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Here’s why Qantas plunged 17% on Thursday morning

Qantas (ASX: QAN) fell 17% in early trade on Thursday as the company announced the cut of 1,000 jobs and a pre-tax loss of up to $300 million in the six months to December. Shares plunged to a low of 99.5 cents during the day, only a few percent above the all-time low of 96 cents hit in 2012 following a previous earnings downgrade.

CEO Alan Joyce once again blamed the airline’s woes on aggressive competition in its domestic and international businesses. Alongside the new earnings outlook, Mr Joyce announced the loss of ,1000 jobs and a massive structural review that could lead to the sale of Jetstar or changes to the frequent flier program. Executive salaries will be cut and frozen and the costs associated with key suppliers will be reviewed in order to improve profitability.

Qantas’ woes in recent years have come from domestic and international rivals increasing capacity and aggressively lowering prices, cutting into Qantas’ profit margins. Perhaps the most significant challenge has come from Virgin Australia (ASX: VAH), which has eroded Qantas’ share of business clients. Virgin didn’t even have a business class in 2010 but has learnt from the best and now offers business clients an equally good service, if reviews are to be believed.

The views of analysts have been surprisingly similar. The majority had forecast the announcement in recent days following the weeks of extremely vocal lobbying to government that the Qantas Sale Act disadvantages Qantas. The act limits the foreign ownership and investment in the airline, supposedly placing it at a disadvantage to key rival Virgin, which is up to 70% owned by foreign airlines or bodies. Analysts have been predicting a loss of between $50 and $500 million, so the forecast $250 to $300 million loss sits nicely in the middle.

The view of politicians has been, for lack of a better word, interesting. Independent senator Nick Xenophon believes the government should not offer any assistance to Qantas until Mr Joyce and the board resign, citing their poor management of the airline and the ‘bean counters’ who trashed the company’s balance sheet. The prime minister, treasurer and Federal Opposition Leader all appear to be considering supporting Qantas in its time of need.

So is it time to buy?

Qantas shares are nearly at all-time lows. It’s has a rough 12-18 months and Thursday’s announcement represents a $500 million turnaround from the $223 million profit in the six months to December 2012. I believe we will have to wait and see what happens at Qantas as the latest news may result in a downgrade of its credit rating, which could spur further share price declines.

Investors will want to see stabilisation of losses in the second half of FY14 and some evidence of progress in cutting costs. Some government assistance would also be welcome.

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

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