There was a sense of inevitability about the announcement Qantas made today, slashing its earnings forecast, announcing capacity reductions, cancellations of aircraft orders and heavy job losses. The global industry is being swamped by a tide of red ink that is rising faster than the industry is able to respond.
Qantas had been almost alone in leaving its forecast of a pre-tax $500 million profit this year untouched, despite the extreme turbulence in the sector. Now it is predicting a pre-tax profit of between $100 million and $200 million, as long as conditions don’t deteriorate further. Any profit would be an achievement in the circumstances, where the priority for all the big carriers is now survival rather than profitability.
Only last month Cathay Pacific announced a loss of about $1.5 billion. Singapore Airlines is expected to lose money this year. Along with Qantas, they are regarded as among the best-managed airlines in the world. British Airways has said it expects to lose about $300 million in the year to March.
The industry as a whole is expected, very conservatively, to lose at least $6.5 billion this year. At the rate at which conditions are deteriorating the losses will inevitably be heavier.
The two most significant factors identified by Qantas as responsible for the downgrade were a deterioration in demand for Qantas’ international services, particularly for premium classes, and for its freight businesses.
The latest International Air Transport Association (IATA) numbers show that global passenger volumes are down more than 10 per cent from their levels a year ago – and falling at an accelerating rate – while international freight volumes were down more than 22 per cent in February compared with the volumes a year earlier.
While airlines have been hurriedly cutting capacity to reflect the tumbling demand, they haven’t been able to cut fast enough or hard enough – the capacity reduction in February was 5.9 per cent against the 10.1 per cent fall in demand, pushing load factors for the industry just below 70 per cent.
As Qantas chief executive Alan Joyce said today, not only has there been a significant drop-off in demand but airlines have responded with very aggressive discounting. Return flights to London of less than $1500, or to Los Angeles for less than $1200, or between Melbourne and Sydney for less than $70 are reflective of a market where there is very substantial excess capacity. Indeed, Joyce said overall capacity into Australia has continued to grow despite the weakening market.
IATA has said that the Middle Eastern carriers – which have an increasingly significant presence in this market – were alone among international airlines in increasing freight capacity and, while they had experienced a slight (0.4 per cent) increase in passenger traffic, had increased capacity by 7.3 per cent and had load factors below the industry average.
Both Qantas and Virgin Blue have already significantly slashed planned increased in capacity, rescheduled new aircraft deliveries and redeployed their fleets, in Qantas’ case switching capacity from the Qantas brand to the lower-cost Jetstar. Last month Virgin Blue said it would cut another 8 per cent from its capacity and could shed up to 400 jobs.
Now Qantas will reduce flying capacity by another five per cent, ground 10 aircraft and try to sell them, defer orders for at least 16 new planes and try to cut or reschedule the delivery of others. The capacity reductions will affect both its international and domestic businesses, with the group cutting frequency of services rather than abandoning routes.
It will also dramatically increase the number of management roles made redundant – another 500 will go to add to the 90 senior positions already removed – and take up to 1250 full-time equivalent positions out of its larger workforce. A planned $3 billion of capital expenditure this year and next will be reduced by $1 billion.
Compared with many of its reeling peers, Qantas remains in a relatively strong position, thanks partly to its ability to shift capacity from Qantas to Jetstar. It will benefit from a big surge – 24 per cent – in redemptions prompted by the changes to its Frequent Flyer program. It still expects to be profitable; it has more than $3 billion of cash and has no significant amount of debt maturing until February 2011.
However, as today’s announcement made clear being in a relatively stronger position than most of its peers doesn’t protect Qantas from the impact of diving demand, particularly at the high-margin end of its passenger business, on the fragile economics of an airline.
The group’s multi-faceted and severe response to the continuing deterioration in demand also shows that, like his predecessor Geoff Dixon, Joyce is prepared to do whatever it takes to try to secure the airline’s position, however unpleasant and unpopular the decisions might be.
The swingeing cuts to management may help defuse some of the resentment and cynicism within its broader staff towards the job losses, although they also provide a very clear signal that the new regime is now in place and that Joyce’s Qantas will have a much, much leaner superstructure than his predecessor’s.
Qantas had been almost alone in leaving its forecast of a pre-tax $500 million profit this year untouched, despite the extreme turbulence in the sector. Now it is predicting a pre-tax profit of between $100 million and $200 million, as long as conditions don’t deteriorate further. Any profit would be an achievement in the circumstances, where the priority for all the big carriers is now survival rather than profitability.
Only last month Cathay Pacific announced a loss of about $1.5 billion. Singapore Airlines is expected to lose money this year. Along with Qantas, they are regarded as among the best-managed airlines in the world. British Airways has said it expects to lose about $300 million in the year to March.
The industry as a whole is expected, very conservatively, to lose at least $6.5 billion this year. At the rate at which conditions are deteriorating the losses will inevitably be heavier.
The two most significant factors identified by Qantas as responsible for the downgrade were a deterioration in demand for Qantas’ international services, particularly for premium classes, and for its freight businesses.
The latest International Air Transport Association (IATA) numbers show that global passenger volumes are down more than 10 per cent from their levels a year ago – and falling at an accelerating rate – while international freight volumes were down more than 22 per cent in February compared with the volumes a year earlier.
While airlines have been hurriedly cutting capacity to reflect the tumbling demand, they haven’t been able to cut fast enough or hard enough – the capacity reduction in February was 5.9 per cent against the 10.1 per cent fall in demand, pushing load factors for the industry just below 70 per cent.
As Qantas chief executive Alan Joyce said today, not only has there been a significant drop-off in demand but airlines have responded with very aggressive discounting. Return flights to London of less than $1500, or to Los Angeles for less than $1200, or between Melbourne and Sydney for less than $70 are reflective of a market where there is very substantial excess capacity. Indeed, Joyce said overall capacity into Australia has continued to grow despite the weakening market.
IATA has said that the Middle Eastern carriers – which have an increasingly significant presence in this market – were alone among international airlines in increasing freight capacity and, while they had experienced a slight (0.4 per cent) increase in passenger traffic, had increased capacity by 7.3 per cent and had load factors below the industry average.
Both Qantas and Virgin Blue have already significantly slashed planned increased in capacity, rescheduled new aircraft deliveries and redeployed their fleets, in Qantas’ case switching capacity from the Qantas brand to the lower-cost Jetstar. Last month Virgin Blue said it would cut another 8 per cent from its capacity and could shed up to 400 jobs.
Now Qantas will reduce flying capacity by another five per cent, ground 10 aircraft and try to sell them, defer orders for at least 16 new planes and try to cut or reschedule the delivery of others. The capacity reductions will affect both its international and domestic businesses, with the group cutting frequency of services rather than abandoning routes.
It will also dramatically increase the number of management roles made redundant – another 500 will go to add to the 90 senior positions already removed – and take up to 1250 full-time equivalent positions out of its larger workforce. A planned $3 billion of capital expenditure this year and next will be reduced by $1 billion.
Compared with many of its reeling peers, Qantas remains in a relatively strong position, thanks partly to its ability to shift capacity from Qantas to Jetstar. It will benefit from a big surge – 24 per cent – in redemptions prompted by the changes to its Frequent Flyer program. It still expects to be profitable; it has more than $3 billion of cash and has no significant amount of debt maturing until February 2011.
However, as today’s announcement made clear being in a relatively stronger position than most of its peers doesn’t protect Qantas from the impact of diving demand, particularly at the high-margin end of its passenger business, on the fragile economics of an airline.
The group’s multi-faceted and severe response to the continuing deterioration in demand also shows that, like his predecessor Geoff Dixon, Joyce is prepared to do whatever it takes to try to secure the airline’s position, however unpleasant and unpopular the decisions might be.
The swingeing cuts to management may help defuse some of the resentment and cynicism within its broader staff towards the job losses, although they also provide a very clear signal that the new regime is now in place and that Joyce’s Qantas will have a much, much leaner superstructure than his predecessor’s.
