tip off

The $450m downgrade that sent Qantas shares diving

Qantas shares went into a power dive to a record low of $1.20 in early trading this morning after it slashed its profit guidance as much as 90% to $50 million-$100 million in the current financial year on an underlying EBIT basis compared to a $552 million profit on the same basis in the previous year.

The group told the ASX it expected the Qantas international operation to lose $450 million in the full year that ends at the end of this month on an EBIT basis compared to a claimed loss of $216 million EBIT in previous year.

This last-minute and drastic downward revision in the Qantas guidance shocked investors, and overshadowed the announcement by Virgin Australia that alliance partner Etihad Airways based in the UAE had bought 3.96% of its stock on the market.  (Virgin Australia initially lost two cents to 41 cents but had risen by half a cent by the middle of the trading session.)

Qantas also said its combined domestic brand and Jetstar franchise earnings would reach more than $600 million on an underlying EBIT basis, which while described as “strong” by the company is only a modest improvement on what these parts of its business made a year earlier.

It blames higher fuel prices, the situation in Europe, and structural issues in the Qantas group involving its international operations, which will be split into a separately managed division  from Qantas domestic brands from July 1, as well as $100 million as the cost of industrial action without mentioning that these include the consequences of its decision to ground the airline without warning last year to force an end to protected industrial action in Fair Work Australia.

The detailed and lengthy Qantas statement to the ASX raises some very serious issues for investors, including how the company is being managed and why such an ambush in terms of poor performance should be staged so late in the financial year, and why is departs so fiercely from a consensus figure of an underlying EBIT result of $285 million for this year reached by the analysts who benefit from detailed briefings by the airline group.

In context, Qantas has recently promised to respond to the success of Virgin Australia in the domestic market with a massive increase in scheduled flights by Jetstar and Qantas and a vow to cut fares to protect its market share.

In the course of the current financial year it has also slashed its flights to London by half, deferred the delivery of two more Airbus A380s, and shrunk its aged 747 fleet while embarking on a refurbishment of the remaining jumbos, which cannot compete with newer jets in terms of maintenance costs or fuel burn.

Qantas group CEO Alan Joyce also trumpeted a new Asia-based, low-cost but premium single-aisle airline that although minority owned was going to generate enough profits to allow the re-expansion of the Qantas full-service, long-haul operations in three, five or even initially, within the first half of financial year 2013 depending on which of his  many interviews on the topic was relied upon.

That project failed to get off the ground, and was followed by the announcement of a Jetstar Hong Kong venture with China Eastern Airlines, which was supposed to begin operations in the middle of next year but is now experiencing regulatory approval headwinds and is officially more likely to begin services by the end of 2013.

Last month Qantas shed Jetstar group CEO Bruce Buchanan, who left to join his wife’s cosmetics company, and also announced the departure of senior Qantas manager Rob Gurney, both of whom had been mentioned within the group as potential replacements for Joyce.

It is time for Joyce to give more analyst briefings, and hopefully shed light on such unaddressed issues in this morning’s guidance as to exactly what he means by a continued strong performance by the Qantas loyalty program, in figures, and why it took until the very last moment to drop such a devastating profit warning on the market.

The shareholders have not been paid any dividends during his tenure as Qantas CEO.

4
  • 1
    zut alors
    Posted Tuesday, 5 June 2012 at 1:53 pm | Permalink

    …and why it took until the very last moment to drop such a devastating profit warning on the market.’

    Ben, we know his modus operandi is to use the element of surprise. It’s a tactic which inevitably leads to trouble but it appears he can’t help himself.

  • 2
    T2
    Posted Tuesday, 5 June 2012 at 7:00 pm | Permalink

    Is Mr Joyce QANTAS’ own Sol Trujillo - the spiv brought in from overseas who does not know the culture of either his clients or his company, and who ends up driving his company’s shares through the floor. Mr Borghetti must be rubbing his hands with glee at Joyce’s handling of Virgin Australia’s major competitor.

  • 3
    michael r james
    Posted Tuesday, 5 June 2012 at 11:08 pm | Permalink

    There is method in the madness; well some of it that can be distinguished from incompetence.

    Here is a comment from a similar story:

    Many expenses incurred by Jetstar are paid for by Qantas.
    Qantas pays for all of Jetstar’s gates at Melbourne Int’l and some other airports. Qantas pays for many of Jetstar’s check-in desks at Sydney Int’l and other airports. Most rebooked seats on a Jetstar flight (in the event of cancellation, overbooking etc) are booked on a Qantas flight, with Qantas picking up the tab and Jetstar keeping the revenue. When a Jetstar plane needs to be briefly replaced due to breakdowns/unscheduled maintenance, it is a Qantas plane that replaces it, with Jetstar not required to pay for this. When Qantas transferred the profitable Singapore-Darwin-Cairns route to Jetstar, the deal involved Qantas paying $6 million to Jetstar for the privilege (yes, this is as stupid as it sounds). Qantas pays Jetstar over $6000 for every Jetstar A330 departure for freight, whether a single parcel is carried for Qantas or not (that’s over 80 departures a week). Qantas manages and pays for Jetstar’s treasury, government affairs and legal services.
    These are based primarily on insider reports, but have been reported in the media and tabled in parliament, and refused comment on by Qantas management. A basic expense audit of Qantas’s accounting books could settle a lot of the speculation of the dishonesty in reported expenditures and profits, and determine just how unprofitable Qantas’s international business is.
    Jay South Yarra June 05, 2012, 12:13PM

  • 4
    Mike Smith
    Posted Wednesday, 6 June 2012 at 12:54 pm | Permalink

    @T2: Yes, and yes. Deciding which airline to fly at the moment doesn’t even require thought.

    You have to wonder at the motives of trashing the Qantas name in favour of Jetstar.

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