Qantas Airways plans to slash the cost base of its ailing international business by almost one-third over the next three years, in a move that has sparked speculation of further capacity cuts and job losses.
Chief financial officer Gareth Evans this month revealed “$1 billion or thereabouts” of the company’s $2 billion cost savings target would come from its international division.
The division had controllable costs – which exclude fuel, depreciation and operating leases – of about $3 billion last year, according to analyst estimates.
Deep cuts: Gareth Evans. Photo: Ben Rushton/Getty Images
“For us, it’s about controlling what we can control, and pulling out $1 billion worth of costs [and] continuing to improve the network and the product quality for our customers is absolutely what we can control,” Mr Evans said at the CAPA Australia Pacific Aviation Summit.
Qantas, including Jetstar, has a total controllable annual cost base of $11.6 billion, so the planned cuts will hit the international division disproportionately.
The company expects inflation will erode some of the cost savings, meaning $1 billion of cuts to international would equate to actual cost cuts of about $730 million by the end of the third year.
Of the $2 billion target for the business as a whole, Qantas has said it will cut $800 million from its cost base by June next year and the other $1.2 billion of savings are expected over the following two financial years.
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 $750 million, but the bottomline loss - including restructuring charges and impairments - could surpass $1 billion.
Qantas provided details in May of several of its planned cost-cutting initiatives, including $100 million 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 $375 million. If overhead costs and engineering costs are allocated based on the kilometres flown by the international fleet, about $200 million 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 $600 million of its $2 billion of savings would come from fleet, utilisation and network changes, and so far only $155 million 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 $2 billion 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.
An analyst said he struggled to comprehend how Qantas could cut $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.
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”.
Qantas’ 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.”
Morgan Stanley analyst Nicholas Markiewicz told clients last month that Qantas’ previous cost-cutting programs had not translated into margin improvements as competitors also were 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.