Chief Executive Alan Joyce said the 13 percent cut in capital expenditure would come from a delayed intake of new aircraft due to manufacturer delays and cuts in planned domestic capacity. The airline will also withdraw from some routes and cut costs in its engineering, maintenance, ground handling and catering units.

The news sent its shares higher by as much as 8 percent to a 3-month high,although the stock is still down by about a third over the past year.

The cuts are designed to protect profitability and an investment grade credit rating at Qantas (QAN.AX), which suffers from a higher cost base than its Asian peers.

Markets welcomed the cost and capex cut plan, while underlying profit before tax of A$202 million still beat analysts expectations for A$176 million.

"The cut in capex now reduces the risk of an equity raising," said David Liu, Head of Research at ATI Asset Management.

The global airlines industry has been struggling to pass on higher fuel costs to customers as demand for business and leisure travel dwindles due to the global economic slowdown.

Qantas employs over 90 percent of its 32,500 employees in Australia, and union fears that it will send jobs offshore helped spark last year's bruising industrial battle that led to the grounding of its entire fleet and prompted intervention by Australia's industrial umpire.

"Today Qantas Engineering services costs are at least 30 percent higher than those of our competitors. And we have the ability to change," Joyce said in a statement.

He said Qantas would review its heavy maintenance operations in Australia, given the introduction of new aircraft such as A380 super jumbos and Boeing 787s was lowering the age of its fleet. The review was expected to conclude in 60 days could lead to more job cuts.

The airline also planned to consolidate some engineering, ground and maintenance operations in its Sydney hub, and was in talks to sell some catering centres.

The changes along with the exit of two loss making routes should be positive for plans to return the international operation to profitability, Credit Suisse analyst Anthony Moulder said.

CAPEX CUT

Joyce said the cut in capital expenditure to a total A$4.6 billion for 2011/12 and 2012/2013, from A$5.3 billion projected earlier, would come partly by adopting a capital-light model for a planned Asian premium airline.

The proposal is Joyce's answer to turn around an international operation that is losing A$200 million a year by setting up an Asian-based airline. Joyce said the airline was still in talks with potential partners.

The Asia plan was a factor in last year's industrial action, which Qantas said cost it more than A$650 million, along with the grounding of the fleet and high fuel bills.

The Australian and International Pilots Association said in a statement ahead of Qantas earnings that investors should be wary of the proposition that a low-yielding, cut-throat, low-cost model could replace a high-yielding, premium traffic model and provide a better return.

Qantas has not had a good run in recent times. Besides trouble with employees, its flagship A380 superjumbo fleet has suffered wing cracks due to design and manufacturing flaws.

Last month, ratings agency Moody's cut its rating on the airline by one notch, citing pressure from high fuel prices, strong competition and a difficult operating environment.

Qantas is not alone in its struggles. Earlier this month, Singapore Airlines (SIAL.SI) said it expected to see a further deterioration in its business as it struggles with sluggish demand and rising fuel costs.

(Editing by Richard Pullin)

• A Permanent Economic Emergency