A coin flip for Qantas

Despite growing passenger numbers, Qantas’ international revenue has been disrupted by competitors. But the lower Australian dollar will agitate the fortunes of all players.

Qantas’ July traffic and capacity numbers show that the pressure on its international business created by its competitors’ pre-emptive responses to its alliance with Emirates isn’t easing.

When chief executive Alan Joyce released Qantas’ results last week, he said the international market had been intensely competitive, with market capacity growing five per cent last year. He attributed the increased capacity to competitors adding capacity to counter the expected impact of the alliance on the routes to Europe via Dubai. Apart from its traditional rivals, Qantas is seeing big increases in capacity by China’s airlines.

The July statistics show that Qantas carried 5.2 per cent more passengers than it did a year earlier but that revenue passenger kilometres rose only 1.1 per cent. Capacity increased 0.9 per cent and the revenue factor 0.2 per cent. Qantas said its Qantas International yields were lower because of the continued market capacity growth; it has had to attract the extra volume by discounting its seats.

Despite the increased competition, Qantas nearly halved the losses within its international business, from $484 million to $246 million, largely by cutting into its cost base and reducing capacity by exiting unprofitable routes.

Joyce was pretty excited about the early response to the Emirates partnership, which has seen big increases in the bookings on both the Qantas domestic network and Emirates' own network. The partnership is also enabling Qantas to reconfigure its Asian schedules to make them more convenient (and frequent) for business travellers, but that is a longer term strategy.

The interesting question for Qantas this year will be the impact of the lower dollar on its business and those of its international competitors. The dollar is trading more than 14 per cent lower than it was a year ago.

Joyce has pointed to the negative impact of the lower dollar – the group’s fuel bill in the first half of this financial year would be $160 million higher if the dollar remains where it is.

There are, however, some potential positive effects.  It should be supportive of domestic leisure travel and make Australia more affordable for international tourists.

It would also, however, lower the earnings for Qantas’ international competitors on outbound flights and could see some of the additional capacity added this year withdrawn. Indeed, United Airlines has already cut back on its capacity on the trans-Pacific route, which ought to be very positive for Qantas.

Without any need for collusion (the Australian Competition and Consumer Commission’s Rod Sims wasn’t happy about Joyce’s musing about Qantas’ response to Virgin Australia’s decisions on domestic capacity), the domestic market ought to be more stable this year.

Neither Qantas nor Virgin Australia would want a repeat of last year, when they added about 8 per cent to the market’s capacity, tipping Virgin Australia into losses and carving into Qantas’ domestic profitability.

Qantas is currently looking at increasing capacity by about 1.5 per cent to 2.5 per cent this year and Virgin Australia about three to four per cent, although Qantas would likely respond aggressively to any material increase in Virgin Australia’s domestic capacity.

Today it said its domestic yields had been flat in July across its three brands: Qantas Domestic, QantasLink and Jetstar Domestic. The flagship brand saw passenger volumes and capacity reduced whereas, relative to a year earlier, both QantasLink and Jetstar added significant capacity and volumes.

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