Qantas to separate international business in turnaround plan

SYDNEY Tue May 22, 2012 5:16am EDT

A ground crew member cleans the windshield of a Qantas passenger plane at Adelaide airport in this February 13, 2012 file photo. REUTERS/Tim Wimborne/Files

A ground crew member cleans the windshield of a Qantas passenger plane at Adelaide airport in this February 13, 2012 file photo.

Credit: Reuters/Tim Wimborne/Files

SYDNEY (Reuters) - Qantas Airways (QAN.AX) is separating its loss-making international business from its profitable domestic operations, and assigning the boss of its frequent-flyer division, the airline's No.2 money spinner, to turn around the ailing global segment.

The restructuring is meant to show Qantas unions, the government and other stakeholders that Australia's top airline needs to fix the bleeding international operations which have been hit by rising costs and weak travel demand, analysts said.

Qantas's plans to cut costs, which are nearly a third more than peers in low-cost Asia, have been opposed by unions who have repeatedly called it a very profitable organization. The airline is emerging from a bruising industrial dispute that led to grounding of the entire fleet for close to two days last year.

"This will now clearly show the strength of the domestic business and the weakness of the international business," said David Liu, head of research at ATI Asset Management, which owns Qantas shares.

"It gives the airline the room to fix it. I don't think this is about the sale or spin off of the unit."

Qantas in August revealed a A$200 million loss suffered by the international business, shocking investors and showing the extent to which it was milking the domestic business, which is facing rising competition from rival Virgin Australia (VAH.AX).

Chief Executive Alan Joyce's preferred plan to revive the international business was to float a new Asian premium airline joint venture, but talks have gone nowhere. In March it ended talks with Malaysian Airlines (MASM.KL).

As a result Joyce has moved to split the organization.

As part of a five-year turnaround plan, the international and domestic businesses will have separate chief executives and operational and commercial plans, the carrier said in a stock exchange filing.

Simon Hickey, CEO for its frequent flyer program, was named as CEO of Qantas International. The Qantas Frequent Flyer division reported underlying earnings before interest and tax (EBIT) of A$119 million ($117.29 million) in the half-year ended December, accounting for more than 40 percent of the group's results.

Lyell Strambi, group executive for airline operations, was named as CEO for domestic operations.

While the two business will have separate financial results, Qantas will remain a single entity.

Bruce Buchanan, CEO of its low-cost offshoot JetStar will leave in six months. Buchanan is credited with building the JetStar brand across Asia. JetStar was the No. 1 contributor to Qantas's first-half EBIT, netting A$147 million.

A spin off or a sale of the international unit is viewed as unlikely by analysts, given its key role as a passenger feeder to the domestic operations. A sale or a significant stake sale in the business would also need changes to legislation which is designed to protect Qantas' position as an Australian airline.

'RICH HISTORY'

Qantas announced an underlying profit before tax of A$552 million for the 2010/11 financial year. Then, it also disclosed the losses at the international operations and said it expected to continue losing money.

"Qantas International, a great airline with a rich history, is loss-making and does not deliver sustainable returns," Chief Executive Joyce said in the statement.

"However, we are committed to turning it around through the five-year strategy we announced last year, based on flying to global gateways, deeper alliances, smart investment in product and disciplined capital management."

RBS analyst Mark Williams called the move a sensible approach but said the challenge was to ensure the maintenance of the strong level of integration between the domestic and international businesses that is driving profits now.

JOB CUTS

Carriers across the world are being pushed to cut costs and delay capital expenditure. Qantas is not alone - Singapore Airlines (SIAL.SI) swung to an unexpected Q4 loss and warned yields would stay weak.

Qantas said on Monday it planned to cut 500 jobs on top a similar number flagged in February to save up to A$100 million ($98.5 million) annually.

It is consolidating engineering, maintenance and ground operation function and also plans to sell some catering centers. It has also cut A$900 million in capital expenditure.

Qantas shares, which have fallen over a tenth so far in May to their lowest level in seven months, perked up in late trade to end 2.8 percent higher at A$1.47. The broader market .AXJO ended 1.2 percent higher.

($1 = 1.0146 Australian dollars)

(Editing by Muralikumar Anantharaman)