Qantas uncertainty lifts prospects for Virgin

QANTAS is under pressure to offer more clarity about its expansion in Asia as it faces the double whammy of high fuel prices and economic upheaval in Europe weakening demand for travel in other markets.

QANTAS is under pressure to offer more clarity about its expansion in Asia as it faces the double whammy of high fuel prices and economic upheaval in Europe weakening demand for travel in other markets.

Although it has been leaning towards Malaysia as a base for a new premium airline as part of a joint venture with Malaysia Airlines, Qantas is not expected to be in a position to offer investors more details about its Asian expansion plans until next month at the earliest.

In the midst of volatile economic conditions, high fuel prices and uncertainty over travel demand, Macquarie Equities said a lack of clarity over Qantas's plans to set up a hub for a new premium carrier in south-east Asia "only serve to complicate the investment thesis".

The broker's preference for investing in airline stocks has reverted to Virgin Australia because it had a "better articulated strategy than Qantas" and was likely to benefit from a restructure aimed at snaring a bigger slice of the corporate travel market from its bigger Australian rival.

The uncertainty has led Macquarie Equities to downgrade Qantas from "outperform" to "neutral", and lower its share-price target from $1.96 to $1.57. Goldman Sachs lowered Qantas from "buy" to "hold" on Friday.

Shares in Qantas have been trading in a narrow band for the past five months between an all-time low of $1.375 - struck in October at the height of a damaging industrial dispute - and $1.705. They closed down 1.5? at $1.49 on Friday. Virgin Australia rose 0.5? to 31.5?. Last month the International Air Transport Association warned that weakness in air freight markets was beginning to be replicated in passenger traffic.

The peak body for airlines reduced its forecasts for combined airline profits this year from $US4.9 billion ($4.75 billion) to $US3.5 billion.

But in a worst-case scenario in which Europe enters a full-blown banking and economic crisis, the association has said that airlines could suffer a combined loss of more than $US8 billion.

Last week AirAsia X, an offshoot of the region's largest budget airline AirAsia, blamed high jet fuel prices and weakening demand for air travel for its decision to abandon flights to Europe and India.

Macquarie Equities analysts said Australian airlines were "somewhat protected" from a fall in demand for premium traffic worldwide due to the strength of the resources and oil and gas industries.

The domestic corporate travel market had been "holding up well", they said.

"[But] we see the potential for Qantas reducing its European exposure further through the suspension of the Sydney-Frankfurt route should European conditions continue to deteriorate."

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