A bluer sky for Qantas

Those first faint sightings of a bluer sky back in August are being confirmed. Qantas' forecast of a first half profit for 2009-10, however modest, suggests that the worst may be over for the carrier.

Qantas lost money – about $93 million – in the second half of last financial year, its first such loss in six years. Today it said it expected to achieve a first-half pre-tax profit of between $50 million and $150 million.

As the crisis gripped, the international aviation industry was among the earliest of casualties. It lost $US16.8 billion in 2008, is expected to lose $US11 billion this year and the International Air Transport Association is forecasting losses of $US5.6 billion this year.

Qantas' response to the deepening crisis in the sector was similar to most of its peers. It slashed capacity, deferred or cancelled orders for new planes, attacked costs and focused on trying to protect volumes rather than yields. The effects of the heavy, almost desperate, discounting of international fares in particular are still flowing through the industry's revenue base.

The first sign that conditions might be stabilizing for Qantas came in August, when there was a discernible lift in volume over still-reducing capacity. That pointed to stabilisation rather than recovery.

Today Qantas said operating conditions had improved by comparison with the second half of last financial year, with both volumes and yield improving.

In November the group's passenger numbers increased by 9.7 per cent compared with the previous year, with revenue passenger kilometres rising 3 per cent on capacity that was 2 per cent lower. Load factors were 4 percentage points higher. For the year to date passenger volumes were up 6.9 per cent, revenue passenger kilometres 1.1 per cent and capacity down 2.5 per cent.

However, illustrating how deeply the crisis has affected the group domestic yields for the year-to-date were 8.9 per cent lower and international yields 23.2 per cent lower.

Yields are now the key to the recovery in Qantas' fortunes. Last week Qantas announced it was raising fares in its international network for the first time in a year and a half. That was an indication that it believed the market was turning.

It is, however, going to be some time before the pipeline of heavily discounted forward bookings has washed through the group's numbers and the impact of the first tentative steps towards more normal pricing are seen.

The resilience of the domestic economy and its continuing ability to divert routes and capacity to the lower-cost Jetstar brand has helped Qantas blunt the edge of the crisis and, with expectations of continuing improvement in the domestic economic growth rate will lead any rebound in profitability.

The international market, particularly for premium travel, remains deeply recessed. IATA, while forecasting a resurgence in volumes to levels experienced in 2007, ahead of the crisis, expects revenues to be about $US57 billion lower. That's primarily because of the impact on business travel.

Increases in capacity on a number of its core routes, particularly the transpacific where there is a four-cornered contest where once there was a highly profitable duopoly but also on the routes to Europe where the Middle Eastern carriers have continued to add capacity despite the industry settings, mean that a significant restoration of profitability in the international business won't be speedy or easy.

The Jetstar franchise will continue to expand, both domestically and internationally, as Qantas seeks to improve the profitability of the international network and build a bigger presence within the relatively healthier Asia Pacific region.

Qantas may be somewhat more optimistic than it has been throughout the industry crisis but its optimism, such as it is, is heavily qualified. It cited high levels of volatility in the economic outlook, in industry capacity, passenger demand, fuel prices and exchange rates.

While its own recovery might weak and fragile, the anticipated $150 million to $250 million turnaround between the second half of last financial year and the first half of 2009-10 would be a very encouraging sign that Qantas has put the worst of the impact of the crisis behind it and managed the challenge the implosion in yield and demand better than most of its international peers.

The bigger challenge for Qantas in a more stable market would be to demonstrate that, in an industry with dysfunctional settings and where the crisis, because of those settings, hasn't produced the clean out of uneconomic and sub-economic capacity that would have been expected in a more conventional sector, it has the ability to generate returns above its cost of capital.

Despite the continual re-making of the group by Geoff Dixon and his energetic successor, Alan Joyce, that remains very much a stretch target and, despite the modest improvement in conditions, quite a distant one.