Markets: Flying in and out of favour

Can Qantas Airways chief executive Alan Joyce afford a smile at the expense of his one-time colleague John Borghetti after Virgin Australia said yesterday it would make a loss of as much as $110 million in its 2013 financial year?

Perhaps not. The mining boom is waning. The fly-in, fly-out business underpinning Qantas’ charter airline Network Aviation and Virgin’s Skywest is ebbing along with it. BHP Billiton is automating its mine operations, and passenger numbers on some of these airline routes are falling.

About four million passengers flew on routes designed to bring them to mining sites in the 2013 financial year. That’s about 13 per cent of Australia’s total domestic flight passengers. Morgan Stanley estimates that more than 25 per cent of Qantas’ domestic revenue and profit is from such fly-in, fly-out business. Just 12 months ago many routes in Western Australia had growth as high as 20 per cent.

Since April the Australian dollar and Brent crude oil prices have been moving in opposite directions – and that direction has not been in favour of airlines. The dollar has fallen about 12 per cent, while Brent is up about 6 per cent, since April 22. Singapore jet fuel at its highest level in three years. Morgan Stanley estimates Qantas’ fuel bill in its 2014 financial year will rise by $260 million, and Virgin’s will increase by $63 million.

Since April 22, Qantas shares have fallen 30 per cent and Virgin Australia shares are down 4 per cent.

The airlines' most profitable seats, business and first class, may begin to empty out as corporate travel budgets are further scrutinised. Morgan Stanley's AlphaWise corporate travel survey reports that companies are applying a more stringent oversight on business class travel. The investment bank says Qantas’ yield growth – a measure of the average fare paid per distance travelled – fell in 2013 on both domestic and international routes.

Unless airlines see positive passenger yield, a drop in the oil price and a pick-up in the corporate travel market – along with the domestic economy – shares in Qantas and Virgin are likely to be hit by further turbulence.

Today Qantas shares were down half a cent, or 0.4 per cent, to $1.24. Virgin’s stock slid 2 cents, or 4.6 per cent, to 41.5 cents, bringing its two-day decline to 9 per cent.