QANTAS FEELING IMPACT BUT WEATHERING ECONOMIC

UNCLAS SECTION 01 OF 02 CANBERRA 000755

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/ANP, EEB/TRA

E.O. 12958: N/A
TAGS: ECON AS
SUBJECT: QANTAS FEELING IMPACT BUT WEATHERING ECONOMIC
DOWNTURN


1. (SBU) SUMMARY: Though Qantas definitely felt the effect
of the global financial crisis, the Australian national
carrier appears to have weathered through it better than most
in the airline industry. The company should post between
USD80 to 160 million in profit for the year ending June 30,

2009. In the short term, the company is paying close
attention to several issues that may also be of interest to
the airline industry. End summary.


2. (SBU) Econoff met with Qantas' Head of Government and
International Relations Jane McKeon on August 11. McKeon
spoke about the state of the airline industry, Qantas'
financial performance, its response to the current economic
environment, as well as issues of concern for the company
going forward.

State of the industry
--------------


3. (SBU) McKeon said the effects of the slowdown in the world
economy caused an unprecedented revenue environment for the
airline industry, forecasted to lose USD 9 billion in 2009
and caused over 40 airlines to enter bankruptcy. The fall in
consumer and business confidence caused airline job losses
and reduced spending and investment. She mentioned that
hedging against this year's high fuel-price volatility also
prevented a full realisation of benefits.

State of Qantas
--------------


4. (SBU) McKeon gave a preview of Qantas' end-of-year results
(30 June 2008-2009),which will first be announced on August

19. According to McKeon, profit before tax for the year was
reviewed downwards from around A$500 million (USD400 million)
to between A$100 and 200 million (USD80 to 160 million). She
explained that some of the key drivers for the revised profit
forecast were: a) Lower demand, particularly in premium
classes; b) extensive sales and discounting by carriers, in
some cases up to 50%; and c) several competitor airlines
reducing capacity even though overall international capacity
continued to expand.


5. (SBU) McKeon enumerated some of the measures Qantas has
taken in response to the economic downturn: Manpower
adjustments; cost reductions; raising equity capital;
deferral of capital expenditure; reduction and redirection of
capacity; retirement of aircraft and deferral of deliveries
(Note: Qantas canceled an order for 15 Boeing 787
Dreamliners, saving USD3 billion, and delayed delivery of
another 15 for four years. End note.) Qantas' strategic
priorities going forward are: To continue the two-brand
strategy with its discount carrier Jetstar, which has
afforded it flexibility in varying market conditions; product
enhancement (premium economy, customer service center,
lounges); operational improvement (fleet efficiency, air
traffic management, on-time performance, continued focus on
safety); improved efficiencies, market segmentation and
capital management.

Issues of concern
--------------


6. (SBU) McKeon mentioned several issues that Qantas will be
paying close attention to in the near term:

-- FAA Reauthorization Act of 2009 (HR 915, passed the House,
now in the Senate Committee on Commerce, Science and
Transportation): The outcome may set a useful precedent for
QTransportation): The outcome may set a useful precedent for
future Australian legislation on many issues of interest to
Qantas, such as regulations requirements regarding antitrust,
immunization, quarantine, lost baggage compensation, customs
and border security.


CANBERRA 00000755 002 OF 002


-- Upcoming European Union negotiations on emissions: Under
some of the measures being considered, Qantas could face
steep long-distance penalties based on its geographic
location.

-- GOA's proposed Carbon Pollution Reduction Scheme (CPRS):
Under the current plan, Qantas would not receive government
subsidies or protection.

-- Upcoming Australia-New Zealand Leadership Forum: McKeon
said Qantas is very interested in following the "US-Canada
model" in seeking to improve transportation links and the
simplification of travel while maintaining effective border
security, customs and quarantine standards.

-- Comparative tax treatment: Qantas pays high corporate
taxes relative to some of its main competitors in the Asian
market, many of which benefit from high government subsidies
(Singapore Airlines, Cathay, Emirates, and Etihad).

-- Retaining domestic market dominance: Qantas' two-brand
strategy has been successful in facing off other competitors.

-- "Shakeout" in US-Australia routes: Delta's entry, among
others, have brought down prices to, in McKeon's view,
"unsustainable levels of unprofitability" and looks to see
who the ultimate survivors will be.


7. (SBU) Comment: Despite a downward revision, Qantas will
manage to end the year with profits. The measures taken by
the company to deal with the economic downturn, although
painful, have largely been successful. We will monitor
developments on the above-mentioned issues of concern to
Qantas and of interest to the airline industry.