Qantas feels pinch as yields slip
Qantas has warned that a pick-up in business confidence has failed to translate into added bookings, forcing it to predict that returns from fares will fall in the first half.
Shares in Qantas fell as much as 5 per cent after the airline forecast that group yields will drop by up to 3 per cent in the first half of the new financial year. The forecast includes budget offshoot Jetstar.
"The magnitude of it is a shock," Commonwealth Bank analyst Matt Crowe said of the expected fall in yields. "The fact is that there is capacity going into the market at a time when demand is falling."
Qantas chief executive Alan Joyce blamed the expected decline in yields in the first half on "weak underlying demand" and intense competition on both domestic and international routes. "The domestic market is still absorbing capacity growth that has been double the long-run average," he told the annual meeting in Brisbane on Friday.
"And this growth has come at the same time as weak underlying demand across the market, from the leisure to corporate segments."
Qantas remains locked in a battle with Virgin Australia for lucrative corporate travellers, while Jetstar and Tigerair Australia are upping their contest as the latter expands its network. Virgin bought a controlling stake in Tigerair earlier this year.
Qantas and Jetstar plan to boost domestic capacity by as much as 2.5 per cent in the first half, while Virgin is aiming for a rise of up to 4 per cent. The airlines make the bulk of their earnings on domestic routes.
Mr Joyce said he was hopeful that the recent lift in business confidence following the federal election would flow through to increased demand for travel but conceded that there would be a "lag effect".
Qantas chairman Leigh Clifford told shareholders that Australia's economic position had been "relatively strong but there were elements of weakness. We have not yet seen the rise in business confidence following the election translate into any discernible increase in demand for domestic or international travel.
"The tough domestic market conditions that we faced in financial year 2013 are unlikely to ease in the short term, with growth coming into the market at the same time as weak underlying demand."
Mr Clifford said the board was committed to resuming dividend payments "when it was appropriate". Qantas has not paid a dividend since 2009.
He emphasised Qantas had almost completed a $100 million share buyback, which was the "most efficient way of returning value to shareholders".
Despite the backdrop of tough trading conditions, the shareholder meeting was one of the tamest Qantas has held in years, ending in just over an hour.
The Australian Shareholders' Association voted its proxies against Qantas' executive-pay card and the granting of up to 2.15 million performance rights to Mr Joyce.
It had concerns about Mr Joyce's "large cash" bonus, and the fact financial targets for executives were based on pre-tax profits rather than after-tax profits. But the resolution on executive pay was passed with overwhelming shareholder support.