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Qantas overhauls with $9 billion fleet order

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By Michael Smith

SYDNEY (Reuters) - Australia's Qantas Airways <QAN.AX> is setting up two new airlines in Asia and ordering $9 billion of new Airbus <EAD.PA> aircraft as part of a do-or-die makeover to salvage its loss-making international business.

Qantas will also cut 1,000 jobs in Australia as it shifts its focus to the world's fastest-growing aviation market, triggering threats by unions to block the move and a government pledge to scrutinize the plans.

Qantas, which has been reviewing its offshore operations to cut costs and unprofitable routes, said it will launch a new, premium Asian airline and a Japanese budget carrier, the latter jointly with Japan Airlines and Mitsubishi Corp <8058.T>.

The new airlines will fly Airbus A320 jets, cementing their reputation as the plane of choice on regional networks over archrival Boeing Co. <BA.N> Qantas, which also flies Boeing's best-selling 737 narrowbodies, plans to acquire up to 110 of the Airbus planes, worth more than $9.4 billion.

As Qantas rebases its loss-making international operations in Asia, it also plans to give up some of its long-haul routes and retire older planes as well as cut jobs.

"Right now 82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas, not including Jetstar," the airline's Irish-born chief executive, Alan Joyce, told a news conference.

Joyce has cut costs and jobs since taking the helm at Qantas in 2008, with growth increasingly focused on the budget offshoot Jetstar, which he ran before becoming chief executive.

"To do nothing, or tinker around the edges, would only guarantee the end of Qantas International in our home Australian market. That would be a tragedy," he said, adding that the international operation's cost base was around 20 percent higher than its major rivals.

Joyce said the new premium airline was expected to be launched next year with an initial fleet size of 11 A320s. It may based in Kuala Lumpur or Singapore and would not be majority owned by Qantas, he said. China was also being considered, one source familiar with the airline earlier told Reuters.

Qantas has an existing relationship with Malaysia's AirAsia <AIRA.KL>, which this week agreed to swap shares with Malaysian Airline system <MASM.KL> as part of a partnership deal.

Qantas shares closed down 0.33 percent at A$1.52.

"It's a prudent move," said Jason Teh, a portfolio manager at Investors Mutual, which does not own Qantas shares.

"That's a way to get your costs down. If you know your return on capital's going to be thin, share your capital base. The international business is more cyclical and poses more competitor threats than their domestic business."

POLITICAL AND UNION RESISTANCE

The plan announced by Qantas drew immediate fire from several quarters. Australian Transport Minister Anthony Albanese said the government will examine the plan to ensure it does not breach the airline's privatization rules.

"The Australian government very firmly believes in an Australian-based and majority Australian-owned Qantas," he said.

The Qantas Sale Act of 1992 requires the airline's operational base and headquarters to be in Australia, foreign ownership is capped at 49 percent and the name Qantas is preserved. At least two-thirds of the board and its chairman must be Australians.

Trade unions and a key independent senator have said they could also seek legislative or regulatory steps to ensure Qantas remains an Australian-owned company.

Qantas faces a likely escalation of industrial action at home over the plan's estimated 1,000 job cuts, with trade unions opposed to any move by Qantas to shift its international operations offshore. About 200 pilot jobs were expected to be included in the cuts.

"Until we get an assurance from Alan Joyce that future Qantas flights will be operated by Qantas pilots, instead of outsourced and offshored alternatives, we will be doing everything we can to stop this destructive strategy for Qantas's future," Barry Jackson, president of the Australian and International Pilots Association, said in a statement.

FOCUS ON ASIA

Qantas' plan refocuses its offshore business squarely on Asia, a region that should account for more than half of global airline profits this year, according to the International Air Transport Association.

Qantas plans to acquire between 106 and 110 Airbus A320 aircraft, including planes for Jetstar Japan and the new premium Asia-based airline. Between 28 and 32 planes of these would be current-generation A320s and the rest the fuel-efficient, next-generation A320neo aircraft.

Airbus has scored resounding victories over Boeing with its narrow-body A320neo aircraft, taking a commanding lead in the single-aisle market once dominated by Boeing's 737 family.

Just last month AirAsia announced a deal worth $18.2 billion at list prices for 200 A320neo planes while AMR Corp's <AMR.N> American Airlines, previously an all-Boeing customer, ordered 260 narrow-body A320 planes.

Qantas and its regional brand QantasLink have mixed fleets with notable Boeing narrowbody and widebody presences. Jetstar has only Airbus narrowbodies, but it has orders for Boeing 787 Dreamliners.

"I would count this as a loss for Boeing," said Richard Aboulafia, an aerospace analyst at The Teal Group, noting Airbus has "core strength" in narrowbody markets with Asian low-cost carriers.

Qantas also delayed the delivery of its final six A380s for up to six years in a move aimed at conserving capital and bolstering its balance sheet.

It said it would retire four Boeing 747s and would make no change to its existing order of Boeing 787s.

Qantas reaffirmed its earnings guidance, though it said the restructuring would cost more than A$350 million ($367 million).

($1 = 0.955 Australian dollar)

(Additional reporting by Rob Taylor in Canberra, Sonali Paul and Victoria Thierberger in Melbourne and Kyle Peterson in Chicago; Writing by Mark Bendeich; Editing by Ed Davies, Matt Driskill and Matthew Lewis)