Qantas cuts costs with new planes

Qantas (ASX: QAN) is preparing to receive the airline’s first Boeing 787 Dreamliner on Wednesday, the first of 14 to arrive between now and the end of 2015, which will simplify the airline’s fleet and reduce costs.

The new aircraft will be operated by Jetstar and offer cost savings on maintenance and fuel of around 20%. They have been hailed as a game-changer for Qantas, as the company aims to cut costs in order to increase competition in low-fare routes and spread margins at a time when competition is increasing on all major routes.

The 787s will allow Qantas to greatly reduce costs by retiring its aging Boeing 767 aircraft operated under the Qantas brand. Like an old car, aircraft cost more to run and maintain the older they get. Qantas’ Boeing 767 fleet has an estimated age of nearly 19 years and will be replaced by 11 newer and more fuel efficient Airbus A330-200s, shifted from Jetstar to Qantas as Jetstar receives the 787s.

Placing the new aircraft under the Jetstar brand seems counterintuitive at first glance, but it will allow Qantas as whole to compete strongly on lower fares, especially within Asia. Overall the new aircraft, along with savings in other parts of the company, are expected to slash 10% from total costs to bring Qantas within 5% of Virgin’s (ASX: VAH) cost base.

This will allow Jetstar to compete with aggressively low fares offered by competitors such as Virgin, Tiger (majority owned and operated by Virgin), and Air New Zealand (ASX: AIZ), and allow Qantas to concentrate on restoring profitability in its important, but loss making, international routes.

Qantas International has been a drag for shareholders and the company in recent years but is expected to break even in 2015. This will coincide with a period of expansion as up to 37 aircraft are retired and 109 planes are received over the next five years. Qantas also has options on the purchase of larger variants of the 787, the 787-9, which will fall due from 2016 onwards and may be key to increasing profitability on international routes. A decision on the purchase will depend on the profitability of the international arm at the time.

Foolish takeaway

Qantas is in the midst of turning the company around from delivering long-term poor returns to a company that can consistently compete with the world’s best. Renewal of aircraft is key to the strategy, with newer aircraft driving cost and efficiency savings as well as greater customer satisfaction. The delivery of new aircraft this year will give Qantas its youngest fleet ever and drop the average age to below that of Singapore Airlines. If Qantas can achieve all it plans to, it will be an excellent investment over the next five years.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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