The Distillery: Qantas olive branch

Jotters point to a détente in the domestic airline price war as great news for Qantas and Virgin in the year ahead.

A $6 million profit had investors clambering all over Qantas stock yesterday and with a domestic pricing war possibly behind it, it’s easy to see why. That being said, does the greatest growth opportunity for Australia’s national carrier lie beyond these shores?

Commentators were largely telling a tale of progress at Qantas, with a ceasefire called in the bitter battle for the local business market. Fairfax’s Malcolm Maiden contends the development has Qantas’ profit, just like its share price, ready to rise.

“The group's shares jumped from the opening on the profit news and closed 17 cents or almost 14 per cent higher at $1.40 because Qantas looks to be now on the cusp of a substantial earnings bounce. The capacity increases that accompanied the market share war have ended, with Qantas' market share, including its business travel market share, intact…The extra capacity came at a cost. Qantas' domestic earnings before interest and tax fell by 21 per cent from $463 million to $365 million, and Jetstar's EBIT fell by 32 per cent to $138 million…Thursday's market response shows, however, that investors reckon the hard yards have been won by Joyce.”

The Australian’s Damon Kitney likewise sees none-too-subtle signs of a truce between Qantas and Virgin, one that should have both sets of shareholders singing in the aisles.

“With the seeming madness of last year's domestic capacity war behind both of them, Joyce held out an olive branch to his rival at Virgin Australia, telling analysts that he hoped capacity growth would moderate even further in the year ahead because "that would be good for everyone"… Certainly (Qantas chief executive Alan) Joyce has shown (Virgin boss John) Borghetti what he is capable of in responding to a challenge, claiming yesterday he'd driven his competitor into a loss-making position in the domestic market, but he's copped collateral damage in the process. But with Virgin having taken control of the bleeding Tiger Airways and its own profits under pressure, the domestic market is returning to a more rational position… It may not be enough to attract the attention of competition czar Rod Sims, and not quite the return to the cosy duopoly that some feared post Virgin's Tiger acquisition, but the end of the capacity war should be music to the ears of Qantas and Virgin shareholders.”

Along similar lines, Business Spectator’s Stephen Bartholomeusz speaks of the “dogfight” that gripped the domestic market in the first half of calendar 2013, and what helped Qantas avoid ending up in the doghouse.

“It was Virgin Australia that ignited the capacity war with Qantas, but the rival carrier was taken aback by the ferocity and nature of Qantas’ response, with Alan Joyce using his Jetstar brand to spearhead his counter-attack. Jetstar’s domestic business added almost 12 per cent to its capacity in the year to June as Joyce targeted Virgin Australia’s still-core customer base – leisure travellers. There was, obviously, a cost to that response and the defence of Qantas’ ‘line in the sand’ within the domestic market – a minimum market share of 65 per cent. The underlying earnings before interest and tax of Qantas’ domestic brand fell from $463 million to $365 million, while the Jetstar group, which includes the carrier’s international operations, experienced a fall in EBIT from $203 million to $138 million…What saved Qantas from what might otherwise have been an ugly outcome was the impact of a traumatic and quite radical restructuring of its international business and Joyce’s re-basing of the group’s costs more broadly.”

While the Australian scribes naturally focus on the local side of things – it is our national carrier after all – the AFR’s Chanticleer columnist, Tony Boyd, finds a reason to be optimistic elsewhere. The “dismal” profit, he says, hides the startling potential of its Japanese expansion through budget spin-off Jetstar.

“Jetstar had a tough year in 2013 and the last few months have been challenging because of negative consumer sentiment ahead of the election. But a closer look at Jetstar’s new joint venture in Japan shows that the company could well repeat the success it had in Australia with its low cost carrier… Japanese consumers, who have been starved of decent airline competition thanks to the cosy oligopoly of Japan Airlines and All Nippon Airways, are reacting just as Australians did when given the choice of cheap airline tickets.”

Qantas wasn’t the only consumer discretionary bellwether in the news, with retailer David Jones reporting sales figures for the most recent financial year. Fairfax’s Elizabeth Knight explains how DJs is belatedly catching up in the online space and why the Aussie dollar could be the sleeper that brings it back to life.

Speaking of retail, Fairfax’s Adele Ferguson discovers that Australian interest in online purchases is intensifying, eventually leading to more heavy discussions over the tax implications – just not before the election.

And finally, the AFR’s Sally Patten outlines why three-quarters of the way through its transformation program, the biggest test is ahead of investment services group Perpetual.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles