Quantas Considers Low Cost Operation

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Qantas Considers Low Cost Operation To Halt Slump
Thursday August 21, 5:39 am ET
By Lilly Vitorovich, Of DOW JONES NEWSWIRES


SYDNEY -(Dow Jones)- Qantas Airways Ltd. Thursday said it dived to a second half net loss of A$9 million, unveiling plans for a low-cost domestic operation to safeguard an essential part of its profit base.
While the Australian flag carrier reported its first loss since being privatized in 1995, Qantas still emerged with a solid full year profit due to a record first half performance.

Net profit fell 20% to A$343.5 million in the year ended June 30, underpinned by a first half contribution of A$352.5 million.

The annual result compared with the 2001-02 profit of A$428.0 million but didn't surprise analysts who had been warned earnings would fall as the war in Iraq and the SARS epidemic reduced traffic numbers and capacity levels.

Qantas said its Australian Airlines operation, which targets Asian tourists and began flights last October, was profitable until March but dropped to an annual operating loss of A$14.7 million.

Sales rose 3.7% to A$11.4 billion, with Qantas and other airlines offering cheap seats for much of 2003 to boost demand.

"After a record first half we saw all sections of our business come under severe strain in the second half, with inbound visitors to Australia falling by more than 20% in some months and by up to 45% on some Asian routes," chief executive Geoff Dixon said.

Dixon acknowledged the aviation market is starting to improve and said Qantas expects a better performance this year, without providing firm earnings guidance.

"What I'm seeing and what we are seeing is a positive comeback in the market both domestically and internationally based on where we were six months ago," he said.

"Our position is quite robust, we need a recovery in the international market, but we are prepared and we have the product to take part in that recovery when it comes."

Responding to the worst period in the history of the aviation sector, Qantas is matching its regional rivals including Singapore Airlines Ltd. and Cathay Pacific Airways Ltd. with plans to restructure operations and cut costs by about A$2 billion over the next two years.

Dixon also said he expects the strategic alliance between Qantas and Air New Zealand Ltd. will come to fruition one day, despite current objections from competition regulators in Canberra and Wellington.

Board To Decide On New Unit In November

Dixon said the Qantas board will decide on plans for a low-cost airline in November, tackling the threat to its domestic market share posed by Virgin Blue, a joint venture between Richard Branson's Virgin Group and transport company Patrick Corp. (A.PRK).

"I think this current year is rather important, I think it's a transitional year...," he said.

Dixon said the "line in the sand" was now in sight as Virgin Blue increases its competitive position.

"We are very close to it," he said. "We believe anything between 65% and 70% is what Qantas must defend, and we are going to defend it."

Dixon said the new low-cost operation will have separate management and be conducted on a standalone basis.

"We are not in the business of starting airlines unless we can make money," he told reporters.

Analysts said Qantas shares rose sharply due to the company's determination to protect its domestic position as well as further details about its cost cutting program.

The stock rose 6.5% or 20 cents to A$3.30 on turnover of about 37 million shares, more than four times its daily average.

ABN AMRO aviation analyst Bruce Low said the plan to launch a low-cost domestic carrier is necessary as the local operation reported a 35% drop in annual pre-tax earnings to A$223 million. Earnings before interest and tax from its international operations, which include its single-class international carrier Australian Airlines, rose slightly to A$206.9 million from A$202.8 million.

"Qantas is losing passengers to a low-cost model, so it makes sense that they lose passengers to their own low-cost model than to Virgin Blue," ABN AMRO's Low said.

Virgin Blue played down the threat of a new entrant.

"Virgin Blue is very flattered that Qantas seems to have changed its opinion, considering a few years ago they didn't think we'd survive, yet alone prove profitable," said a Virgin Blue spokeswoman.

Qantas also said it plans to protect and grow its international market share with the introduction of cocoon-style sleeper seat 'Skybeds', which will be installed on all 30 of its 747-400s from next month.

ABN AMRO's Low said the 'Skybeds' will help Qantas compete more effectively for the corporate market against British Airways Plc. and Singapore Airlines.

British Airways hasn't indicated any plans to quit its 17% stake in Qantas, Dixon said.

-By Lilly Vitorovich; Dow Jones Newswires;

61-2-8235-2963; [email protected]

-Edited by Ian Pemberton
 
In other QF news.....

Qantas Opposed To Singapore Air Flying Australia-US Route

Friday August 22, 6:24 am ET


SYDNEY -(Dow Jones)- Qantas Airways Ltd. Chief Executive Geoff Dixon said Friday he is opposed to any plan by Singapore Airlines Ltd. to begin flying between Australia and the U.S.
"We don't think it's right. And we don't think there's an equivalent trade-off for Qantas in such an arrangement," Dixon said during an interview on Australian Broadcasting Corp. television.

http://biz.yahoo.com/djus/030822/0624000200_2.html