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Crippled Dreamliner program keeps Qantas in black

Qantas continues to do it tough, partly through its own fault, and partly through the grindingly tough factors of fuel costs, changing consumer expectations, and too many wickedly smart competitors, that are the lot of most airlines throughout the world today

One of the shocking sets of numbers in this morning’s Qantas half year to 31 December profit result of a statutory profit of $111 million after tax is that it booked $125 million in liquidated damages from Boeing for cancelled 787 Dreamliners in the same period.

Headlines about ‘dud jet saves Qantas from ruin’ will probably tempt the media throughout the day, although the reality is much more complex but not a pretty read from any perspective once all of the filings to the ASX made by the Qantas group are taken into account.

These were the headline figures Qantas led with in its media release:

These are the nittier and grittier figures that are contained in the full half year results.

Qantas international‘s underlying profit before interest and tax was a loss of $91 million in first half FY13, a 65% improvement on a loss of $172 million in first half FY12. Qantas CEO Alan Joyce made the point that this confirms the troubled long haul division is on track to return to profitability in FY15.

Qantas domestic‘s underlying result on the same basis was a profit of $218 million, which is a steep fall from $328 million in first half FY12, and one which the company attributes to tougher competition, two words that stand for Virgin Australia.

Jetstar‘s total contribution to profits were also down to $128 million in the first half compared to $147 million in the comparable half in FY12, although Qantas pointed to a 12% rise in its revenues and a substantial investment in its expansion in Australia and in its offshore franchises.

The crown with the jewels was again loyalty, with the Qantas frequent flyer program posting a record half yearly profit of $137 million compared to $119 million in the same period in FY12.

In terms of fleet developments little was said about the Dreamliners today, apart from the glory-in-failure aspect of the very timely $125 million in liquidated damages included in the first half FY13 results.

The big, big news is a total remake of the Qantas A330 fleet, with new flat bed seats in business class and a new economy class product throughout the 10 A330-300s that will be used for Qantas services to Asia and the 20 A330-200s which will be used on domestic routes, especially to Perth from the eastern states but starting late in 2014.

This is an intriguing development for Qantas watchers because it is clearly predicated on all of the A330-200s being used by Jetstar being returned to Qantas and being replaced by 787s for Jetstar, which despite deliveries officially still taking place from August this year  would seem to be at some risk.

Qantas deserves some recognition for being the world’s most profitable user of Dreamliners even without having ever taken delivery of one.  It is hard to imagine what Boeing is thinking about this.

There has also been a minor topping up of the Qantas 737-800 fleet announced, in which the real significance is the lack of a Qantas order for single aisle fleet replacements later in the decade by either the 737 MAX new engine technology jet or the Airbus A320NEO family, which Qantas has already ordered for Jetstar anyhow.

Those hoping for 777s for Qantas, or for some sort of sugar daddy deal from Emirates for a few dozen of them to suddenly materialise were, as always, dreaming, including the writer.  If such excitement is in store with the Emirates partnership, it didn’t get any daylight this morning.

On reflection, Qantas continues to do it tough, partly through its own fault, and partly through the grindingly tough factors of fuel costs, changing consumer expectations, and too many wickedly smart competitors, that are the lot of most airlines throughout the world today.

The next installment of the joy and tears of being an Australian airline will be delivered by Virgin Australia with its first half FY13 results next Tuesday.

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  • 1
    Alex
    Posted February 21, 2013 at 12:02 pm | Permalink

    Aren’t you being a little kind towards Qantas’ management, Ben? An increase in profits from bugger-all to a bit more than bugger-all is highly unimpressive. It might have looked better if they’d made even less profit previously, then the relative improvement would could have looked ‘amazing”, e.g. $111m/$1m = 11,100%, now that’s “impressive”!

    But there’d have been a loss of $14m if it wasn’t for the cancellation of the 787′s! Nearly every corporation in the world could improve profits overnight if they eliminated or reduced efforts towards, or commitments to, future development.

    And it might be a tough environment, but there’re still those airlines who manage to flourish, as you’ve highlighted on many occasions. Qantas looks like it’s the football team from Nar Nar Goon trying to compete in the AFL. Everyone’s doing it tough!

    (No offence to residents of Nar Nar Goon intended, but you’re entirely justified in taking it. I apologise in advance and regret my words already).

  • 2
    moa999
    Posted February 21, 2013 at 12:18 pm | Permalink

    So Ben, what happened to your ‘rumour’ sourced to business circles published last week that due to reallocation of costs between Jetstar and QFi, that QFi was now profitable.

    Sure doesn’t look like it to me.

  • 3
    Ben Sandilands
    Posted February 21, 2013 at 12:39 pm | Permalink

    One of those sources made the interesting comment only a short while ago that the cost allocations within the group are now being managed to achieve the goal of FY15 viability as mentioned by Joyce this morning.

    I don’t think anyone outside of Qantas knows exactly how those costs are being managed between the divisions. More transparency would be good, but at the end of the day, it’s one company not paying a dividend from the aggregate outcomes, and the total result this morning was less than half that achieved two years ago for first half FY11.

    I despair at the coverage on the ABC, with a commentator saying the Emirates partnership has underpinned a trebling of profits. Joyce of course was at pains to say that none of the benefits of the partnership have been included in the results, indeed they couldn’t be, since it hasn’t actually been approved. Joyce did however point to some good bookings for European cities it doesn’t fly to, except as a code share user of Emirates jets, when it all starts to happen.

  • 4
    Rocco Nicotra
    Posted February 21, 2013 at 1:19 pm | Permalink

    wouldn’t the 787 money have gone to help offset the increased costs of servicing older aircraft, that by now would have been replaced one way or another with the 787 fleet ?

  • 5
    Cameron Newton
    Posted February 21, 2013 at 1:45 pm | Permalink

    On the whole a good result for QF.

    As Ben and Rocco point out the 787 settlement has limited impact when view holistically. The whole premise of the 787 settlement is to compensate QF for both the ‘lost revenue’ and increased costs of operating the 767 (and to refund QF the prepayments it has made on jets it will probably never receive).

    It is worth noting that the restructuring and redundancy costs incurred by QF are substantial and these are ‘one-off’ costs which will decrease QF’s future cost base. However, one could be cynical here and ask how ‘one-off’ these costs really are… given the constant transformation of the airline (the wonders of legacy airlines).

  • 6
    patrick kilby
    Posted February 21, 2013 at 2:46 pm | Permalink

    Rocco that is exactly what the compensations is for, but it does improve the bottom line.

    The overall result is much the same as its competitors in Asia (~$200m) but they often break it down in different ways. Most Asian carriers have (the profitable) short haul (<5hrs) and long-haul together while QF has the shorthaul domestic split out for obvious reasons. QF also splits out its FF business while I am not sure the others do in the same way. I notice the sale fares on the QF/EK are rapidly disappearing which means there is a (goodish??) uptake of the new arrangement.

    Also notice the A333s and A332s are getting the same makeover treatment which means they may add flexibility to long haul with the A332s greater range.

  • 7
    Mark Skinner
    Posted February 21, 2013 at 2:52 pm | Permalink

    Qantas is most likely quite reasonable in booking the liquidated damages to profit. The reason for this is that contractually speaking liquidated damages are compensation for profit that a Principal in a contract would have made if the contract had been completed on time. So while it is an estimate, it really is the amount of money Qantas would have made had the planes been delivered on time.

    The only quibble I would have is if Qantas were booking the whole amount it received in one year, when the delays themselves are spread much longer. For example, not booking some of it last year would have made the figures worse. Without knowing how Qantas is distributing the damages it is hard to tell.

    But it is a legitimate revenue item reflecting the underlying profitability (or not) of the company.

  • 8
    Josh B
    Posted February 21, 2013 at 3:12 pm | Permalink

    Ben I believe you have the gift of hindsight. It is impossible to predict the troubles of the Dreamliner (which is a better aircraft fit than the 777 for QF), Boeing cannot even figure out what is wrong with it at the present day. I cannot wait for you to tell us all the probelm after Boeing have issued the press statement with your obvious comment that you were right all along…

  • 9
    Ben Sandilands
    Posted February 21, 2013 at 4:19 pm | Permalink

    Keep in mind, as I’m sure many have, that when Qantas sells as a code-share a seat on an Emirates jet (and vice versa, but in this case there is far more vice than versa) it pays Emirates whatever the price Emirates sets to cover minor expenditures like fuel, capital expenditure and labor, and that in a no tax economy, those costs don’t become any easier because you can’t do fancy offsets or anything like that.

    So Emirates is not a river of gold pouring into the Qantas coffers. It is is fact a way for Qantas to segue out of parts of the business the current management, whether for good or less good reasons, seems very reluctant to pursue.

  • 10
    ltfisher
    Posted February 21, 2013 at 4:24 pm | Permalink

    I guess all these ‘bookeeping’ actions are kosher but in the end there is still nothing for the shareholders, well nothing that an ordinary shareholder can see. And what a strange situation where an airline guts a huge amount of its network and yet has a FF program contributing so much to the bottom line of the business. Ben’s comment the other day about FF programs seems to be pretty close to the mark.

  • 11
    patrick kilby
    Posted February 21, 2013 at 5:47 pm | Permalink

    Not sure ‘gutting’ is the right word QF have been steadily replacing Europe with codeshares for nearly decades now and growing the US and Asia instead (QF wins on the US AA code shares and EK wins on Europe beyond Dubai!!, note those fees only apply beyond Dubai; to Dubai is a sort of revenue sharing arrangement). In recent years QF to London is down by less than half (A380s v 744s)and Frankfurt gone (probably to be replaced by Berlin early next year when it eventually!! opens.

  • 12
    Rufus
    Posted February 21, 2013 at 7:44 pm | Permalink

    “Berlin early next year when it eventually!! opens.”

    Now you must be even more of an optimist than BBI management! On the latest updates, spring 2015 is a distinct possibility…

    (and Ben – for whatever planning disasters afflict Australian airports, surely nothing comes even close to the saga of Berlin)

  • 13
    Mark Skinner
    Posted February 21, 2013 at 7:47 pm | Permalink

    Josh, I don’t know about hindsight, but if any company in any industry introduces:

    1). A new product line.
    2). A new production method.
    3). A new suite of production materials.

    What chance do you give it of coming in on time and budget?

    Now add to that the fact that this is the aviation industry where there are literally gazillions of components to be assembled.

    I would suggest, most respectfully, that with that number of flaming red flags, that a prediction of delays is a tad more than an even bet.

    So from that point of view, Qantas’ negotiations of liquidated damages was wise too. Having said that, maybe a more strategic decision might have been to ask Boeing to provide delivery slots for B777s as ‘substitutes’ (Pedants please not the quotation marks). That would have provided Qantas with the metal, and Boeing with a face saving ‘out’. However, that might have looked a bit too much like Qantas management goofed on one of their primary functions – fleet management.

  • 14
    moa999
    Posted February 21, 2013 at 9:08 pm | Permalink

    Whilst when Qantas sells an Emirates codeshare it obviously covers Emirates cost, it at least is able to sell a fare and make a profit – something that is obviously not happening more than often than not in Qantas International, all whilst in the meantime still enabling its QFF members to earn points and the all important status.

    Whilst I agree that tax is not an issue if you aren’t making a profit, there are a lot of other areas where Qantas is not competitive

  • 15
    ghostwhowalksnz
    Posted February 22, 2013 at 4:16 pm | Permalink

    Could I be out of line if I suggested that the reason Qantas cancelled the dreamliner orders was to get the cash. maybe those who still wanted delivery had to accept a discount on the sales price ?

  • 16
    keesje
    Posted February 23, 2013 at 5:55 am | Permalink

    Qantas would have had more then 50 787-8s and -9s in service by now according to the initial schedule. Would that really have made a material difference for Qantas during the last 5 years? Yes enormously I guess. In network flexibility and development, as well as fuel and maintenance costs. Far exceeding the numbers mentioned here. I said it before, I wont be surpriced if an Airbus deal will be announced this year.

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