Fuel bill hits Qantas profit

Geoff Dixon

Qantas Airways, the world's ninth-largest passenger airline by market value, yesterday posted a 10 per cent fall in first-half profit on a soaring fuel bill and the cost of cutting 600 workers, and warned of more job losses.

Qantas said it had already identified two-thirds of the A$1.5 billion ($1.64 billion) in savings for its 2007-2008 restructuring plan, including setting up stand-alone engineering businesses to compete against providers in North America, Asia and Europe.

Analysts said Qantas and rivals such as Japan Airlines had to cut maintenance costs and then pick up third-party engineering contracts to be able to compete against centres such as China, where costs are about 20 per cent lower.

"The Chinese have got to the stage where they have enough skilled people to do this work - they've been getting to that for a long time with joint ventures - and they're now picking up larger amounts of third-party work," said Peter Harbison, the managing director of the Centre for Asia-Pacific Aviation.

Shares in Qantas, which has about 6900 engineering staff, fell as much as 2.3 per cent yesterday after the company said its net profit for the six months ended December 31 declined to A$352.6 million from A$390.2 million a year earlier.

Analysts' first-half profit forecasts had ranged from A$354 million to A$360 million, according to three brokerage reports.

The price of jet fuel traded in Singapore jumped nearly 60 per cent in 2005. Qantas said higher fuel prices in the July-December period increased its underlying fuel costs by A$689.8 million before hedging benefits of A$214.7 million.

Qantas had warned in August that its fiscal 2006 earnings would fall due to soaring fuel prices, after it posted a record 2005 profit on the back of cost cuts and higher fare yields.

Qantas said its three-year A$1.5 billion "sustainable future" plan had so far achieved A$1.27 billion in savings. That plan finishes in June. The company announced in August last year that it would seek a further A$1.5 billion in savings over 2007-2008.

"As we make these changes, job losses across various areas of the business will be inevitable," CEO Geoff Dixon said.

Qantas has about 38,000 employees.

The airline, which had a 5.4 per cent rise in its first-half average fare yield, approved in December the international expansion of its low-cost domestic airline Jetstar to fly to cities within six to 10 hours of Australia by next January.

Dixon announced a new executive structure to allow senior managers the "freedom to pursue" business developments and said that over the next two years the company would also develop two distinct and competitive brands - Qantas and Jetstar.

"The Jetstar strategy involves expanding the domestic network, launching international operations and bringing the Jetstar Asia operation closer to the Jetstar Group," he said.

Part of that plan included the decision two months ago to order 45 twin-aisled Boeing B787 jets, with options for 20 more, valuing the total deal at about A$13 billion.

Qantas owns 44.5 per cent of the holding company that owns Singapore-based Jetstar Asia. The other major owner is Singapore state firm Temasek Holdings.

- REUTERS