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Sydney - Qantas Airways 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 biggest headache.
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 reconfigure its ageing fleet, invest resources in popular routes and further enlarge its global network, partly through its partnership with Emirates Airline.
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 Australia Holdings.
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 earlier.
Aviation experts also point the finger at CEO 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$2.8bn ($2.6bn) annual net loss and an underlying loss before tax of A$646m were "unacceptable", but vowed that "the worst is over".
The headline loss was almost entirely due to a A$2.6bn 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% stake - a major change from the previous 35% 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.
5 000 jobs to be axed
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 candidate.
"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.
Joyce said that foreign investment was a long-term strategy, and the focus remained on a A$2bn turnaround programme that includes stripping costs, freezing capacity and slashing 5 000 jobs.
"We are focused now in the short to medium term on the transformation programme," he said. "We are not actively out there looking for an airline investor."
Qantas shares were up 7.3% 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.
Blue skies
The headline A$2.8bn loss overshadowed a smaller-than-expected underlying loss before tax of A$646m, compared with a restated A$186m profit a year earlier. Analysts had on average anticipated an underlying loss around A$750-770m.
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 current year.
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$250-270m 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.
Air New Zealand reports profit jump
In stark contrast to the Australian carriers, Air New Zealand, which owns around 26% of Virgin Australia, on Wednesday reported a 44% jump in annual net profit to NZ$262m. 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$2.5bn, 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 debt.
