The Labor Party’s weekend announcement that it would soften its stance on Qantas ownership restrictions suggests shadow transport minister Anthony Albanese may be girding his loins for another round of public debate on the need for some kind of government leg-up for the airline.
It’s probably no coincidence his concessions have been heralded towards the end of a financial year in which the airline’s performance has continued to deteriorate and on the eve of the matter being put to the Senate.
Stranger still, it coincides with speculation in the industry that Qantas may be set to release a loss much larger than anticipated.
Following a $ 250 million loss in the first half of the year the current analyst consensus is for a loss of around $ 700 million on an underlying basis. On top of this they are expecting about $ 200 million-$ 400 million of one-off losses – most accounted for by the cost of making 2200 jobs redundant by June 30, 2014. This would boost the airline’s statutory loss to more than $ 1 billion. Some analysts have this number as high as $ 1.2 billion.
But over the past week the chatter that additional write-downs will be made – particularly on aircraft – has led to a view that even $ 1 billion could be well shy of the year-end underlying loss and that $ 1.5 billion could be closer to the mark. Qantas wouldn’t be drawn on the speculation.
That kind of headline result may not faze analysts who focus on the underlying profit but it would send market traders into a frenzy and place significant pressure on Canberra.
It could also prompt ratings agencies to lower the airline’s credit rating another notch. Both Moody’s and Standard & Poor’s lowered the Qantas debt to junk status six months ago in response to the airline forecasting a loss of up to $ 300 million in the first half of 2014.
Meanwhile, traffic statistics released on Monday by Qantas showed pretty mixed results that clearly disappointed the market and sent the shares down 5.2 per cent. In May Qantas mainline domestic load factors fell by 2.9 percentage points to 70.4 per cent and Qantas mainline international rose 1.6 percentage points against the same month last year. The big concern was Jetstar International whose load factor fell 4.6 percentage points to a load factor of 68.8.
Whether Qantas delivers this level of loss in August when it announces the June 2014 result will be largely determined by its board and its external auditors.
The chief executive, Alan Joyce, could decide to clean out the asset cupboard as he attempts to restore the airline to profitability.
He could also press the button on the partial sale of the airline’s hugely profitable frequent flyer program.
Over recent months we have already seen Qantas take steps to fortify its balance sheet by replacing shorter-term debt with longer-dated debt.
More significantly, Qantas announced that from this month (July) it would abandon its domestic capacity war with Virgin, which had been the primary culprit in the losses of its domestic mainline operation.
Until now Qantas has maintained it would adhere to its long-held stance to retain a 65 per cent market share to ensure it optimised its network and frequency advantages.
But the pressure this strategy was placing on its earnings, combined with an influx of capacity from offshore airlines competing with Qantas, convinced the board it needed to rub out the line and redraw it closer to 60 per cent.
We won’t see any of the impact on the Virgin/Qantas truce for a while yet, as there is still plenty of spare capacity that needs to be soaked up before prices recover.
The road to financial recovery will be a long one for both airlines. Late last year Qantas sought government assistance in the wake of its deteriorating performance – a plea that received some support from Treasurer Joe Hockey but was ultimately killed off by Prime Minister Tony Abbott, who settled on a plan to repeal the Qantas Sale Act that restricts foreign ownership to 49 per cent.
Labor is now holding to the 49 per cent foreign ownership, but it is prepared to scrap the 25 per cent ownership limit by an individual investor and a foreign airline owning more than 35 per cent. But Albanese will not support any elimination of requirements that at least two-thirds of the Qantas board must be Australians, that Qantas’ head office must remain in Australia, and that the majority of the airline’s international maintenance must be conducted in Australia.
While this places some limits on Qantas’ cost-cutting, it will open the doors to allowing overseas airlines to take a greater investment in Qantas. However, it will not come close to putting its ownership structure on the same field as Virgin whose share register is overwhelmingly dominated by three offshore airlines, Air New Zealand, Singapore Airlines and Etihad.