Australia’s Qantas Group said Thursday (20 February) that it would cut capacity by 15 percent after reporting first-half earnings that were weaker than expected. The company’s underlying profit before tax came in at A$771 million (US$511.8 million), which was A$4 million less than the same period last year and said it incurred A$51 million in higher foreign exchange related cost impacts, a A$68 million impact from global freight weakness and disruption in Hong Kong, and a A$55 million increase in operating costs from the sale of domestic airport terminals.
The airline group said the global spread of the COVID-19 coronavirus, which originated in China and has claimed more than 2,000 lives, would cost the airline between A$100 million to A$150 million. Qantas is just one of dozens of airlines that have cut capacity to and from China. The loss of Chinese passengers will also have an effect on the domestic business of Qantas because Chinese tourists often travel throughout Australia on their trips there.
Qantas Group CEO Alan Joyce said: “Overall, our performance in the first half was very positive and it shows we remain in a strong position going forward. In the domestic market we dealt with some travel demand weakness and a structural change in our overheads from the sale of domestic terminals. Fundamentally, Qantas and Jetstar both did well. Internationally, the growth in passenger revenue outweighed the impact of disruption in Hong Kong and a freight market affected by trade wars. Our ultra-long haul routes like Perth-London continue to perform extremely well.”
Qantas said its domestic business saw underlying earnings before income tax fall A$47 million to A$645 million, but said there was “some improvement” in travel demand in the second quarter. It said the domestic business of Jetstar also fell 16 percent to A$180 million due to “pockets of demand weakness”, labour unrest and high fore exchange related costs. Qantas international achieved a 2.5 percent increase in underlying earnings to A$122 million.
The “coronavirus resulted in the suspension of our flights to mainland China and we’re now seeing some secondary impacts with weaker demand on Hong Kong, Singapore and to a lesser extent, Japan. Other key routes, like the US and UK, haven’t been impacted,” CEO Joyce added. “We’re taking action now to limit our exposure to softening markets. The group’s total capacity to Asia will reduce by 15 percent from now until at least the end of May and Qantas’ only route to mainland China (Shanghai) will remain suspended for the same period.”
Joyce said the group was using annual leave provisions with its employees to minimise the impact of the capacity cuts. “What’s important is that we have flexibility in how we respond to coronavirus and how we maintain our strategic position more broadly. We can extend how long the capacity cuts are in place, we can deepen them or we can add seats back in when demand rebounds, which we know it will.”
