There’s no place like home for Qantas

26 October, 2017

As the chilly winds blow outside Australia, Qantas is moving along pretty nicely at home.

Average revenue per passenger kilometre is up a whopping 8% over the first quarter of FY2017; that’s a feature of higher prices and a shift in the average distances flown as (shorter haul flights tend to enjoy higher prices/km); and the joy of market dominance has allowed the flying kangaroo to fly 3% less than last year.

The three limbs of the supply-demand-price equation are heavily visible here. If demand stays reasonably level, squeezing supply means prices go up. It’s a simple business really, the airline business.

And the very good news that Qantas offered today – while the share market seems to be more preoccupied with the threat of greater competition internationally in the future – is that the domestic market strength is holding up well.

Now it does need to be remembered that the first quarter of FY2017 was arguably dragged down by political and election factors, so the base might be a bit lower than “normal”. And, as a side note, despite the continuing drag on our economy created by the never ending Canberra Games, the market is showing remarkable resilience. Imagine what we could be achieving if the pollies would just get out of the way.

Qantas can bank a billion dollars each year just from staying home

But even allowing for adjustment for last year’s headwinds, things do look very positive at home for Qantas. That’s where the profit is, virtually guaranteeing Qantas nigh on a net billion dollars profit annually. Virgin is still weak and yet to complete a leadership transition. Basically, Qantas has the market exactly where it wants it: a viable but weak competitor and a two thirds market share.

At the same time, it’s pretty much got its own house in order and is continuing to force costs downwards.

Domestic fares have remained pretty steady, although “restricted economy” has edged up

Source: BITRE Domestic Air Fare Index; Index = July 2003 @ 100

So where has the extra revenue come from? It is apparent from the BITRE fares reporting that fares overall haven’t gone up much in any category. While part of the 8% rise may have come from e.g. passengers buying up from discount fares and a bit of a rise in corporate fares, that does tend to suggest that at least part of that equation is that the Virgin group is struggling to keep its prices up.

Nice stable low fuel costs are continuing to make discounting possible and, even if prices unexpectedly spike, Qantas is well hedged through into the next financial year. The Aussie dollar is still in Goldilocks territory (given that well over 50% of costs are in USD), so no problems there.

Market positioning doesn’t get much better. Moreover, barring exceptional external developments, there’s almost nothing on the horizon to challenge the rosy situation. However much market demand might grow, there’s basically nowhere for anyone else to enter. Sydney is the key to the Australian market and there’s no space there, and won’t be for at least another 10 years when the city’s second airport is due to come on line (drastically under capacity, but that’s another story).

It has to be assumed that Virgin will regain some traction in 2018, but not enough to make a substantial difference to Qantas’ bottom line for the FY.

Internationally, competition will undoubtedly remain strong. The renegotiated JV with Emirates looks the goods; but a lot will depend on the Trump Administration approving the expanded Qantas-American JV as well, with United renewing its position on the valuable US-Australia routes.

All in all, even if it’s all in Aussie dollars, CEO Alan Joyce’s bankers should be confident he’ll be banking another 25 million next year too.