OREANDA-NEWS. The Qantas Group announced a market update, accelerated cost reductions and a capital expenditure and structural review, in response to fundamentally changed market conditions.

Market update

The Group expects to report an underlying loss before tax in the range of USD 250 million to USD 300 million for the six months ending 31 December 2013. Trading conditions saw a marked deterioration in November in particular, with both passenger loads and yields below the already negative trends for the year to date.

The Group can also provide the following guidance for the first half of FY14:

Group capacity is expected to increase by 1.1 per cent in 1H FY14 compared to 1H FY13. Group Domestic capacity (comprising Qantas Domestic, QantasLink and Jetstar Domestic) is expected to increase by 1.9 per cent in 1H FY14 compared to 1H FY13;

Total domestic market capacity is expected to increase by approximately 2.7 per cent, driven by estimated competitor capacity growth of 3.9 per cent;

Group yield (excluding the impact of foreign exchange movements) is expected to be approximately 3.5 per cent lower in 1H FY14 compared to 1H FY13, largely due to increased capacity in the domestic and international markets;

Group loads are expected to be 1.6 percentage points lower in 1H FY14 compared to 1H FY13; and

Underlying fuel costs (excluding the impact of the carbon tax) for 1H FY14 are expected to be approximately USD 2.27 billion, an increase of USD 88 million from 1H FY13.

The outlook for the second half of FY14 remains volatile and, given the uncertainty in global economic conditions, fuel prices and foreign exchange rates, it is not possible to provide further guidance at this time.

Qantas CEO Alan Joyce said the circumstances demanded urgent action.

“We will do whatever we need to do to secure the Qantas Group's future,” Mr Joyce said.

“The challenges we now face are immense - but we will overcome them and we will continue to build a stronger and better Qantas for Australia.

“Since the Global Financial Crisis, Qantas has confronted a fiercely difficult operating environment - including the strong Australian dollar and record jet fuel costs, which have exacerbated Qantas' high cost base.

“The Australian international market is the toughest anywhere in the world.

“Our competitors in the international market, almost all owned or generously supported by their governments, have increased capacity to pursue Australian dollar profits, changing the shape of the market permanently.

“Since early 2012, there has also been an unprecedented distortion of the Australian domestic market, with Virgin Australia's strategy to seek majority ownership and massive financial backing from foreign government-owned airlines.

“This foreign government capital has been used to finance dramatic increases in domestic capacity, with profound implications for the future of Australia's aviation industry. In November, Virgin signalled its intention to continue its strategy, which is designed to weaken Qantas in the domestic market, with a USD 300 million-plus injection from its foreign owners.

“The uneven playing field in Australian aviation is being tilted further.

“We cannot and we will not stand still in these extraordinary circumstances.

“As we take these urgent actions, we will continue to take the fight to the competition and strengthen our leading position in the domestic market, and we will continue the turnaround of Qantas International.”

Accelerated cost reduction program

The Group will make accelerated cost reductions across all areas of the business, to achieve total cost savings of USD 2 billion over three years.

The existing Qantas Transformation program will be accelerated, with an expanded mandate to achieve these targets, including the following steps:

Head count reduction of at least 1,000 positions within 12 months, with an ongoing review

CEO and Board pay cut

Pay freeze and no FY14 bonus for executives

Review of spending with top 100 suppliers

Network optimisation and improved fleet utilisation

Further overhead reductions

Mr Joyce said the Group had already made significant progress in becoming leaner and more efficient.

“We have reduced the Group's unit costs, excluding fuel, by a total of 19 per cent since FY09, including by 5 per cent in FY13 (see Appendix 2).

“But these actions are not enough to deal with the current situation.”

Capital expenditure and structural review

Given the deterioration in earnings, the Group no longer expects to generate positive net free cash flow in the current financial year.

The Group will conduct a review of all planned capital expenditure to achieve further substantial reductions to ensure that the business generates positive net free cash flow from FY15.

This continues the deep cuts to capital expenditure already achieved since 2011.

The Group will also launch an immediate review to identify structural changes that could potentially unlock sources of capital and value for shareholders. No options will be excluded from the review.

Mr Joyce said the Group would take all steps necessary to respond to the toughest market conditions it had ever faced.

“We will focus relentlessly on cutting costs and improving productivity, while maintaining our competitive advantages as a business,” Mr Joyce said.

Australia's best airline for customers

Mr Joyce said customers would remain at the heart of the Group's strategy, with a continued focus on service in all areas.

“We have Australia's best airline and loyalty program, with nearly 10 million loyal frequent flyers,” Mr Joyce said. “Over the past two years, we have developed a global network based on strategic alliances, including the ground-breaking Emirates partnership and expanding relationships in Asia.

“The Qantas customer experience is the best it has ever been. After an intensive fleet renewal program, our average passenger aircraft age is now below eight years, the youngest in two decades, and we have revitalised service with a focus on training and new technology. Customer satisfaction is soaring, with record scores in both the international and domestic markets.”

Discussions with the Australian Government

“As we work through our cost reductions, capital expediture and structural review, no options will be off the table,” Mr Joyce said.

“Political leaders recognise Qantas' strategic importance, its critical role in providing essential air services, and the benefits to Australia of a strong and viable national carrier.

“None of the measures being discussed with the government would alleviate the need for us to take the comprehensive actions we have announced today. Government action will, however, be key in enabling us to keep competing effectively on a level playing field.”