and Hong Kong, Qantas is a distant second behind carriers like Singapore Airlines and Cathay Pacific, respectively, by most metrics.

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FlightMaps Analytics

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FlightMaps Analytics

Joyce has even conceded that the carrier is struggling in the current environment.

“Our competitors in the international market, almost all owned or generously supported by their governments, have increased capacity to pursue Australian dollar profits, changing the shape of the market permanently,” he says.

The situation is likely to get worse before it gets better. From the end of 2014 it will lose some capacity as its 10 A330-300s undergo a cabin refit, further stretching a fleet that has failed to keep up with the capacity growth of its Asian competitors.

Further out, Qantas faces the prospect of squaring off against competitors who have a massive number of firm orders for widebody aircraft, many of which are likely to fly to Australia. Those include new-generation A350s and 787s, which will give them an advantage over A330s delivered in the early 2000s.

Qantas must make some tough decisions about its international fleet in the coming years, but there is a danger that its desire for short-term cash could do long-term damage to its competitive position.