* Qantas reports record net loss on restructure
* Shares rise on potential of foreign investment, positive
* CEO says "worst is over"
(Updates with more detail on potential foreign investment,
analyst comment, share price)
By Jane Wardell
SYDNEY, Aug 28 Qantas Airways Ltd is
looking past its record annual loss and predicting blue skies
ahead, as a landmark change in Australian laws opens the door to
foreign investment in the airline's international arm - its
A funding injection into its international division would
allow Qantas to better compete on price and service offerings
with rivals whom it says are bolstered by unlimited funding from
wealthy state backers.
It would also support Qantas' plans to re-configure its
aging fleet, invest resources in popular routes and further
enlarge its global network, partly through its partnership with
Qantas said on Thursday that it expected to return to profit
sometime in the current financial year. The surprisingly
positive outlook gave the airline's shares their largest one-day
percentage gain in a year.
The so-called 'Flying Kangaroo' has been bruised by high
fuel costs, a strong Australian dollar, increasing international
competition, and a domestic price war with arch-rival Virgin
Qantas International has been the biggest drag on the
airline's earnings, with its loss for the year ended June 30 the
largest among the carrier's divisions and doubling from a year
Aviation experts also point the finger at Chief Executive
Alan Joyce and his management team, criticising ill-fated moves
such as the rollout of its low-cost Jetstar subsidiary in an
already crowded Asian market.
Joyce acknowledged that a record A$2.8 billion ($2.6
billion) annual net loss and an underlying loss before tax of
A$646 million were "unacceptable", but vowed that "the worst is
The headline loss was almost entirely due to a A$2.6 billion
non-cash writedown in the value of Qantas' fleet as it
restructured to take advantage of new domestic laws allowing
greater foreign investment.
In the biggest restructure since Qantas was privatised two
decades ago, the airline is hiving off its international arm
from its domestic unit. The move will allow a foreign airline to
take as much as a 49 percent stake - a major change from the
previous 35 percent limit.
"The changes to the Qantas Sale Act have removed a
significant impediment for Qantas to be involved in long-term
consolidation," Chief Financial Officer Gareth Evans told
reporters in Sydney.
"By providing a separate subsidiary you give an option for a
foreign investor to take equity directly in the international
business," he said.
Still, analysts cautioned the airline against expecting a
rush of foreign investors on its doorstep any time soon, with
current alliance partner Emirates seen as the only likely
"I think the most logical partner would be Emirates because
they've already got relations with them, but there is a lot of
speculation that continues to occur and the business should just
focus on improving its underlying operations," said David Liu,
head of research at Above The Index Asset Management Pty Ltd.
Joyce said that foreign investment was a long-term strategy,
and the focus remained on a A$2 billion turnaround program that
includes stripping costs, freezing capacity and slashing 5,000
"We are focused now in the short to medium term on the
transformation program," he said. "We are not actively out there
looking for an airline investor."
Qantas shares were up 7.3 percent in midafternoon trade at
A$1.39, a three-month high and the biggest intraday gain in a
year. The stock reached an all-time high of A$6.05 in 2007
before the global financial crisis hit.
The headline A$2.8 billion loss overshadowed a
smaller-than-expected underlying loss before tax of A$646
million, compared with a restated A$186 million profit a year
earlier. Analysts had on average anticipated an underlying loss
around A$750-770 million.
Joyce said there was a "clear and significant" easing of
both international and domestic capacity growth and the airline
expected "rapid improvement" in its financial performance with a
return to underlying profit before tax in the first half of the
Bell Potter analyst John O'Shea said there was evidence that
domestic airfares have stabilised, which was a positive sign for
the sector generally, but added that Qantas needed to commit to
backing away from its price and capacity war with Virgin.
Analysts expect Virgin to post a A$250-270 million pre-tax
loss when it reports earnings on Friday, with both airlines
caught out by excess capacity in global markets and moves by
international carriers to increase capacity into Australia.
"Looking at how bad the result is, maybe it will be a
catalyst for them (Qantas) to actually behave more rationally in
relation to pricing," O'Shea said.
Joyce said that Qantas would extend a freeze on increasing
domestic capacity into the first half of the current year.
In stark contrast to the Australian carriers, Air New
Zealand Ltd, which owns around 26 percent of Virgin
Australia, on Wednesday reported a 44 percent jump in annual net
profit to NZ$262 million. The New Zealand flag carrier also said
it planned to significantly grow capacity this year.
Despite an investor push for major asset sales, Joyce said a
review of its profitable Frequent Flyer loyalty scheme, which
analysts value at up to A$2.5 billion, had concluded there was
"insufficient justification" for a partial sale.
However, he said the airline had identified other potential
asset sales, including airport terminals, property and land
holdings. Any proceeds from such sales would be used to repay
(1 US dollar = 1.0714 Australian dollar)
(Additional reporting by Byron Kaye and Swati Pandey in SYDNEY;
Editing by Ryan Woo)