Feb 25, 2013

Qantas cost figures remain under question

A quizzical look at some of the figures in the Qantas first half financials

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

The view that Qantas has massaged the financial performance of its loss making full service international operations to suit an ideological agenda to marginalise if not exit a large part of them while favouring Jetstar by making it carry some of its costs have been around for a long time.

They have also been denied for a long time by management.

However the implication of a review of its first half FY13 results, which were released last Thursday, is that some of the costings are possibly wrong, and being ‘managed’ to a schedule by which a much reduced international division could be deemed to have become viable by 2015, by which time there won’t be nearly as much of it left as there is today.

By 2015 Qantas might only be flying from Sydney and Melbourne to Dubai, where its passengers will transfer to Emirates flights for onward connections, while in the rest of Australia, under the Qantas-Emirates partnership, Qantas will expect whatever customers it still has over this cities to fly all the way on Emirates, not to mention those who already do so from Sydney or Melbourne anyhow.

The other key international operations will be to Singapore and Hong Kong, for mid-trip connections to the Jetstar franchise connections deeper into Asia, and to Los Angeles and Dallas Fort Worth, and to Santiago and Johannesburg.

Qantas has actively encouraged most of these predictions already, with group CEO Alan Joyce last Thursday talking up the Qantas/Jetstar connections in Asia, which begged the unasked question as to why Qantas customers would bother when the real choice would be going all the way on Jetstar, or going all the way on Singapore Airlines or Cathay Pacific flights with a vast number of full service onward connections on SilkAir or the soon to be rebranded Cathay Dragon.

This is what the ‘ginger group’ notes on the first half FY13 figures says, in part:

1.       How did Qantas International achieve a 9.1% ($254M) reduction in operating costs (including fuel) in 6 months compared to 1H12, noting that Qantas Group operating costs increased by 2.9%? With regard to fuel costs, the 1H13 results state that the fuel cost was $2181M in both 1H13 and 1H12 indicating that fuel costs have been unchanged. The reduction in operating costs must therefore have come about in other expense categories. Given there has been no significant change in Qantas International’s workforce, the reduction cannot be attributed to a large drop in employment.   

2.       How can one part of the business incur substantial cost increases and yet another part of the business incur a very sizeable cost reduction? Qantas Domestic costs increased by 6.4% including fuel (which is a non-issue) but Qantas International’s costs decreased by 9.1%. Both these businesses employ very similar types of resources (engineering, maintenance, labour) and use similar inputs. Aircraft operating lease rentals and depreciation are not included in these costfigures so there is possible explanation there.

3.       Qantas International Segment Revenue and Other income decreased by 3.5%. With a reduction in revenue, there is less scope to improve the underlying EBIT. To achieve a smaller loss in the context of declining revenue requires an even greater reduction in operating costs. And this is exactly what has happened if one is to believe the 1H13 results. If one was trying to engineer a turn-around in Qantas International, one would need to “produce” a very large cost reduction in the face of declining revenue.  

4.       Perhaps a reduction in Qantas International capacity is the answer? According to the 1H13 results, Qantas International reduced capacity by 7%. However this capacity reduction cannot translate into anywhere near a 7% reduction in operating costs as many of Qantas costs are fixed costs that cannot be varied in the short run (eg labour).

Whilst some of the cost reduction can be attributable to reduced capacity such as reduced fuel costs, perhaps it is in the order of 3-4%, nowhere near the 9% cost reduction purported in the 1H13 results.

In summary, the 9.1% reduction in Qantas International’s operating costs seems incredulous in light of (i) an increase in Qantas Group costs and a sizable increase in Qantas Domestic Costs (ii) relatively constant fuel prices and a strong Australian dollar (reducing the AUD cost of fuel) and (iii) declining revenue.

What is interesting is that none of the commentary I’ve seen has focused on Qantas International’s “amazing” cost reduction achievement. Nor did Alan Joyce point to it at all. If the cost reduction were the real thing, they would be singing out loud and clear about it.  

This graphic draws attention to the key metrics which have changed:

It is important to keep in mind that subject to the rules that apply to listed companies Qantas can aggregate, consolidate and promulgate its performance how it sees fit.

Similarly, curious employees, shareholders and journalists can look at the disclosures and suggest otherwise.

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7 thoughts on “Qantas cost figures remain under question

  1. ghostwhowalksnz

    I dont know what the obsession is with the Sydney Heathrow route, after all, about the same number of passengers go from Sydney to Christchurch ( or did up till the earthquakes). Sure the RPK are higher because of the distance but bums on seats are still the same.
    And going via Dubai ?, well during the 80s Qantas flights skipped Singapore and went via Bangkok to Europe, using Russian airspace. But I think the Russians ( Soviets at the time) got too greedy and made that uneconomic. I think I ended up in Dubai in the middle of the night, during the 80s, on the way to Athens

  2. moa999

    Not sure if you actually read the presentation. But on Page 17 of the main presentation:
    – Exited loss making routes, 7% ASK reduction
    – Comparable unit cost1 improvement 4%

    Thus capacity down 7% which will pull down a bunch of costs buy near that amount, yield and load factor is up as the revenue hasn’t fallen by 7%.

    Further cost reductions of 4% across a bunch of factors ex fuel.

    7+4= 11 less allowance for fixed costs = 9

  3. Wayne Litton

    It is only a matter of time before DXB/LHR/DXB goes – a pity, but they can take 2-3 x A380 and deploy them on the LAX or whatever route and reduce their 744 fleet. There is no way that Joyce and the QF board are going to expand QF Intl, forget new A380 or 787, you will need a new CEO and Board before this happens. As for JQ ironically I made a booking through the platinum desk last week and one the sectors came up JQ and the agent quickly said we will not go there will we. Joyce forgets that QF customers actually like flying on QF.

  4. moa999

    QFi will continue to shrink as the additional non-refurbed 747s (nine of them at last count) are retired over the next few years. Any additional A330s from Jetstar will continue to be pushed out as its B787-8s get later due to the battery issues.

    I can only see Qantas continue to defer the B787-9 options, unless it can get a new pilot/FA deal for QFi mainline for 789 aircraft that is broadly comparable with what JQ A330 pilots get (and I suspect the parties are a long way apart on that)

  5. johnb78

    Wayne: one of the less noted aspects of the EK deal is that Qantas has earlier morning LHR arrivals than EK’s first plane of the day. As a result, the DXB-LHR leg of QF1 and QF9 is going to load far better than QF was able to achieve from Singapore.

    This is already happening. If you try and book SYD-LHR flights for this SH winter/NH summer holiday season, the cheapest option is to wait for a couple of extra hours at DXB and fly to LHR on Emirates metal – because QF1 and QF9 are filling up with people from across Emirates’ network who want the earliest London arrival.

  6. Wayne Litton

    Good point John lets hope QF metal stays on the UK route.

  7. Kneelo67

    On the subject of Qantas International ‘s turnaround, Qantas’s 1H13 indicated international capacity decreased by 7% (offset by a small rise in B744 and A380 capacity). With a 7% reduction in capacity, Qantas International ‘s total costs (fixed + variable) will only decline by the reduction in variable costs, which perhaps amount to 70% of costs or 4.9%. Whilst Qantas reports a 3.4% decline in Comparable Unit Cost (Net Underlying Unit Cost adjusted for the impact of industrial action, Boeing settlement and carbon tax and changes in average sector length) we don’t know what this really means in terms of Qantas Domestic, International and Jetstar’s unit costs. What we know is that at the Group level, the amount of capacity (ASKs) increased 1.7% so that overall costs decrease is going to be less than a 3.4% decline as costs are being spread over a greater number of ASKs. In any case, the decline in Qantas International’s costs due to lower operating costs and unit costs improvements doesn’t sum to 9.1%.

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