Qantas cancels 15 B787-9, defers 15 more, Boeing’s Dreamliner nightmare continues

Qantas CEO, Alan Joyce, stated the changes to the Group's B787 orders were "appropriate" in the current economic climate, but added the decision was not influenced by the announcement this week of a design issue and further delay to the aircraft's first flight - although that may have influenced the negotiations, given the timing of the announcement.

Mr Joyce stated, "the agreement we have reached with Boeing will provide greater certainty going forward in terms of our fleet renewal and growth strategies as well as broader resource planning and matching capacity with demand".

The changes will see Qantas Group firm orders reduce from 65 to 50 aircraft, comprising 35 B787-9s and 15 B787-8s.

Jetstar's expansion on hold; a shift in Qantas' long term development strategy?

The Group's first 15 aircraft - B787-9s for Jetstar's international operations - will now be delivered from mid-2013, around three years later than planned. Jetstar was originally expected to take delivery of 15 smaller B787-8s in mid-2010.

15 B787-8s will follow over the 12 months from 4Q2014 for Qantas' Australian domestic operations and to retire the remaining Qantas B767-300 fleet. Remaining deliveries, of 20 B787-9s for both Qantas and Jetstar international operations, take place from 4Q2015 through to 2017.

Mr Joyce said the cancellation of 15 B787-9s would reduce the Group's aircraft capital expenditure by USD3 billion, based on current list prices. This will take any immediate heat off Qantas on the aircraft financing side.

But bigger issues are in play. Going out four years - by which time the world will be a very different place - is really looking beyond most current planning programmes.

It appears Qantas could be effectively ceasing to include the B787 in its development strategy, which would have major implications for hubbing and partnerships, not to mention Jetstar's international expansion plans.

Assuming Jetstar does continue to expand, it simply will not have a sufficient platform to develop markets in Europe and North America as intended. However, unless Qantas/Jetstar decide that their expansion plans are effectively nil, Jetstar will need to order more A330s. For Qantas, its ageing 767s will now need to be refurbished too.

Mergers/partnerships now back on the agenda?

The implications for the group - which is increasingly confronted on international routes to Europe by the expansion of the Gulf carriers (with Qatar Airways soon to join Emirates and Etihad in operating to Australia) - are that new expansion plans will almost certainly have to involve other airlines.

The implied shift from organic growth towards a partnership strategy could involve acceleration of any proposed relationship with Malaysia Airlines, which desperately needs a friend as its market evaporates, and/or with Abu Dhabi's cash-rich Etihad, with whom Qantas recently established a codeshare agreement. But, unless Qantas is prepared to confine itself to a smaller proportion of Australia's international market, a proposition that becomes more costly to its overall network attraction. Jetstar has helped reinforce the Group's international share of total seats over the past couple of years, but that now looks set to change - barring a large new order from Airbus.

More cancellations to come for the manufacturers - and new strategies for airlines

Whatever this scenario, the key immediate issue for Qantas is on the cash front. Like most others, it is haemorrhaging cash; were it not for its highly profitable frequent flyer programme, the challenge would be even greater too.

Qantas, like most airlines around the world, is clearly in survival mode. As more airlines seek to preserve their cash balances amid the sharp downturn in demand, more aircraft cancellations - of all types - are probable. For it and for other long established carriers, losing market share in a big way becomes increasingly dangerous to market power, a key ingredient of pricing differentiation. In those circumstances, other market strategies become necessary.

B787 orders: Cumulative through to May-2009