Qantas shares rebound on job cuts

Qantas (ASX: QAN) has raised the ire of the Australian Worker Union following the announcement last week of the closure of the company’s Boeing 747 heavy maintenance facility in Avalon, Victoria.

The closure, which will result in up to 300 redundancies, is due to Qantas’ relentless pursuit of lowering costs. The union claimed that Qantas had acted with contempt for the workers and without properly considering all options.

The key issue concerned the reduced maintenance requirement at the facility in the coming years. As a result of the fleet renewal program being undertaken by Qantas, there was expected to be up to 22 months of downtime over the next four years. The union had offered for staff to take up to three months of unpaid leave per year, but in the end Qantas blamed the sub-scale and inefficient facility for the closure.

Work at the plant has reduced due to a program put in place by group CEO Alan Joyce where the aging Boeing 747 and 767 aircraft in the Qantas fleet are being replaced with Airbus A320s and Boeing 787s. In 2004 the company had 35 747s, compared with 15 now, and just 10 in three years’ time.

The fleet renewal program is being undertaken to get costs under control at the airline, which posted a statutory profit of $5 million in FY13, compared with a loss of $244 million in FY12. Profit was hampered by the loss-making international segment, plagued by high fuel and maintenance costs, as well as increased capacity from rivals at a time when demand was stagnant.

In the September traffic statics released by Qantas and rival Virgin Australia (ASX: VAH), it was apparent that domestic and international capacity is increasing, while passenger demand continues to be weak. This is expected to lead to lower yields in FY14 as Qantas has to reduce fares in order to sell seats. Only a turnaround in demand from increased consumer confidence and tourism will help to improve the yield in the short term.

Foolish takeaway

Warren Buffett once described airline stocks as a “deathtrap for investors”. While long-term shareholders would probably agree with him, Qantas is flying a dedicate course to cut costs and boost profit in its domestic and international segments. It is a long-term project and investors will have to be patient for the next 12 months at least before any real improvement is seen.

While yields are largely out of the company’s control, strict cost control measures are being put in place to ensure net profit can grow this financial year. Qantas shares jumped over 3% on the news of the job cuts, as it provided further evidence that the company is making the tough changes required to turn around the business.

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

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