For a company with a broken business model, Fairfax Media’s half-year accounts in February showed it was in surprisingly good shape — profitable, with net cash on its balance sheet, arguably undervalued — making the fresh jobs cuts announced yesterday somewhat surprising.

Fairfax shares leapt 20% to hit the $1 mark after the December interim result, which notably included the first year-on-year increase in underlying earnings on a like-for-like basis since June 2010.

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At the briefing, chief executive Greg Hywood offered congratulations all round on the turnaround and said “we can’t say we have turned the corner, but let me say we are certainly accelerating through it”.

Hywood also gave what counted for an upbeat assessment of trading conditions in the current half-year to date — revenue shrinkage was slowing, from 5 % decline a year ago to 3% now — and there does not appear to have been a dramatic deterioration in the advertising market since.

Hywood’s presentation noted that Fairfax “continued to identify further operational cost savings with the Fairfax of the Future program [announced amid heavy job cuts in 2012] on track to deliver $120m of cost benefits in 2013-14”.

It is not clear whether that figure included the savings expected from yesterday’s job cuts — estimated in today’s Sydney Morning Herald at between $5 million and $6 million a year — but there is no doubt they are tiny for a business with a cost base of $1.5 billion, which only underlines questions about the strategy for the deepening cuts to journalist staff, given the risk of damage to staff morale and quality of content.

The sharemarket has barely reacted to the announcement, with Fairfax off 3c this morning, and analyst opinion is mixed. One media analyst speaking off the record questioned whether the new redundancies were part of a continuing plan. “Here’s a novel idea!” he said. “Perhaps the ad market is just that bad, the numbers are that bad, that this is a necessary evil.”

He says investors are starting to question the wisdom of continued cuts given they only provided a one-off benefit, compared to investing in content: “What kind of multiple do you want to put on cost-cutting compared to revenue growth, because $6 million worth of cost-out seems a little bit irrelevant?”

Credit Suisse media analyst Fraser McLeish told Crikey the cuts were an ongoing part of the Fairfax of the Future rationalisation. “We’re expecting them to keep on looking to find savings, across all areas. It has to continue. They’ve still got declining trends in terms of print advertising. These businesses are still under pressure from a top-line perspective — it’s not just Fairfax. News Corp has to do it, too.

“These businesses are under revenue pressure, and you can’t run them at losses. They’ve got to find new revenue streams and manage their cost base really carefully.”

Senior Fairfax editor and union rep Stuart Washington is aware the traditional media business remains under pressure and does not doubt Fairfax management “need to cut, and they need to cut more”. Cuts would continue, he said, “until digital revenues replace print revenues, and that hasn’t happened yet.”

But he was surprised at the lack of consultation with staff this time around, from a management that had been so adept at negotiating 150 redundancies in 2012: “We need to to be heard on the future of our newsroom.”

“The rationale hasn’t been spelled out effectively. We get the overall picture, but the overall urgency hasn’t been spelled out to us. Why do cuts have to fall so heavily on the editorial side, if you say that’s at the core of what you do?”

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Peter Fray
Peter Fray
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