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Qantas chief executive Alan Joyce announces a first-half loss of $235-million Australian ($211-million U.S.) during a press conference in Sydney, Feb. 27, 2014. (Rick Rycroft/AP)
Qantas chief executive Alan Joyce announces a first-half loss of $235-million Australian ($211-million U.S.) during a press conference in Sydney, Feb. 27, 2014. (Rick Rycroft/AP)

Inefficiences, tough market conditions finally catch up to Qantas Add to ...

John Tate was piloting a two-engine Boeing 777 across the Pacific a few years ago when he began a cockpit-to-cockpit chat with another pilot flying a similar route for Qantas, Australia’s flag carrier.

They talked about their passenger and freight loads, and Mr. Tate noted the Qantas pilot was flying an aging, four-engine Boeing 747. Crunching the numbers, Mr. Tate, a 30-year industry veteran who has flown for Cathay Pacific and other airlines, estimated his rival was burning about 30 per cent more fuel – roughly two additional tons of it per hour.

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“The inefficiencies of their fleet are huge,” he says of Qantas. “It’s definitely old, decrepit.”

This week Qantas’s lagging performance finally caught up with it. On Thursday, the battered airline announced a sweeping restructuring that will lead to 5,000 job cuts and a $2-billion Australian ($1.97-billion) cost-reduction amid what CEO Alan Joyce called “the toughest market conditions (Qantas) has ever faced.” The airline – nicknamed the Flying Kangaroo for its iconic logo – has struggled with record-high fuel costs and fierce competition from Virgin Australia, and its troubles could spread further afield.

The airline’s difficulties now put Prime Minister Tony Abbott’s freshly elected conservative government in a tough position. With Australia’s automotive and manufacturing industries in retreat, there is now growing pressure for Mr. Abbott and the opposition to agree on some sort of government assistance for Qantas. That could mean bumping the airline’s foreign ownership levels beyond 49 per cent to enable a fresh injection of cash, or easing its borrowing costs. The importance of the brand as well as the sheer size of the job losses in Australia have amplified the pressure on all sides, and the company’s unions are now threatening to strike.

Qantas reported a $252-million half-year loss as it revealed the restructuring. The airline will also defer or sell 50 aircraft, and send aging, fuel-guzzling jets like the 747 flown by Mr. Tate’s transpacific acquaintance into early retirement. But even though Qantas says these moves will lower the average age of its fleet to eight years by the end of fiscal 2016, that metric is still nearly twice as high as the 4.2-year average at Virgin Australia, which is jointly owned by three foreign government-backed airlines.

Those backers have invested more and more in Virgin Australia even as it lost money, Mr. Joyce noted in a statement, aggressive moves that allowed the rival airline to expand rapidly over the last few years. Virgin Australia has vowed to put the romance back in travel – painting women on the side of its planes, like old bombers – and installed pale purple dividers to allow the airline to scoop up business travellers. Virgin Australia’s in-flight entertainment is cheaper and more modern: There are no TVs, only a down-loadable app that works on Wi-Fi.

As it continues a turnaround, Qantas has returned its terminal lease at Brisbane’s airport, as well as pledged to reduce capital costs by $1-billion and slash under-performing routes such as its Perth-to-Singapore route. Executive pay is being frozen and there will be no bonuses, Mr. Joyce said, noting the company will still employ about 27,000 people. Airline analysts seemed unimpressed, however, saying in research notes that Qantas has claimed around $4.5-billion of cost savings since 2003, and that the gains from these new cuts – drastic though they seem – will likely dissipate with inflation.

To Mr. Tate, who has had many interactions with Qantas over the years, the problems were clear. The planes are old, he says, and the infrastructure was aging. Qantas is making improvements and is on track with purchase orders for better, more fuel-efficient planes, he notes. But the work force, he added, was top heavy with middle managers and “way overstaffed.”

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