Qantas and Our Super

You can fly, but you can't hide from the financial crisis
Elizabeth KnightMarch 26, 2009
The International Air Transport Association - the organisation that covers most of the world's top airlines - has made a particularly bleak assessment of the industry, saying it was in intensive care and the worst region was the Asia Pacific.
Australia's flagship carrier, Qantas, is feeling its share of the heat and yesterday confirmed speculation that it would slice 90 management positions and keep its salary freeze in place.
The move is expected to save between $21 million and $24 million but result in a one-off charge for redundancies of under $20 million.
This comes along with other operational changes being put in place by the new chief executive, Alan Joyce - all of them designed to expand the roles of the remaining managers and flatten the corporate structure. As a result, some stand-alone operations will be merged.
Qantas has been hacking into its cost base for years, mainly operational staff, especially in maintenance and engineering. So when the cyclical downturn began in earnest and pressure mounted on revenue there were few meaningful cuts left.
Now Qantas faces the problem of financing a shortfall in its defined benefit superannuation scheme. Merrill Lynch has estimated this shortfall to be $296 million, based on the fall in the value of the assets in the fund.
Qantas says the super fund has not yet made a call on the company to top-up the scheme. But logic suggests it is only a matter of time before, at the very least, Qantas will need to increase its provisioning to cover the shortfall.
Qantas may not have to pay the cash in one hit, but the shortfall may be reflected in its profit and loss for the year to June 30.
There will be a cash flow impact, and if it is large enough it is reasonable to question how Qantas will fund it.
The staff cuts made over the past year suggest there will be significant calls made on super entitlements, and some of these employees will have been covered by defined benefits plans. Many of the flight engineers who left in December are understood to have been covered by such schemes.
Defined benefits schemes, which were popular in the 1980s, entitle superannuants to a guaranteed lump sum - as opposed to regular super schemes, which rely on accumulated returns from the super fund. If sharemarkets continue to fall, the hole in the scheme will be bigger by the end of this financial year.
Qantas is not alone here. Plenty of companies face defined benefit shortfalls - including the Commonwealth Bank, Telstra and AMP. But Qantas is an extremely cyclical company, and both business and consumers are cutting travel in response to the global economic slowdown. Air travel is the extreme end of discretionary spending.
To date Australia has been less affected by the crisis, but more economists are downgrading their expectations of the economy with each week.
There is near certainty now that we will move into recession this year, which would add to the pressure on Qantas's earnings.
Having issued profit downgrades last year, the airline is sticking to its forecasts of a full-year pre-tax profit of $500 million for the year to June 30.
But given the worsening environment it would come as no surprise to see a further downgrade before the end of this financial year.
IATA said on Tuesday it had revised its outlook for the global air transport industry, and estimated $US4.7 billion ($6.7 billion) in losses this year, compared with $US2.5 billion in December. This reflected the rapid deterioration in the global economy, it said.
To put this into perspective, IATA expects global aviation revenue to fall $US62 billion. The fall after September 11, 2001 was $US23 billion.
This is nothing short of a catastrophe. Qantas has been cushioned so far, in part by relatively strong domestic demand. But as economic conditions deteriorate here its yields will continue to suffer as a result of discounting.
And its offshore profits, already being squeezed, will be hurt by competition on the Pacific route from Virgin's V and Delta Air Lines.
http://business.smh.com.au/business/you-can-fly-but-you-cant-hide-from-the-financial-crisis-20090325-9ak1.html