The Qantas Airways Limited (ASX: QAN) share price was out of form on Monday and sank a disappointing 11% lower to a multi-year low of $4.15.
This followed the release of a trading update from rival Air New Zealand Limited (ASX: AIZ), which revealed that it was withdrawing its earnings guidance due to the impact the coronavirus outbreak was having on bookings.
This morning Qantas has responded to this by releasing an update of its own.
What did Qantas announce?
Qantas has announced further cuts to its international flying, reducing capacity by almost a quarter for the next six months.
Management advised that these latest cuts follow the spread of the coronavirus into Europe and North America over the past fortnight, as well as its continued spread through Asia, which has resulted in a sudden and significant drop in forward travel demand.
According to the release, these additional changes will bring the total international capacity reduction for Qantas and Jetstar from 5% to 23% compared to the same time last year.
The airline's biggest reductions will be in the Asia market, which will be down 31% on the prior corresponding period. In addition, capacity has been reduced 19% to the United States, 17% to the UK, and 10% to the Trans-Tasman. This is in line with forward booking trends.
However, rather than exit routes altogether, the company intends to use smaller aircraft and reduce the frequency of flights to maintain overall connectivity. This approach means that eight of the airline's largest aircraft, the Airbus A380, will remain grounded until mid-September. A further two A380s are undergoing scheduled heavy maintenance and cabin upgrades, leaving just two of its A380s flying.
Another change will see the company's Sydney-Singapore-London return service temporarily re-routed to become a Sydney-Perth-London service from April 20.
And domestically, Qantas and Jetstar capacity reductions will be increased from 3% to 5% through to mid-September. This is in line with broader economic conditions.
Financial impact.
Whilst this is expected to result in meaningful cost savings, given the dynamic and uncertain nature of the situation, management warned that it is not possible to provide meaningful guidance on the impact on its earnings for the remainder of FY 2020.
But it notes that the airline is financially strong, with low debt levels and a long debt maturity profile. It also has $1.9 billion in cash, plus a further $1 billion in undrawn facilities, and $4.9 billion in unencumbered assets.
However, given the current uncertainty it is facing, the Qantas board has decided to cancel the off-market buyback announced in February in order to preserve $150 million in cash. The interim dividend of 13.5 cents per share will still be paid on April. 9.
And finally, both the Qantas chairman and CEO Alan Joyce will take no fees or salary for the remainder of the financial year. Whereas, the Qantas board has agreed to take a 30% reduction in fees and executive management will take a 30% pay cut. Qantas and Jetstar employees have been asked to take paid or unpaid leave in light of reduced flying activity.
