Updated: Qantas slashes international capacity, grounds A380s

March 10, 2020
Image: Qantas

The Qantas Group will reduce its international capacity by almost a quarter over the next six months as the spreading coronavirus crisis sees cuts to Europe and the US joining those to Asia.

The airline said fears of the continued spread of coronavirus had resulted in a “sudden and significant drop in forward travel demand”.

Rather than exit routes altogether, it said it would use smaller aircraft and reduce the frequency of flights to maintain overall connectivity.

READ: Coronavirus prompts Air New Zealand to can earnings guidance, slash capacity

The cuts will see the airline ground eight of its A380 superjumbos until mid-September and see its QF1/QF2 Sydney-Singapore-London service temporarily re-routed through Perth to give the West Australian capital a double-daily service.

Two more A380s are undergoing heavy maintenance and cabin upgrades, leaving just two of the superjumbos flying.

The new Sydney-Perth-London Boeing 787 service starts April 20 and stems from strong customer demand on the Perth-London route.

Also on the board are senior management remuneration cuts estimated to be worth tens of millions of dollars.

Qantas boss Alan Joyce will also take no salary for the remainder of the 2020 financial year, the airline’s chairman will take no fees. Board members and group executive management will also take a 30 percent cut in remuneration. Financial bonuses have also been “zeroed”.

Tuesday’s additional changes will boost total international capacity reduction for Qantas and Jetstar from 5 percent to 23 percent versus the same time last year. The cuts are also extended until mid-September.

The biggest cuts remain in Asia where capacity will now be down by 31 percent compared to last year.

Capacity to the US will be cut by 19 percent and to the UK by 17 percent.  Capacity between Australia and New Zealand will also be reduced by 10 percent.

The start of Qantas’ new Brisbane-Chicago route will be delayed from April 15 to mid-September and low-cost offshoot Jetstar will make significant cuts to its international network.

The Jetstar cuts include suspending flights to Bangkok as well as reducing flights between Australia and Vietnam and Australia and Japan by almost half.

In Australia, Qantas and Jetstar capacity cuts will increase from 3 percent to 5 percent through to mid-September “in line with broader economic conditions”.

Joyce said Tuesday demand had continued to deteriorate from Asia and on the trans-Tasman market, which had a lot of Asian travelers.

Some of the continued domestic weakness was a flow-on from the fall in overseas traffic.

“To be clear, it is holding up compared to what we’re seeing on international but there is some softness there and we think this reflects the nervousness in the Australian economy more broadly,” he told a conference call.

Qantas expects the lower demand to continue for the next several months, with Joyce noting “we think that this outbreak still has some time to play out”.

“So rather than taking a piecemeal approach we’re cutting capacity out to mid-September,” he said.

“This improves our ability to reduce costs as well as giving more certainty to the market, customers and our people.

“We retain the flexibility to cut further or to put capacity back in as this situation develops.”

Qantas calculates the capacity cuts are the equivalent of grounding 38 group aircraft across its international and domestic network,  resulting in the group’s total capacity reduction increasing from the 4 percent announced on February 20 to 17 percent for the first quarter.

The Qantas boss said the capacity cuts could be made deeper by parking the remaining two A380s.

“We still have every intent to reconfigure those aircraft and keep them in the fleet for the next decade because when this rebounds,  we’ll need those aircraft back,” he said.

“We also have five 747s that are due at the dnd of the year. if things were really bad we would bring the retirement …forward.”

On the financial front, Qantas said it was not possible to provide meaningful guidance at this time but noted it was in a strong financial position with $A1.9 billion in cash plus another $A1 billion in undrawn facilities and $A4.9 billion in unencumbered assets.

It canceled an off-market share buy-back, which would preserve $A150m in cash, but will still pay an interim dividend of 13.5 cents.

The airline has frozen all non-essential recruitment and consultancy work and is asking staff to take paid or unpaid leave.

Joyce said the airline would have about 2000 extra staff for the schedule it would be flying but it new the situation was temporary and it wanted to avoid job losses where possible.

The single bright spot in the announcement was the drop in fuel price.

Qantas has a world-leading hedging program that allows it to participate in lower fuel prices, although chief financial officer Vanessa Hudson said that was nearing its limit with the latest radical oil price fall.

Combined with lower consumption due to the reduced flying, the fuel cost is now expected to be $A3.7bn, down from a previous forecast of $A3.85 billion.

Joyce emphasized that the Qantas Group had entered the crisis in “really strong shape” but said that it needed to cut costs and reducing flying was the best way of doing this.

“That’s clear from our first-half financial performance, it’s clear from our balance sheet, our debt position, our cash on hand,” he said.

“We know we can ride this out, not all airlines in the world will, and we’ve taken very decisive action to make sure we remain in a strong position.”

While observing that no-one knew when the outbreak would end, Joyce said it would end at some point and pointed to coverage showing that more people have now recovered from the outbreak than are infected with it.

“And when it does, we’ll be well placed to take advantage of the opportunities,” he said.

Qantas and Jetstar will contact customers affected by the changes and those who booked via a travel agent will be contacted by their agent.

The airline expects customers flying internationally to be typically offered an alternative flight via another capital city or a partner airline, or an alternative day.

It expects disruption to domestic passengers to be minimal “given the continued high frequency on most routes”.