Business | Aviation

Qantas cancels order for 35 dreamliners after annual loss

$8.5b order scrapped because of ‘lower growth requirements’

  • Bloomberg
  • Published: 19:30 August 23, 2012
  • Gulf News

  • Image Credit: REUTERS
  • Qantas Chief Executive Officer Alan Joyce at the company’s full year results news conference in Sydney on Thursday. Qantas Airways cancelled orders for 35 planes on Thursday, delaying delivery of its first Boeing 787-9 aircraft as it seeks to cut costs.

Sydney: Qantas Airways Ltd cancelled an order for 35 Boeing Co 787-9s after posting its first annual loss in at least 17 years because of higher fuel costs, labour disputes and rising competition on international routes.

The order, worth $8.5 billion (Dh 31.22 billion) at list prices, was scrapped because of “lower growth requirements in this uncertain global context,” Chief Executive Officer Alan Joyce told reporters in Sydney. The airline, Australia’s biggest, reported a loss of A$245 million ($258 million) for the year ended June 30.

Qantas, based in Sydney, rose the most in about a month on the city’s stock exchange as the Dreamliner cancellation and a $433 million payout from Boeing eased funding concerns. Joyce has also delayed Airbus SAS A380s, cut overseas routes and begun talks on working with Emirates to revive international operations that lost A$450 million last fiscal year.

“Qantas is working within the constraints they have to deal with,” said Peter Esho, chief market analyst at City Index in Sydney. “The alternative would have been to raise equity and that wouldn’t have been doable.”

The carrier’s main flying unit had an underlying loss of A$21 million in the year ended June. Budget arm Jetstar had a profit of A$203 million and the frequent-flier programme unit made a profit of A$231 million. The company divided the Qantas unit into international and domestic businesses starting July 1.

The company booked one-time charges of A$398 million in the year as Joyce restructures operations in a bid to return to profit. Labour disputes culminated in the airline grounding its main fleet October 29 to force a showdown. The carrier has cut the equivalent of 2,800 jobs, about 11 per cent of its workforce, the CEO said August 8.

Boeing payments

The payments from Chicago-based Boeing will include more than $300 million of compensation for 787 delivery delays, said Chief Financial Officer Gareth Evans. Budget arm Jetstar will begin getting 15 on-order 787-8s next year. Qantas will also get back deposits for the cancelled 787-9 orders totalling less than $100 million, Evans said. Marc Birtel, a Boeing spokesman in Seattle, declined to comment.

The cancelled -9 orders were converted into options, raising the carrier’s total Dreamliner rights to 100, Evans said. If options are exercised, 787-9s could begin arriving as early as 2016, two years later than previously planned.

Shares jump

The carrier rose as much as 6.8 per cent in Sydney, reaching the highest since June 4. It was up 2.6 per cent at A$1.20 as of 1.38pm. The S&P/ASX 200 index gained 0.2 per cent.

The airline was expected to report an annual net loss of A$223.5 million, based on the average of six analyst estimates compiled by Bloomberg. It forecast an annual loss in June, prompting its shares to plunge 32 per cent in four days and causing Standard & Poor’s to say it may cut the airline’s investment grade credit rating.

Joyce said it would be “imprudent” to offer any earnings forecast and that it wasn’t clear when the carrier would return to profit due to volatility in global conditions, fuel prices, foreign exchange rates and internal changes. The carrier’s fuel bill rose 18 percent last fiscal year to A$4.3 billion because of higher prices and increased flying.

“Fuel has been the biggest culprit but the European market has been very weak for them too,” Russell Shaw, a Sydney-based Macquarie Group Ltd analyst, said by phone before the announcement. “That’s not showing any signs of recovery.”

Domestic yields

Domestic yields, a measure of ticket prices, will come under pressure in the short term, Joyce said, as Qantas plans to raise capacity by as much as 11 per cent in the six months through December compared with a year earlier.

The airline is adding domestic flights to defend a 65 per cent group market share that it considers to be optimal from Virgin Australia Holdings Ltd and budget carrier Tiger Airways Holdings Ltd. The competition has caused a government-run index of air fares to fall 8.5 per cent in the past year.

Qantas’ total group capacity will rise by as much as 4 per cent in the six months ending December, while fuel costs may rise to A$2.3 billion from A$2.2 billion, the airline said.

The carrier, which flew its first overseas flights in 1935, has seen its main unit’s market share on international routes from Australia decline from 30 per cent in September 2003 to 18 per cent in March because of competition from fast-growing Middle Eastern airlines led by Emirates Jetstar has a 7.8 per cent share in March, according to the government’s Bureau of Infrastructure, Transport, and Regional Economics.

The 787 cancellation is the biggest so far for the aircraft, which entered service last year with All Nippon Airways Co. The plane’s debut was more than three years late because of Boeing’s struggles to adopt new materials and production techniques.

Boeing had lost orders for 25 Dreamliners this year before Thursday, including 24 scrapped by China Eastern Airlines Corp in March. The largest single cancellation previously had been a 25-plane order by an unidentified customer in 2009, said Boeing’s Birtel. The company still has about 800 Dreamliner orders in hand, based on data on its website.

In the red

$8.5b

Value of the cancelled Dreamliner order at list prices.

A$21m

Underlying annual loss at Qantas’
main flying unit.

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