Qantas in line for best profit

By PAM GRAHAM and AGENCIES

Qantas is on course for its best ever annual profit but continues to argue a need to merge with Air New Zealand because the industry is tough.

Australia's national carrier yesterday reported a record A$357.8 million ($402 million) first-half profit, beating analysts' forecasts and setting it up for what is expected to be a near A$600 million full year.

The airline typically makes 60 per cent of earnings in the first half and said it was on track for a full year in line with that trend.

Its merger plan with Air New Zealand has been blocked by competition authorities on both sides of the Tasman.

Chief executive Geoff Dixon admitted that people would think the above-expectation profit suggested the industry was okay, but he said airlines needed to merge to get the scale to compete internationally.

"We will continue to pursue, at this stage, the Air New Zealand relationship and I believe at some stage or another even the competition authorities will realise that there is some need for that [scale]."

Dixon paused when asked whether Qantas was considering investing in an airline other than Air New Zealand.

"We're looking at other opportunities," he said.

The airline reported revenue of A$191 million in New Zealand, down from A$240.5 million last year. The transtasman route was "pretty rugged".

The route Virgin's Pacific Blue is now flying makes up about 5 per cent of Qantas' overall business.

It was still profitable, but not returning what the company would like on assets invested.

"I'm quite sure Air New Zealand will survive on the transtasman," said Dixon.

Qantas' international operations and brand were the engine of all of its businesses and had to be protected, he said.

Dixon declined to go into merger alternatives beyond saying that Qantas had a close relationship with British Airways.

"Scale is very important. On passenger numbers Qantas is now the tenth-biggest airline in the world. Our concern is we have a much greater proportion of those passengers in our domestic operations."

Qantas had as much as 80 per cent of its domestic market after Ansett collapsed. It now had 66.2 per cent, Virgin Blue, Rex and other carriers making up the rest.

Qantas countered Virgin Blue by cutting costs, simplifying fare structures, changing schedules and giving the business market what it wanted.

It said its new domestic budget product, Jetstar, launching in May, would not cannibalise its existing business.

"Our main game is Qantas. Our brand is centred around Qantas and I could not be happier with the success and way that the Qantas domestic mainline operation is running at the moment."

Total revenue for the six months fell by 4.4 per cent, but expenses were down 6 per cent.

Total revenue was down A$228.7 million in the first three months but recovered to be down only A$39.1 million in the second three months.

A cost-cutting programme aiming to save A$500 million in 2003/04 would be extended over another year, and the expenditure reduction target increased by another A$500 million. The airline is investing A$7 billion in aircraft, products and technology by 2006.

The Jetstar network and fare structure will be announced later this month.

"We are confident Jetstar will commence with a cost base of 8.25Ac per ASK [available seat capacity] compared to Virgin's unit cost of 8.72Ac per ASK, as stated in its prospectus.

"When Jetstar has an all A320 aircraft fleet, we expect its cost base to be 7.8Ac per ASK."

Qantas declared a fully franked interim dividend of 8Ac a share.

The full-year result is expected to meet the airline's cost of capital.

"We're one of the few airlines that would ever meet its costs of capital," Dixon said.