Qantas warns of short-term pain
While he was upbeat about the airline's long-term prospects, Mr Joyce 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," he said. "[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 that led to the dramatic grounding of Qantas' fleet in late 2011.
Shares in Qantas fell almost 6 per cent on Friday before closing down 7.5¢ at $1.775, 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.
After 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.
He tempered investors' expectations of a strong pick up 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 yen will also affect its budget airline Jetstar Japan, launched last year.
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Qantas shares fell after CEO Alan Joyce warned of a tough second half driven by domestic competition and one‑off international costs. The company said it would book about $75 million in costs (shifting its European base and pilot back pay), and Joyce pointed to a high degree of volatility and uncertainty — news that pushed the stock down almost 6% on the day and left the share price at $1.775.
Qantas outlined roughly $75 million in one‑off costs: about $50 million related to the new Emirates alliance and shifting its main overseas base for European flights from Singapore to Dubai, and about $25 million in back pay from settling the enterprise bargaining agreement with long‑haul pilots.
Alan Joyce declined to give a profit forecast because of a 'high degree of volatility and uncertainty' in the business environment. He noted the airline's second half is typically the toughest period and that short‑term competitive and transition pressures make guidance difficult.
In the short term, Qantas is managing transition costs from the Emirates alliance (including shifting its European base) and facing aggressive competitor responses on fares. Long term, Joyce said the alliance should deliver 'major benefits over many years,' and early sales show a significant increase in bookings to Europe compared with last year, reflecting pent‑up demand.
Qantas says a high degree of capacity in the domestic market is pushing down yields and profitability. The airline does not expect improvement in the current half, though it expects capacity growth to ease next financial year, which should lead to a healthier domestic capacity position.
Qantas described Asia as 'a long game' and said it is building long‑term partnerships to improve performance there, but tempered expectations of a quick pick‑up. The company also warned that a weaker yen will affect its budget carrier Jetstar Japan, which launched the previous year.
Singapore Airlines and Cathay Pacific — key rivals to Qantas and Emirates on Europe routes — have responded with more competitive fares. Alan Joyce described these as 'aggressive short‑term responses' that are affecting the market while Qantas manages the alliance transition.
Investors should watch Qantas's second‑half trading updates for the impact of the $75 million transition and pilot‑pay costs, domestic capacity and yield trends, booking momentum on Europe routes from the Emirates alliance, competitor fare responses, and currency moves (such as the yen) that could affect Jetstar Japan. These factors were highlighted by management as drivers of near‑term volatility.
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