Rearranging the deck-chairs at Qantas

Despite the best efforts of management, airlines are a tough business

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published May 24, 2012 8:52 am AEST

Qantas Limited (ASX: QAN) has announced that it is separating its domestic and international airlines, and appointing CEOs to head each business. The move comes as the company tries to turn around its loss-making international division, which reported losses of over $200m in 2011, on capital invested of over $5 billion. The domestic airline division by comparison reportedly made a profit before tax of over $550m in 2011.

The company also announced changes to Qantas' group executive committee, and the departure of Jetstar chief executive, Bruce Buchanan. This comes on top of the company's announcement that it was consolidating its heavy maintenance operations and sacking more than 500 staff.

From the 1^st July 2012, Qantas will have five divisions, Qantas Domestic, Qantas International, Qantas Frequent Flyer, Qantas Freight and Jetstar as well as a 29% stake in Jetset Travelworld Limited (ASX: JET).

Transparency equals job cuts?

Many analysts were singing from the Qantas hymnbook yesterday, trotting out similar versions of the company's line that it will improve transparency, speed up operational decisions and allow the company to run each business according to its specific priorities and market conditions. Analysts also suggested that it will make it easier for the airline to deal with union and government opposition to a productivity drive.

Who's going to argue about job cuts in a business that's consistently losing money? The alternatives could be much worse.

Unions on the other hand, suspect that the move is the first step in a plan to offload the international division. They may be right, but in the short-term, the most likely result will be more job losses at Qantas International.

Differing priorities

As part of the plan to return Qantas International back to profit, the division will focus on forging alliances, which enables the company to add routes and expand its network, without having to buy or lease new planes and allows it to conserve capital. Qantas Domestic on the other hand is going toe-to-toe with Virgin Australia Holdings Ltd (ASX: VAH) on domestic flights and trying to stave off the flight (sorry!) of its corporate customers to Virgin.

The Foolish bottom line

It says a lot about an airline, when the most profitable division is its Frequent Flyer program. Qantas Frequent Flyer reported Earnings Before Interest and Tax (EBIT) of $342m in 2011, compared to $228m for the Qantas division (which included domestic and international), and $169m for Jetstar.

Airlines are notoriously bad investments – In aggregate airlines globally lose billions most years. These moves by Qantas may be well intentioned, but the results are unlikely to be a spectacular turn-around in its fortunes.

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).Authorised by Bruce Jackson.

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