Qantas to cut 1,000 jobs, says challenges ‘immense’

Australia’s national carrier says its conditions has seen a “marked” deterioration

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Australia’s national carrier Qantas said it would axe 1,000 jobs and faces “immense” challenges in a shock profits warning Thursday, flagging a half-year loss of up to Aus$300 million (US$271 million).

Chief executive Alan Joyce said conditions had seen a “marked” deterioration and the airline was battling “extraordinary circumstances” including record fuel costs, a strong Australian dollar and fierce competition from subsidized rivals.

The news sent Qantas shares into freefall, with the stock plunging as much as 17 percent to 99.5 cents before regaining ground to close 10.79 percent lower at Aus$1.075.

“The challenges we now face are immense,” Joyce said in an update to the Australian stock exchange.

“Since the global financial crisis, Qantas has confronted a fiercely difficult operating environment -- including the strong Australian dollar and record jet fuel costs, which have exacerbated Qantas' high cost base,” he added.

“The Australian international market is the toughest anywhere in the world.”

Ratings agency Moody’s put the airline’s investment-grade Baa credit rating on review for a potential downgrade, saying the forecast conditions were “outside the rating expectation.”

“In the absence of countermeasures, the challenging operating conditions may therefore result in Qantas’ credit profile no longer being consistent with the current ratings,” said Moody’s vice president Arnon Musiker.

Qantas was optimistic it had turned a corner after signing a major partnership with Dubai-based Emirates and reversing its 2012 annual loss -- the first since privatization -- with a modest Aus$5 million full-year profit announced in August.

But Thursday’s announcement shows it is still facing significant headwinds.

Joyce said Qantas expected to report a loss before tax in the six months to December 31 of Aus$250-$300 million, with passenger loads slipping significantly in November as increased competition drove down the carrier’s market share.

Fuel costs for the half-year were Aus$2.27 billion -- Aus$88 million higher than in the second half of 2012.

“Urgent” action was needed to salvage the Flying Kangaroo’s profitability, Joyce said, including the sacking of “at least 1,000” staff, a 38 percent cut in his own pay and that of the Qantas board, a review of spending with top suppliers and a salary and bonus freeze.

“We have reduced the group’s unit costs, excluding fuel, by a total of 19 percent since FY09, including by five percent in FY13. But these actions are not enough to deal with the current situation,” he said.

The airline will undertake a structural review, to report back in February, prompting speculation a sell-off of its Jetstar assets in Asia could be on the cards.

“All options are on the table in terms of the structural review, we’re not ruling anything in or anything out,” Joyce said when asked about potential divestments.

He added that Qantas was “in dialogue with the government on a number of different options” as he continues lobbying for the easing of foreign investment restrictions or state intervention to shore up the carrier.

Under the Qantas Sale Act, dating from 1995 when the airline was privatized, foreign ownership in the national carrier is limited to 49 percent. Joyce wants that reconsidered in the face of what he described as “unprecedented distortion” by foreign backers of the Australian market.

“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,” the Qantas chief said.

He again took aim at domestic rival Virgin Australia, which is now majority owned by state-backed Singapore Airlines, Air New Zealand and Etihad, accusing it of a deliberate “strategy to weaken Qantas in the domestic market” with cheap seats underwritten by foreign cash injections.

“Essentially what’s happened is three state-owned entities have gotten, through the back door, access to Australian traffic rights,” he said.

Joyce has been locked in a bitter war of words with Virgin in recent weeks over what he has described as “predatory” behavior by his rivals.

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