The Qantas share price correction we had to have

Photo by Sergio Dionisio/Getty Images

Qantas shares went through a technical correction yesterday, falling more than 10% in trade after the airline warned it was seeing signs of softer domestic demand.

A confluence of factors has seen the airline post a breathtaking corporate turnaround over the past two years. The cost savings of its transformation plan involving thousands of layoffs started paying dividends just as some significant tailwinds arrived, in the form of a crash in global oil prices and the falling Australian dollar.

With Qantas holding around two-thirds of the domestic market, the airline is naturally positioned to benefit when the currency weakens and more Australians deciding to stay at home for their holidays.

At the same time, as activity in the services sectors has picked up in the big east coast cities, business travel has been re-energised. The Sydney to Melbourne corridor boomed, with 8.6 million passengers flying on the route in 2015, an all-time record and more than 3% up on the previous year.

They were Goldilocks conditions for the airline. The share price rose from a buck to over $4.

It was also a healthy sign for the progress with Australia’s economic transition: more business trips means more people buying and selling, and more deals getting done.

In announcing today that it was winding back its plans for adding extra domestic capacity, Qantas said: “Some softness in demand, related to the upcoming federal election and recent drop in consumer confidence in Australia, began to emerge over the peak Easter and school holiday period in late March and continued to be seen in forward bookings in April and May.”

In other words, the lower rate of bookings didn’t appear to be just a blip. The concern now is this softening in demand might be a sign that the Australian consumer – whose dollars are so important to helping propel the domestic economy through its transition – might be winding in spending.

After all, when you’re tightening the reins, the big-ticket treats like holidays are among the first things to go.

Here’s a simple chart that Commsec’s Craig James sent around last year showing the relationship between falls in load factor and economic growth.

Image: Commsec

As you can see, an increase in load factor tends to be associated with increasing economic growth, while reductions in load factor tend to be seen when the economic growth rate is falling.

This isn’t the only evidence that consumers are getting a bit wary. Last year one of the high-discretionary categories in the retail sales data started posting some low numbers, and often going backwards. It’s the measure of spend in cafes and restaurants, which shows you how much people are eating out. Here’s the chart:

That distinctive saw-tooth pattern in the rate of growth in cafe and restaurant sales – one month up, one month down – is an indication of an overall plateauing in the total dollar value that Australians are spending. Eating out is simple and inexpensive in Australia’s big population centres, and so this is an indicator that we like to watch because flat or negative numbers hint at a more cautious consumer.

This all lines up with some new data we got last week from the RBA, which, as Greg McKenna outlined here today, shows that Australians are stuffing money into their mortgage offset accounts, perhaps a recognition that household debt levels have become unsustainably high.

But a bit like the correction in the Qantas share price, perhaps this is just a healthy reality check. Consumers and households carried the Australian economy on their back in the fourth quarter of 2015, running down the their savings rates to a post GFC low of 7.6%. With the prime minister struggling in the polls, with tax thought bubbles apparently concerning consumers, and with the usual election slowdown in spending the economy might be softening a little. Add in household budgets and balance sheets that consumers might feel need need a little repair, it looks like there’s an increasing chance that the economy is heading for a flat spot.

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