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Qantas Plans Will Stop Growth and Cut Jobs as Consumer Confidence Wanes

May 21, 2014 5:00 am

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Qantas isn’t entering this period from a position of strength.

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Reuters

A Qantas Boeing 747 prepares to land at Kingsford Smith international airport in Sydney. Reuters


Qantas Airways Ltd., the Australian carrier that’s firing workers as it reels from losses, will halt capacity growth on local routes for the longest period since 2009 to curb a fall in fares amid weak consumer confidence.

The carrier won’t add domestic capacity relative to a year earlier during any of the three months ending September, the Sydney-based carrier said in a regulatory statement today. Qantas has increased seat availability by about 4.1 percent annually over the three years to April and hasn’t halted growth for such a long period since the three months ended November 2009, according to data compiled by Bloomberg News.

Chief Executive Officer Alan Joyce has increased seat space faster than demand growth in recent years to defend a 65 percent local market share target amid increased competition from second-ranked Virgin Australia Holdings Ltd. That’s forced both carriers to cut prices to fill their planes, driving discount ticket prices to a three-year low this month while a measure of business-class fares dropped at the fastest pace on record.

“We doubt whether Virgin will respond aggressively to Qantas’s olive branch,” Sam Dobson, an analyst at Macquarie Group Ltd. in Sydney, said in a note to clients today. The announcement is “pointing towards an end of the capacity war.”

Qantas shares fell 1.6 percent to A$1.22 at 12:14 p.m. in Sydney, and Virgin dropped 1.3 percent to 38.5 Australian cents.

Poor Sentiment

Australia’s largest airline is cutting 5,000 jobs, selling or deferring 50 planes, and freezing pay after competition on domestic and international routes caused it to post a A$252 million ($233 million) first-half loss in February and lose its investment-grade credit ratings.

Qantas is also considering selling a stake in its frequent-flier program, Joyce told a May 8 conference in Sydney.

The 65 percent domestic market share is a “line in the sand” that will maximize Qantas’s profits, according to a 2007 presentation. Stepping back from that target would be “waving the white flag”, Chief Financial Officer Gareth Evans wrote in a Jan. 24 article in the Sydney Morning Herald newspaper.

An index of Australian consumer sentiment fell today to the lowest level since August 2011 after the government’s budget last week flagged spending cuts and a new tax on high-income earners.

The country’s central bank expects below-trend growth in the next few quarters and will keep interest rates low “for some time yet”, according to minutes released yesterday from the bank’s May 6 meeting, where it kept its key policy rate unchanged at a record-low 2.5 percent.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net. 

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