Qantas' future: A nosedive or a smooth landing?

June 22, 2012, 12:00 am Yahoo7 Finance Yahoo7

Another week, another distress call from Australia’s flagship carrier – Qantas’ troubles seem never-ending.

On Friday, Qantas said it feared going under by Arab airline Etihad’s deal with rival Virgin.

The Flying Kangaroo warned the airline could go under if the state-owned Etihad is allowed to buy enough of a share of Virgin Australia to allow it to start undercutting Qantas on its profitable domestic routes.

On Thursday, the airline cut 108 maintenance jobs saying the “consolidation was necessary to improve productivity”.

Rumours of a possible hostile takeover also hit the market last week and the airline confirmed it had appointed an army of bankers in a preemptive strike on potential “private equity vultures” keen on a takeover.

Related: Qantas fears it could go under
Related: More jobs go at Qantas

While Qantas chief executive Alan Joyce denied any takeover attempts at the time, insisting the shareholders were backing his strategy, speculation on the airline’s future continues to mount.

“They know that the company has been oversold (it’s now at 40% of book value), the company has a huge amount of assets, has a very profitable domestic operation, a very profitable Jetstar operation and a very profitable frequent flyer business,” Joyce emphasised.

“We have a clear strategy for the business endorsed by the Qantas board and we are focused on delivering it. The last thing people want to do is people overreacting to the situation and making wrong decisions,” Joyce added.

Which way is Qantas headed?

With a mix of negative factors weighing in on the carrier, Qantas Group fears the carrier might suffer from a post-tax loss for the first time since its public listing in 1995.

It announced in a profit update that its profit before tax in FY2011/12 ending 30th June will fall by 90 per cent to A$50-100 million. 

Related: Qantas 'pocketed millions in excess fee'
Related: Outrage as Qantas slashes 500 jobs

The grim announcement sent its shares tumbling by 35 per cent to a record low of 96 cents over the next week. Nearly $1 billion were wiped out from its market capitalisation that week.

According to a Bloomberg report, Qantas is trading at an unprecedented 61 per cent discount and is undervalued by nearly $3 billion.

The airline is now focusing on trimming its operations and shedding any extra flab. On May 22, it announced a spilt in its international and domestic business effective July.

“Qantas Domestic and Qantas International face very different situations. Qantas Domestic is strong and profitable. We are seeing the most sustained levels of high customer satisfaction on domestic services since 2004, and we are the airline of choice for corporate Australia,” Alan Joyce commented

Each of the two businesses will have its own chief executive, and will report its financial results separately, Qantas said on Tuesday.

The restructure will bring about several changes to the airline's executive team, including the departure of Jetstar boss Bruce Buchanan.

On June 18, the airline also admitted its international business arm was suffering thanks to record fuel prices, the global economic outlook and natural disasters.

Speaking at the Australian Tourism Exchange 2012 in Perth, Qantas executive manager of global sales Stephen Thompson said factors such as the European debit crisis were all making things harder for the airline, ETravel Blackboard reports.

The way forward

Aspire Aviation
says that an acquisition by a private equity fund or coalition of investors such as Alan Joyce’s predecessor Geoff Dixon and Jon Singleton may not be in the best long-term interest in turning around Qantas International.

An analysis published on Aspire Aviation suggests Qantas should do more to address its network and fleet issues to increase profitability and focus on tapping into the robust Chinese market.

With its international business suffering and the domestic market getting more competitive, experts say the way forward for Qantas  is to implement a strategy that combines cost reductions and revenue growth.

But will the carrier be able to strike the fine balance? Only time will tell.

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