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Qantas heads for billion dollar blowout

By David Flynn     Filed under: qantas, Virgin Australia

Qantas is expected to reveal a record billion dollar loss next week when the airline open its books on the 2013-2014 financial year.

The Flying Kangaroo is tipped to report a pre-tax loss of some $750-770 million, according to analysts, as the airline enters the second year of an ambitious three-year ‘transformation program’ aimed to carve out $2 billion dollars in costs by mid-2017.

But one-off costs from the airline’s restructuring, including redundancy payments for 2,200 workers, are likely to add some $250 million to the tally.

Virgin Australia won't exactly be sending out rays of sunshine either, with analysts pegging Virgin Australia’s pre-tax loss at around $250-$270 million including the lacklustre performance of low-cost airline Tiger, in which Virgin holds a 60% stake.

Qantas will present its annual results next Thursday, August 28, with Virgin Australia following on Friday August 29.

The cost of competition

Australian aviation’s billion dollar sinkhole of 2014 is a stark contrast to just four years ago.

In mid-2010 Qantas was riding high on a pre-tax profit of $377 million, and one year later would see this catapult to $552 million before everything went pear-shaped.

Virgin Australia – then operating as the low-cost airline Virgin Blue – had turned the corner to eke out a net profit of $21 million, compared with a $160 million loss the year prior.

How to account for the turbulent flight path from 2010 to 2014?

It's a result of keen competition between Qantas and Virgin Australia, says CIMB analyst Mark Williams, with both airlines adding more seats or capacity onto the domestic market in an effort to win over travellers or protect their own turf.

“It’s the effect of excess capacity in the domestic market driven by Virgin (initially) increasing its frequencies to target the corporate market, which Qantas then reacted to by putting its own capacity into the market to maintain market share, its 65% line in the sand” Williams told Australian Business Traveller.

“This has been exacerbated by excess capacity in the international markets as well as a number of international carriers have increased their capacity into Australia” Williams says.

The knock-on effect of so many new flights with so many extra seats meant lower passenger revenue or yields for each airline.

“The result of too much capacity has been downward pressure on yields, which has has been the main driver of the losses you are now seeing for both airlines” Williams explains.

A war on two fronts

Qantas has also been squeezed by foreign airlines, with Morningstar Equity Research analyst Scott Carroll describing the international market as “Qantas Achilles’ heel”.

“Qantas International operates at a cost-base disadvantage to Asian and Middle Eastern airlines that have added capacity” into the Australian market, Carroll says.

So while a capacity freeze by Qantas should allow natural market growth to catch up, Carroll predicts the airline’s international recovery will see it “exit loss-making routes, deliver cost saving initiatives and announce new international partnerships.”

Analysts will go into next week’s back-to-back financials from Qantas and Virgin Australia seeking more clarity from both airlines as to how they will claw back costs in the coming year.

Also read: Qantas Frequent Flyer sell-off shelved

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About David Flynn

David Flynn is the editor of Australian Business Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

 

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1 on 22/8/14 by Jono

So is this to suggest that adding lots of capacity to routes and thus creating over supply before you see signs of demand, whilst having your work force focus most of their efforts on side-shows like the Qantas Golf community rather than the core product attributes, (which are actually quite good for both airlines,) is a bad idea!?

I also recently read something here on AusBT about these code shares which look from the sidelines, (which is where I am,) as if Aussie airlines are charging customers more for fares on their own planes. Why should I buy a ticket with VA when I can get the exact same ticket from SQ for cheaper?

I once questioned a QF saleswoman who proudly told me I could fly to Europe solely on EK flights. When I asked ‘doesn’t that mean you only make a small cut of the profit!?’ She sadly replied yes.

I’m not suggesting that the aviation industry isn’t challenging and acknowledge the regulatory and labour intensive issues. I just sometimes see these stories and sadly question, ‘why do they make it so hard for them to make money from customers like me?’

1 on 22/8/14 by moa999

The problem for Qantas is with its cost base - it has a choice of a small share of the profit (via codeshare) or a large share of the loss, on its international routes

It seems they are electing more and more for the former

2 on 22/8/14 by smit0847

I can't see QF ever making a profit again. They have absolutely no plans to increase revenue and cutting costs will only reduce the losses not make a profit. What are their plans for new routes and fleet? Absolutely nothing. The only thing on the horizon is the A330 refurb. They have nothing else.

3 on 22/8/14 by MichaelP

Qantas' timid, short - sighted fleet plans will only exacerbate the situation, as competitors (SQ, NZ, EY, CX - even United!) re - fleet with fuel efficient types (geez the 787 - 9 looks like a game - changer!). Why not bite the bullet; back yourselves; take the (calculated) risk & incur the cost of a newer, passenger friendly fleet, & remove at least one of your key disadvantages (increased fuel burn of the 330's vs. 787 / A350), rather than giving your low cost arm the pride of the fleet & pretending your premium traffic isn't going to notice they're flying in an (even if refurbished) Jetstar hand - me - down. This seriously HAS to be one of the most short - sighted decisions current management has ever made. 

Fleet aside, their biggest disadvantage is obviously staff costs. This HAS to be tackled by management at some point. I don't understand how Qantas can (rightly) have such consistently high expectations of their pilots & engineers, yet not enforce the same rigour on their cabin crew? Surely the same consistent excellence should be expected; they are some of the most highly paid in the world. Some of them are excellent; but the consistency is just not there, & needs to be to justify the premium of travelling with them. The sense of entitlement among some staff just simply is not in line with the reality of the competition they face.

4 on 22/8/14 by aggie57

To be frank, the management of Qantas don't seem to have any sort of passion for their business.  If they did we wouldn't have had those ridiculous "business class" seats in the domestic A330-200's and we see them looking at ways to grow their business and brand.

5 on 22/8/14 by ourladyair

Focussing on just the domestic business, how have either airline managed to not take advantage of the huge FIFO boom over the past few years is beyond me. As mining comes off the boil they will only suffer even more, where is the that income going to be replaced? Qantas are just not cutting it, I agree with others here, old fleet, inconsistent in flight entertainment, (some or none.) Overpriced lounge membership (why not have a domestic price and a international price?) to overcrowded lounges etc etc. A near if not better quality offering from Virgin and competition from their own cut rate Jetstar and yet their Loyalty program is supposedly raking it in! Why not give Qantas flyers a free toaster at check-in paid for by Frequent Flyer, that will win some hearts and they can save on in flight meals by cooking up some vegemite on toast:-)   As for staff costs mentioned by MichaelP don't they all have similar domestic staff costs?? Or does Virgin pay their domestic crews less? Tiger? Jetstar? and hasn't Qantas just sacked thousands of staff as well? yet they are still going backwards. MY CEO would have been shown the door years ago. Are we heading towards a Ansett meltdown soon?

6 on 22/8/14 by zxsder

Please, please, please......

Qantas is in the current predicament due to gross mismanagement.

Clifford/Joyce have no plan for the airline. Clifford/Joyce are using Jetstar as an industrial sledgehammer with no regard for the proud history of Qantas or care for the future of the company or staff. The billions that have been poured into the loss making Jetstar franchises with no hope of ever recouping the money are criminal.

Clifford/Joyce have no idea how to run a full service airline. Cliffotd/Joyce run a reactionary plan which has no hope of competing against better run competition.

Look at the hundreds of millions of dollars that have been spent refurbishing almost brand new A380's with no chance of ever earning a return on the money spent.

Qantas are currently receiving second hand A330's from Jetstar which are being painted/configured for Qantas and then in the next 18 months will be reconfigured again - at what cost?

Qantas have no aircraft orders for the international business and yet the various Jetstar loss making franchises have ober 100 A320's on order - why does Qantas International require a profit to receive additional funding whilst the loss making Jetstar continues to receive brand new aircraft whilst posting record losses.

When will Jetstar Hong Kong ever receive approval?

When will jetstar japan receive approval for international operations - critical to Jetstar Japan making any king of profit?

When will Jetstar Vietnam ever return its cost of capital?

When will Jetstar asia ever return its cost of capital?

When will Jetstar International ever make any money?

When will Clifford/Joyce realise that:

Passengers want to fly on Qantas flights?

Passengers want to redeem Qantas Frequent Flyer points for Qantas flights?

Passengers do not want to be forced onto Jetstar flights?

Passengers want to fly to Europe, but not through Dubai?

Qantas staff are the key to the turnaround of a once great airline?

That they are totoally incompetent and should resign?

7 on 22/8/14 by Al

No surprises in the numbers but good analysis David.

1 on 22/8/14 by ozboy62

If I were a Qantas share holder, i would be calling for Joyce's and the boards heads, clearly they have no business sense, who in their right mind would flood the market with additional capacity before ensure there is a demand,  Joyce is behaving like a 5 year old child who cannot get his or her own wayby trying to hold onto the magic 65 percent  marketshare at all costs.

For the life of me I cant understand why Joyce is still in the job. I refuse to fly Qantas why remains the CEO, and happily give my money to Virgin my fsvouriter airline and overseas carriers, Joyce and Co is killing the Qantas Brand.  I hope the next  Qantas CEO is an Aussie or someone who understands that  Qantas is the Australian airline, like other airlines around the world , Singapore, British  that are the respective carriers for those counties.

1 on 22/8/14 by woganfan

I am not a Qantas shareholder but I have been calling for AJ to fall on his sword for a long time.  

He has done nothing for the airline and nothing for the shareholders, blindly following the budget airline model.  He has removed route after route and then put all the eggs in one basket with his bizarre alliance with Emirates and the rerouting of his final European flights through Dubai and turned Qantas international in to a travel agent.

For sure, he has massive overheads to contend with and these need to be reigned in quickly but this is not the only issue he needs to contend with. He needs to stop chasing his Ryan air dream which works on short haul in Europe where wages are lower, flying times shorter, airports are better and better served by cheaper public transport and focus on quality competitive flights from a proper airline.  How can they make money if they don't fly anywhere?

8 on 22/8/14 by Rishi

Qantas got robbed by Emirates with their 33 European routes. 

1. Qantas changed the stop-over to Dubai while Singapore was just fine, removed the PER-SIN & ADL-SIN Routes, the passengers had no choice but to go with either Emirates & bypass Qantas alltogether to go to Virgin Australia or one of their partners.

The whole purpose of this partnership for Emirates was to chip away Qantas as a competitive airline one by one, first of all which I mentioned making Dubai the new hub which no one really liked, people liked Singapore then they also did it to get more passengers to Europe (other than London).

1 on 25/8/14 by franz

I agree there and tradition for many years even after the US Carriers offered one Stops VIA LAX to London and Europe always preferred Singapore.What was Qantas thinking anyway.I have done the UK Run on SIA anyway and loved it.Give me The Likes of Night Safari,Zoo,Bird Park,Sentosa over the Middle East as a stopover.

9 on 22/8/14 by Rishi

It is Qantas' own fault they engineered their own bankruptcy, I am not saying it should go away but I want the airline to overcome this and become one of the best airlines, beating out Qatar, Cathay & BA, also other top airlines. Good luck Qantas!

1 on 22/8/14 by Jedinak K

That's going to take a heck of a long time buddy, first we need to assess how bad this financial year is going to be and then look at things from there. 

 

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