A380 Groundings Cost Qantas AU$80 million

Qantas says the grounding of its Airbus A380 fleet earlier this year due to engine problems will cost it at least AU$80 million ($80.3 million), although the carrier claims its public image has recovered quickly.

The carrier estimates the economic impact of the groundings was AUS$55 million in its fiscal first half through Dec. 31, and another AU$25 million in the current six-month period. This does not include an estimated AU$100 million in aircraft and engine damage that is covered by insurance and existing agreements with engine manufacturer Rolls-Royce.

The groundings were triggered by an uncontained failure in one of the Trent 900 engines on a Qantas A380 flying out of Singapore in November. Although this aircraft suffered considerable damage and still needs months of repair work in Singapore, CEO Alan Joyce says the aircraft will “absolutely” fly again by the end of this year.

Negotiations are continuing with Rolls over compensation for the AUS$80 million economic cost. Qantas CFO Gareth Evans says these talks are “moving forward quite well,” although he says the carrier is not setting a timetable for their completion.

Qantas is still retaining its right to take legal action if the talks are not satisfactory. However, Evans says both sides are anxious to reach a deal outside court. When asked if cash and in-kind compensation are being considered, Joyce says there are “lots of options” as to how the total could be achieved. However, he says the carrier will need to realize “real benefits up-front” that will help it overcome the economic damage inflicted to its balance sheet for this fiscal year.

Joyce says the carrier’s research shows that its public image is faring well despite the A380 problems. Qantas took “a bit of a brand hit,” but not as much as during the dispute with engineers in 2008. Surveys show the carrier’s customers recognize the engine troubles were not Qantas’s fault, and that management acted quickly. The brand is also bouncing back faster than in previous high-profile crises, Joyce says.

Despite the additional cost from the A380 problems, Qantas reported a net profit of AU$241 million for the six months through Dec. 31, which was its fiscal 2011 first half. This was up from AU$58 million in the same period a year earlier. Underlying profit before tax and non-recurring items was AU$417 million in the fiscal first half, compared to AU$267 million in the previous year.

All operating segments in the group were profitable during the half-year. The group’s revenue increased 10% year-on-year to AU$7.6 billion, and yields rose 7%.

Qantas also faces challenges to its bottom line from the catastrophic storms that have affected eastern states this year. The Queensland floods will reduce underlying profits by up to AU$55 million in the fiscal 2011 second half, and the damage from Cyclone Yasi will cost another AU$15 million.

The company expects fuel costs to increase in the second half due to more flying and higher prices. Capacity is forecast to rise 11% during the period. Yields are expected to be stronger, however, and Qantas says the full 2011 fiscal year should be more profitable than fiscal 2010.