Coronavirus a $100m problem for Qantas

Coronavirus a $100m problem for Qantas

Leading Australian flight operator Qantas (ASX: QAN) has decided to temporarily reduce flights across Asia as demand wanes due to coronavirus Covid-19.

The cuts come as the group announced its 1H20 results, with Qantas saying the virus outbreak will hit profits by between $100 million and $150 million in 2H20.

Qantas will reduce 16 per cent of its Asian capacity until at least the end of May, impacting flights from Australia to mainland China, Hong Kong, and Singapore.

This downsizing is the equivalent of grounding about 18 aircraft across Qantas and Jetstar until the end of May, which will impact about 700 full time jobs.

To avoid job losses during this soft period, Qantas will be using leave balances across the group's workforce of 30,000 staff and freezing recruitment.

The cute follow the group's recent announcement that it would suspend its routes to mainland China - Sydney to Shanghai and Sydney to Beijing.

Flights to Hong Kong have been reduced from 28 per week to just 16, while flights from Melbourne to Singapore will be operated by the smaller Boeing 787 plane instead of the larger Airbus 380 (approximately 250 less seats per flight).

Domestic capacity has also been reduced by 2.3 per cent for the second half of the financial year to match softened demand.

Demand for the group's flights to the US and the UK remains unimpacted by Covid-19 at this point in time, so for Qantas these routes remain business as usual.

"What's important is that we have flexibility in how we respond to Coronavirus and how we maintain our strategic position more broadly," says Qantas Group CEO Alan Joyce.

"We can extend how long the cuts are in place, we can deepen them or we can add seats back in if the demand is there. This is an evolving situation that we're monitoring closely."

"We know demand into Asia will rebound. And we'll be ready to ramp back up when it does."

"A sudden capacity reduction like this will have an impact on our people, which we're working to minimise through annual leave," says Joyce.

The Australian tourism industry has been pummelled by Covid-19, with travel bans, quarantine periods, and reduced flight paths all taking their toll on businesses with ties to the Asian market.

Corporate Travel Management (ASX: CTD) reduced its FY20 EBITDA guidance by 16.6 per cent yesterday as a result of the outbreak.

However, the group is optimistic that trade will pick back up sometime between March and July this year.

Similarly, Webjet (ASX: WEB) was unable to lift its FY20 guidance because of Covid-19.

"Based on our 1H20 performance and TTV growth in January 2020, we would have been upgrading our previous FY20 EBITDA guidance," says Webjet CEO John Guscic.

"However, we are seeing an impact on bookings and TTV across all our businesses as a result of the current Covid-19 outbreak which will impact 2H20 EBITDA."

Specifically, Webjet expects WebBeds to be hit by a material slowdown of bookings in China and the Asia Pacific.

Sydney Airport (ASX: SYD) today reported a dip in the number of passengers coming and going through the airport during January.

Total traffic was down 0.6 per cent on the January 2019 result to 3.9 million passengers which CEO Geoff Culbert says was strong in the circumstances.

"January traffic held up reasonably well, despite the impact from the bushfires," says Culbert.

"We expect traffic to be more significantly impacted in February as a consequence of the coronavirus."

Qantas succeeds despite geopolitical pressure

Despite a $68 million impact from market weakness and disruption in Hong Kong, an increase of $51 million in foreign exchange related cost impacts, and a $55 million increase in operating costs from the sale of domestic airport terminals, Qantas performed strongly in 1H20.

The company finished 2019 with revenue up 2.8 per cent to $9.4 billion, which the group attributes to capacity discipline, ongoing transformation and growing share in key markets.

Its underlying profit before tax was down just 0.5 per cent to $771 million, which CEO Joyce says demonstrates how the flight operator is in a strong position going forward.

"In the domestic market we dealt with some travel demand weakness and a structural change in our overheads from the sale of domestic terminals," says Joyce.

"Fundamentally, Qantas and Jetstar both did well.

"Internationally, the growth in passenger revenue outweighed the impact of disruption in Hong Kong and a freight market affected by trade wars. Our ultra-long haul routes like Perth-London continue to perform extremely well."

Qantas expects group capacity will decline by around 3.8 per cent across international routes and 2.3 per cent within Australia during 2H20.

Ultimately though, the group's second half results will be underpinned by the $100 million to $150 million EBIT impact as a result of Covid-19.

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