Australia's largest carrier Qantas Airways Limited (ASX: QAN) will on Thursday announce its operational results for the 6 months to 31 December and an expected $2 billion in cost-cutting measures. Media reports over the last 48 hours have also thrown up countless rumours about the potential for widespread Australian job cuts. While job cuts will obviously be terrible for the Australian families affected (if it happens), what impact will the rumored cost-cutting measures have on investors?
Accelerated fleet renewal
The $2 billion in cost-cutting measures are expected to hit all parts of the company; however one initiative which would have a significant operational impact may be the acceleration of the existing fleet renewal program.
The existing program will see Qantas reduce the number of aircraft types in the fleet from 9 currently, to 7 by 2016 through the retirement of a number of Boeing 767s, 737s and Airbus A330s. This process could be brought forward by reducing the number of overall aircraft and increasing operation of existing and to-be-purchased aircraft in order to reduce fuel and maintenance costs. This would have a positive effect on Qantas' operational costs but will require an accelerated capital outlay for new aircraft.
Job cuts
Rumours in the media suggest that anywhere between 1,000 and 6,000 Australian jobs could be cut by Qantas on Thursday. Qantas already announced in December that at least 1,000 jobs would be lost through the rationalisation of existing maintenance facilities, however if the fleet renewal program is brought forward it could result in additional job losses to cheaper overseas firms that specialise in aircraft maintenance. Again, this would improve Qantas' operational costs; however damage to the Qantas brand may make this unpalatable in the short term.
Asset sales
The last major rumour includes the sale and leaseback of its airport facilities in Brisbane and Melbourne. This would free up capital for debt reduction, but would increase the operational costs of the company over the long term due to the new leases. This is currently viewed as the most likely course of action for the company, though the sale of Jetstar and the Frequent Flyer club would likely be viewed negatively by investors.
Foolish takeaway
Qantas has been backed into a corner largely by management's insistence on maintaining a 65% share of the domestic market and an unfavourable exchange rate, high tax, and growing fuel costs. The company's poor debt and profitability position resulted in the downgrade of its credit rating earlier in the year, which has also increased operational costs. Some sort of government aid now appears to be the best solution for Qantas; however the Abbott government is insisting that Alan Joyce gets the company back into decent shape before any guarantee is offered. The latest cost-cutting drive will hopefully go towards achieving this, which may help Qantas out over the longer term by lowering borrowing costs and allowing greater foreign investment in the carrier. For now though, it appears as though anything could be announced on Thursday, meaning an anxious wait for investors.
