It’s been a bizarre week for Qantas, which delivered great news for investors on Monday with a profit upgrade for the first half of 2014-15 that sent its shares rocketing almost 15%, but has been beset by a horror stretch of five mid-air turnbacks due to mechanical and electrical faults that could easily have turned serious — although as Crikey aviation reporter Ben Sandilands pointed out, one of the unscheduled landings was an entirely appropriate response to a warning light.

Are the two phenomena related? That is, could the same cost cuts that have spurred a turnaround in profitability at the airline also be driving the spate of air safety incidents? This is not a trivial question, given Qantas’ safety track record is the best thing going for the world’s second oldest airline. Only a year ago chief Alan Joyce was warning that Qantas faced an existential crisis warranting a government bail-out, and his strategy since the federal government rightly knocked him back has been what we might loosely call “cutting to greatness”, with $2 billion in savings over three years and 5000 jobs cut from a 33,000-strong workforce.

On Tuesday, after the first three incidents, Transport Workers Union national secretary Tony Sheldon said major changes at Qantas involving cuts to the workforce and outsourcing of staff were “having an effect”.

“Maintenance standards have dropped since the savage cuts were made with lower training required for the outsourced workforce both in Australia and overseas,” Sheldon said. “Qantas now has less direct control over the people whose job it is to ensure their fleet is operational and safe. An efficient airline needs to be profitable with a well-maintained aircraft fleet, but this appears to be wanting after what has happened in the last 24 hours.”

Qantas rejects that, of course, and a company spokesperson pointed Crikey to the Airline Ratings website, which in January ranked Qantas safest of 448 airlines around the world, with no fatalities in the jet era since 1951.

But the Airline Ratings don’t include hard numbers on incidents like turnbacks or in-flight engine shutdowns, although these are monitored by airlines and manufacturers. Joyce told reporters that Qantas had half the number of turnbacks as other airlines flying Boeing 737s, for example (one of the planes turned back this week), but Qantas could not provide the Boeing figures yesterday to back this up.

A middling position seems reasonable: (a) Qantas’ turnaround in profitability is neither as spectacular or as assured as the company and the market suggest; (b) the turnaround that is underway is not driven mainly by Joyce’s cost-cutting, as he claims, but by falling fuel prices and the end of the damaging capacity fight he picked with Virgin; and (c) this week’s run of mishaps aside, there is no hard evidence that cost cuts have reduced safety at Qantas — it is probably too soon to say, though, and proof could still emerge.

Qantas attracted shocking headlines in August when it unveiled a $2.8 billion statutory loss after tax, but most of this was non-cash write-downs — the underlying loss before tax was $646 million. Comparing Monday’s upgraded forecast of a first-half underlying profit of $300 million to $350 million for 2014-15, with the underlying loss of $252 million a year ago, gives a truer impression of the turnaround: half a billion dollars gained represents 3% of annual revenues of some $15 billion. Joyce has insisted that his cost cuts are responsible for the bulk of the first-half gain, and given there is a delayed effect from both currency and fuel price movements under rather opaque hedging contracts, it is hard to argue. What is clear is that the oil price could easily move against Qantas again. Joyce warned the same himself this week and expressed surprise at the speed of his own turnaround, which does not inspire confidence and only underlines that there was too much crying wolf about the Qantas crisis earlier this year. The fact that Qantas is clinging on to fuel surcharges despite falling prices shows shows the airline is not out of the woods, notwithstanding a raft of broker upgrades this week.

It is hard to argue Qantas is a particularly attractive long-term bet for shareholders, particularly given the stock has doubled already this year, competition remains fierce, and Jetstar Asia is a dead weight.

Value fund manager Roger Montgomery refuses to invest in airlines, full stop, after he wrote a published study of the accounting treatment of aircraft. The paper showed how airline profits were routinely overstated because the depreciation of the expensive, long-life assets never covered the replacement cost. Instead of depreciating aircraft in a straight line, airline accounts should make provision for the cost of new aircraft.

“Reported profits would be much lower and there would be no dividends,” Montgomery told Crikey.

Qantas shares have enjoyed a strong run this year, but like many companies they are still well short of their pre-GFC peak — when the ill-fated Airline Partners Australia privatisation bid pushed the stock up — and over a decade they have gone nowhere.

“This is a business whose total market capitalisation is less than the capital that’s been injected by shareholders over the last 15 years,” Montgomery told 2GB’s Ross Greenwood last week. “They’ve destroyed wealth.”

“Guess what the oil price has been here before in the last ten years, and now everyone says this is promising for Qantas. Nothing’s going to change for this business. It’s like putting a lighter jockey on a horse and saying, ‘oh good, that horse is going to win’, forgetting there’s a lighter jockey on every other horse!”

Peter Fray

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