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
Follow Australian Business Traveller on Twitter: we're @AusBT