Big cuts for Qantas

Qantas Airways plans to slash the cost base of its ailing international business by nearly one-third over the next three years, in a move that has sparked speculation of further capacity cuts and job losses.

Qantas chief financial officer Gareth Evans this month revealed "A$1 billion (NZ$1.1b) or thereabouts" of the company's A$2b cost savings target would come from its international division.

Analysis of Qantas accounts shows the overseas division had controllable costs of A$3b last year, excluding fuel, depreciation and operating leases - suggesting one-third of these would need to be cut to meet the company's financial targets.

Qantas expects inflation will erode some of the cost savings, meaning A$1 billion of cuts to international would equate to actual cost cuts of about A$730 million by the end of the third year.

An analyst said he struggled to comprehend how Qantas could cut A$1 billion from its international division without further route withdrawals and job cuts, even though the airline has so far played down the prospect of more wholesale network changes.

"They will probably announce they will cut another 2000 or 3000 [jobs] on top of the 5000 already announced," the analyst said.

Speaking at the CAPA Australia Pacific Aviation Summit, Evans argued the cost savings could be made without sacrificing customer services.

"For us, it's about controlling what we can control, and pulling out A$1b worth of costs [and] continuing to improve the network and the product quality for our customers is absolutely what we can control," Evans said.

Qantas, including Jetstar, has a total controllable annual cost base of A$11.6b, so the planned cuts will hit the international division disproportionately.

Of the A$2b target for the business as a whole, Qantas has said it will cut A$800m from its cost base by June next year and the other A$1.2b of savings are expected over the following two financial years.

Qantas's current plan is to cut its fleet of fuel-guzzling 747s to nine over the next 18 months, but further acceleration of retirements cannot be ruled out.

However, the airline's fleet of A330s does not have the range to replace 747s on long routes like Sydney-Los Angeles-New York and Sydney-Johannesburg and Qantas does not have enough A380s available to fill the gap.

Former Qantas chief economist Tony Webber said: "I think they have more or less cut [routes] to the bone already. The problem is actually not in costs at the moment, it is revenue."

The airline is expected to provide a further update on cost-cutting alongside its full-year results on August 28. Qantas is expected to report a pre-tax underlying loss of A$750m but the bottom line loss could surpass A$1b including restructuring charges and impairments
In May, Qantas provided details of several of its planned cost-cutting initiatives, including A$100m from international route exits, schedule changes and early retirements of ageing Boeing 747s announced in February.

The total from the initiatives announced at the time would save a combined A$375m. If overhead costs and engineering costs are allocated based on the kilometres flown by the international fleet, about A$200m of those savings would come from the international division.

Qantas has since announced a few more international changes, such as cutting flights to New Zealand in non-peak periods, which will save an unspecified amount.

However, in February the airline said A$600m of its A$2b of savings would come from fleet, utilisation and network changes, and so far only A$155m of the savings have been identified clearly to the market.

A Qantas spokesman said the airline had about 250 projects under way to contribute to its A$2b of cost-cutting being rolled out over three years.

"We've provided a lot of detail already on some of the key initiatives, but we're not going to comment on speculation of what other components will or won't be," he said.'They have more or less cut to the bone already'

Another analyst said he was not factoring in all of Qantas's planned cost savings in his figures - and neither was the market - because "we just don't have the clarity to break it down".

Morgan Stanley analyst Nicholas Markiewicz told clients last month that Qantas's previous cost-cutting programs had not translated into margin improvements as competitors were also slashing costs.

"With a lack of solid detail around the cost-out plan, other than the quantum and focus areas, we see separating structurally unique cost-out from 'business as usual' as a challenge," he said.