News
Australia domestic saves the day at Qantas results
February 22nd 2019
Qantas sought to convey business resilience in its first half results that largely weathered the fuel price storm. But competitive international took a beating while a docile domestic duopoly saw passengers pay more for higher costs. Domestic Australia shines and is nearly an annual US$1 billion profit business for the group. Read More »
Qantas has what other airlines in the region lack: a majority position in a sizeable domestic duopoly. The benefits are evident in the airline’s 1H2019 results, where domestic recovered fuel increases whereas the more competitive international market saw a steep decrease in profitability.
Qantas Domestic accounted for 23% of Group ASKs but 52% of EBIT (A$453 million). Jetstar Domestic contributed another 24% of EBIT ($206m); three-fourths of Qantas’ profit was made domestically. Qantas notes it has 80% of domestic profit pool despite 62% of the capacity (the balance is mostly Virgin Australia).
Across the group, ASKs decreased 0.5% while unit revenue growth of 5.7% was outpaced by 9.8% growth in costs, led by a 27% increase in fuel costs. Excluding fuel, costs rose 1.3%. Underlying EBIT was A$871 million, down from A$1,046 in 1H2018. Qantas’ half-year figures are better than many airlines’ full-year results.
Qantas Domestic saw a record profit, although operating margin decreased from 14.7% to 14.0%, but this is still a double-digit figure most airlines do not see. Qantas tightened up domestic by trimming ASKs 2.1% and growing load factor by 0.9pt.
CEO Alan Joyce said, “We’re really pleased with how the business responded.” The unsaid development is that passengers paid more as unit revenue grew 7.5%. But lest anyone think fares were unattainable, Joyce said two-thirds of Jetstar’s domestic and international seats sell for under A$100.
Qantas’ turnaround was driven by a rationalisation in the domestic market battle with Virgin Australia. Qantas is now cushioned for a while as Virgin Australia changes CEO from storied John Borghetti to new face Paul Scurrah.
Qantas clearly has the upper hand in the status quo. Reflecting on this, and perhaps warning Scurrah against attempting another Borghetti-style expansion, Joyce remarked: “Broadly, the domestic market remains well balanced.” Scurrah, who takes up the post on 25 March, was metaphorically put in his place before physically arriving in his place.
Qantas International’s operating margin decreased from 6.5% to 2.4%, a range that airlines in Asia are more familiar with. Revenue growth of 6.7% outpaced ASK growth of 1.3%. Seat factor increased 1.1pts, but all three metrics were not enough to compensate for higher costs.
Loyalty revenue grew 8.3%, faster than airline revenue and capacity growth, reflecting Loyalty’s push into non-flying businesses. Loyalty delivered a record profit.
In both domestic and international markets for 2H2019, Qantas expects flat capacity growth and increases in unit revenue.
Qantas had no major announcements, saying its “Project Sunrise” A350/777X evaluation is still underway. 2020 will see Qantas order aircraft to replace its domestic fleet, the airline later told Reuters.
Qantas’ messaging remains on key and resonates to passengers and the government. Despite a domestic duopoly and a record Qantas Domestic result (in the face of the increased fuel costs Qantas said so much of), Qantas stressed what is was doing in return: refurbished interiors, new aircraft, and improved lounges. Yet as Joyce said about high airport charges: “that cost is ultimately paid by passengers”.
Not enough airlines successfully communicate their value. It is the rare ones that are profitable and liked.
