One Thing Going For Qantas: The Loss-Making Capacity War Must End

QantasPhoto: Getty Images

Qantas marks a milestone in its history tomorrow with its half-year results presentation also the scene for chief executive Alan Joyce setting out his plan for turning around the airline.

It appears Joyce’s intense lobbying in recent months has paid off, with the government giving every indication that it is prepared to open up the airline to foreign investment in the long-run, and in the interim provide a debt guarantee that will restore the airline’s credit rating.

On the company results, there’s an expectation the airline will post a loss somewhere in the region of 300 million. Remember that the profit warning has come about as a result of:

  • The airline competing with Virgin to maintain its 65% market share by adding capacity, driving down yields and turning what was previously a sector offering $1 billion in industry profits into a loss-making business;
  • Increased international competition from from overseas airlines for people flying in and out of Australia, and
  • Stubbornly high fuel prices.

In the current maelstrom it’s worth remembering that the first point here – that the domestic market has become a money pit – will inevitably be neutralised. It’s hard to say how long Virgin Australia can continue the capacity war but it is a certainty that at some point the bleeding has to stop.

One analyst from a major investment bank said today: “The good news on that front is that Virgin needed the capital raising to stay solvent and to add new capacity. From here on, they probably need to go to their shareholders again. Given the level of discussion on Qantas and the ‘un-level playing field’, it will be hard to see how they can get another capital infusion.”

Eventually there will have to be a return to more rational behaviour. It may be in a matter of months or it may take longer to play out, but it will end and this will help the company as it works towards improved results.

The job cuts will take the immediate headlines but the key things to watch in the results are comments on changes to capacity, cost-cutting plans, and plans for asset sales, especially with the Frequent Flyer business – $2.5 billion asset for which there are a number of options available including a partial float.

Now read: What A Horrible Week To Be A Qantas Employee

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