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Qantas issues plea for govt intervention after loss warning

By Jane Wardell

SYDNEY (Reuters) - Qantas Airways Ltd (ASX:QAN.AX - News) put fresh strain on Australia's 'open for business' credentials on Thursday, calling for government support after shocking investors with a loss warning.

As the national carrier's shares plummeted as much as 17 percent, Chief Executive Alan Joyce said he placed calls to government ministers seeking urgent action, complaining that rival Virgin Australia Holdings Ltd's (VAH.AX) access to foreign funding has created an unfair playing field.

Virgin Australia "should not have the benefits conferred by an Australian carrier designation when it has only 20 per cent Australian ownership," Qantas said in a statement.

After Qantas warned it expects an underlying pre-tax first-half loss for the first time ever, analysts said government support for the formerly state-owned carrier would provide an obvious financial solution to the airline's woes. That could come via a share purchase, or ownership of Qantas's loss-making international division.

But they said lawmakers may be reluctant to answer Joyce's call after charges of protectionism followed the government's block on U.S. agribusiness giant Archer Daniels Midland's (ADM.N) A$2.8 billion offer for Graincorp (GNC.AX).

"Turning Qantas public again by a share purchase buyback would look very, very poor from a protectionist standpoint," said IG markets strategist Evan Lucas. "The government is already struggling to maintain its 'open for business' stance after blocking the GrainCorp deal."

On Thursday Qantas said it would accelerate a cost-cutting programme following a "marked deterioration" in market conditions, axing 1,000 more jobs as it braces for an underlying pre-tax first-half loss of between A$250 million and A$300 million.

"The challenges we now face are immense," CEO Joyce said, noting Virgin Australia's move last month to tap its majority owners, Gulf carrier Etihad, Singapore Airlines (SES:C6L.SI - News) and Air New Zealand (NZC:AIR), for A$350 million to add capacity and lift service levels.

Treasurer Joe Hockey cited national interest grounds when he last week prohibited the takeover of GrainCorp following strong opposition from local grain growers. International lawyers and bankers who work in mergers and acquisitions said the decision was likely to spook foreign investors who already think pushing through a deal in Australia is tough.

Qantas's Joyce has hinted he would like the government to either provide support through subsidies or tax breaks, or move to limit Virgin Australia's foreign ownership.

But, acknowledging last week that Qantas is in "regulatory handcuffs", Treasurer Hockey appeared to lean toward opening up foreign investment avenues, rather than increased government support.

Hockey's spokesman Tony Ritchie declined to comment on speculation about government intervention on Thursday, adding that the treasurer had an open mind about the options on the table.


Convincing taxpaying voters of the merits of wading in to save the loss-making airline is likely to be a hard task, particularly after high-profile government support for the domestic car manufacturing industry failed to stop it hitting the skids.

Ford Motor Co (NYS:F) is shutting its two Australian auto plants in October 2016, while General Motors Holden, the local unit of General Motors Co (NYS:GM - News), has cut its workforce and said its presence is dependent on government support.

"The government is loath to buy assets," said Tony Webber, an associate professor at the University of Sydney Business School and a former Qantas economist.

"They've got themselves into trouble assisting the car industry, and so it's going to be hard for them to win over voters in terms of trying to find a voice for assisting the airline industry."

Qantas, which earlier this year signed an alliance with Dubai-based Emirates Airlines (EMIRA.UL), claims it is hampered by laws introduced when it was privatised two decades ago that cap its foreign ownership at 49 percent and bar government support.

The carrier said on Thursday the outlook for the second half of the year "remains volatile" and declined to provide further guidance, citing uncertainty in global economic conditions, fuel prices and foreign exchange rates.

Group capacity is expected to rise 1.1 percent in the first half, leading to a 3.5 fall in group yield, excluding foreign exchange movements. Underlying fuel costs are expected to jump 68 percent to A$2.27 billion.

As well as 1,000 job cuts within 12 months, the acceleration of the cost reduction program - aimed at total savings of A$2 billion over three years - includes a pay cut for Joyce and the board, a pay freeze and no bonuses for executives, and a review of spending with the airline's top 100 suppliers.

Qantas also launched a review of all planned capital expenditure and potential structural changes, saying no options were excluded. It has already cut unprofitable international routes, shed jobs, reduced capital spending and sold assets to cut debt.

Those measures had helped Qantas's more than double its underlying profit to A$192 million for the most recent financial year.

Shares in Qantas were down 11 percent at A$1.08 in afternoon trade, after touching a 16-month low at A$1.00.

(Additional Reporting By Jackie Range. Editing by Richard Pullin and Kenneth Maxwell)