Qantas Suffers Worst Loss Ever; Frequent Flyer Program is Bright Spot

Fuel costs, aircraft write-downs and competition cited as main reasons for record losses; frequent flyer program strongest performing division

Citing smaller passenger loads within Australia, rising fuel costs and a write-down on international aircraft, Qantas recently reported their worst loss in the history of the company. The company reported a total loss of $2.84 Australian Dollars ($2.6 billion United States Dollars), compared to a profit of $2 million AUD ($1.86 million USD) in the previous fiscal year. Despite the loss, the frequent flyer program, Qantas Points, will remain as part of the company.

The biggest factor in the significant losses came from the non-cash write-down of their aging international fleet, including the Airbus A380 and Boeing 747. Fuel costs also drove the final loss numbers higher. According to reports from Business Insider, the Australian flag carrier spent $4.5 billion AUD ($4.2 billion USD) in underlying fuel costs.

In addition to the write-down and fuel crunch, Qantas is feeling the pressure from increased air traffic competition. Virgin Australia and Singapore Airlines have both increased their presence in the country. As a result, airfare price wars ensued over the past year, leading to reduced passenger demand and aircraft loads.

As a direct result of the loss, the airline has spun off their international division as a separate corporate entity, creating two independent operating companies. However, Qantas remains dedicated to keeping their loyalty division, Qantas Loyalty, within the company. The Australian reports the loyalty program was responsible for $286 million AUD ($267 million USD) of profit last year before taxes, making it the highest performing unit. According to Business Insider, some analysts anticipated the loyalty program would be at least partially spun off, similar to the move Air Canada made in 2012 as they came out of bankruptcy.

Though the loss is the worst for Qantas in 94 years of operations, company officials remain optimistic that the hardest difficulties are now behind them. “There is no doubt today’s numbers are confronting, but they represent the year that is past,” Qantas CEO Alan Joyce told AFP. “We expect a rapid improvement in the group’s financial performance – and a return to underlying profit before tax in the first half of FY15, subject to factors outside our control.”

To soften the long-term blow, Qantas has installed a number of cost-cutting measures. The BBC reports that 5,000 jobs were announced for elimination in February, and other reduction measures have been implemented as well. This includes deferred aircraft deliveries, eliminated routes and stunting growth of Asian subsidiary Jetstar. Qantas also formed an alliance with competitor Emirates last year, in order to drive more traffic on kangaroo-branded planes.

The company’s ultimate goal is to reduce costs by over $2 billion AUD ($1.87 billion USD) over the next three years. With 2,500 jobs already eliminated and access to foreign capital increased through legislation, company officials are confident that their turnaround can begin immediately. “While the numbers are dramatic, the reality is Qantas is a strong company and seems to be positioning itself for a better future,” Joyce told AFP. “We are removing costs to drive earnings growth. With our structural review complete, we can move forward with certainty.”

Regardless of the record losses, investors are rewarding the company for their announced turnaround plan. Qantas stock price has increased since Wednesday, August 27, closing near their three-month high on Thursday.

[Photo: iStock]