Clouds on horizon for embattled Qantas

Qantas dropped almost 6 per cent on Friday after chief executive Alan Joyce flagged a tough second half due to competition in the domestic market and one-off costs from international flying.

Qantas dropped almost 6 per cent on Friday after chief executive Alan Joyce flagged a tough second half due to competition in the domestic market and one-off costs from international flying.

While upbeat about the airline's long-term prospects, he indicated it would be a tough second half, with the airline set to book $75 million in costs from shifting its main overseas base for European flights from Singapore to Dubai, and back pay for its long-haul pilots.

He declined to give a profit forecast for this financial year because of the "high degree of volatility and uncertainty".

The second half is typically the airline's toughest.

A month after launching the Emirates alliance, Mr Joyce told investors in Sydney the deal would deliver "major benefits over many years" but "right now we are still managing through the transition phase".

"We saw a significant increase in bookings to Europe on the joint network in the first nine weeks of sales, compared to the same period last year, which we knew reflected some pent-up demand.

"[But] we are also seeing aggressive short-term responses from our competitors."

Singapore Airlines and Cathay Pacific - the main rivals to Qantas and Emirates - have been reacting to the alliance with more competitive fares on flights to Europe.

Apart from $50 million in costs arising from the alliance, Qantas faces a one-off hit of $25 million in back pay from settling its enterprise bargaining agreement with the long-haul pilots. It was the last of the disputes with three unions which led to the dramatic grounding of Qantas' fleet in late 2011.

Shares in Qantas fell almost 6 per cent on Friday before closing down 7.5ยข at $1.77, making it one of the biggest losers among the ASX's top-200 companies.

Mr Joyce said the airline faced a "tough environment" in the domestic market from a "high degree of capacity in the market pushing down yields and profitability".

"While we do not expect any improvement this half, capacity growth is alleviating, which will lead to a healthier domestic capacity position [next financial year]," he said.

Following the launch of the Emirates alliance, which is focused on routes to Europe, investors are turning their attention to Qantas' plans to improve its performance on routes to Asian destinations.

Mr Joyce tempered investors' expectations of strong improvement in its performance in Asia.

"Asia is a long game for us, but we are making all the right moves and building the long-term partnerships for success," he said.

A weaker Japanese yen will also adversely impact its budget airline Jetstar Japan, which was launched last year. However, Mr Joyce said he remained confident it would become profitable in its third year of operation.

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