With turnarounds in the fortunes of Qantas Airways and rival Virgin Australia, both carriers are keeping their cool in the core domestic market.
Qantas particularly rose to market expectations in unveiling a A$975 million ($701 million) underlying pre-tax profit for the year ended 30 June, as lower fuel costs and its ongoing transformation programme gave it a major tailwind.
While Virgin remained true to its brand by staying in the red – reporting an underlying pre-tax loss of A$49 million – but momentum has shifted from the year before where the aggressive domestic capacity battle drove it to an A$212 million underlying loss.
Indeed, with the capacity battle over (for now, anyway) the domestic units of both carriers are showing major improvement. Virgin’s domestic business swung from an earnings before interest and tax (EBIT) loss the year before to a profit of A$111 million. Qantas saw its full year domestic profits go from from A$30 million to A$480 million.
Fortunes were less rosy internationally. Qantas delivered its first positive result since the global financial crisis. For Virgin, though, overcapacity on its Southeast Asian routes pushed its international business to an EBIT loss of A$68.9 million.
GROWING SLOWER AT HOME
Despite the return to profit on the domestic front, both carriers are wary of re-starting the capacity war that saw the profit pool almost evaporate last year.
“We will see moderate growth in the Australian market overall, between zero and 1% is our plan this year in capacity,” Qantas group chief executive Alan Joyce told reporters at a briefing following the release of its results.
His opposite number at Virgin, John Borghetti, declines to give capacity forecasts, but signs are that overall domestic capacity will remain lower. The airline has converted its remaining Boeing 737-800 to the Max variant. The airline says that higher aircraft utilisation means that two 737s could leave its fleet this year.
Both carriers have said that the slowing Australian economy, thanks largely to the fall in commodity prices, is affecting demand in some sectors, although growth is starting to return in the leisure market.
“The resources sector is still weak and we are seeing a decline in Western Australia and Queensland, but we are seeing strengths in other parts of the economy,” says Joyce, who adds that services along the east coast, and the leisure segment, are showing signs of picking up.
Accordingly, Qantas has announced that it will add more mainline services to the Gold Coast, and re-start services to the Sunshine Coast – both strong leisure destinations. It has also cut capacity on intrastate routes within mining-heavy Western Australia, and downgauged some of its transcontinental flights by substituting some A330 services with 737s.
Borghetti says that Virgin has no plans of following that lead: “Qantas has withdrawn a few A330s; we have to intention of withdrawing A330s.”
He adds that even in spite of the downturn in resources, its transcontinental routes have been “constantly improving”, thanks to its improved product and gains in the key corporate and government markets.
PREMIUM SEATS AND LOWER COSTS
Virgin’s new business class product on its A330s, centred around its B/E Aerospace Super Diamond seat, is aimed at consolidating those gains on the transcontinental market.
The airline is playing catch-up somewhat to Qantas, which has been rolling its much larger fleet of A330s through a refit programme. That has seen it start to roll out new business and economy class cabins, including its new Thomson Vantage XL seat in business class, on aircraft that operate on both domestic transcontinental and international services.
Nevertheless, Virgin has the advantage of a smaller fleet, meaning that it will have all six of its A330s in the new layout by October, before it progresses to the refit of the five Boeing 777-300ERs it flies on long-haul routes.
While Qantas has been keen to stress that it is not planning major capacity growth, the reshaping of its 737 configuration and network shows that it is learning to be a much leaner operation, more akin to its budget unit Jetstar.
In May, the airline announced that it planned to lower the turnaround times on the 737 fleet from 40 minutes to 35 minutes from 1 July, aimed at delivering an estimated A$80 million benefit to its bottom line in fiscal 2016.
It will soon also start reconfiguring the aircraft to add another row of economy seats, taking the total seat count to 186. Business class will remain at 12 seats and pitch across the aircraft the same, with space gains being made by fitting smaller cabin monuments, such as galleys and lavatories.
Virgin adds that it is running ahead of its own planned three-year A$1 billion cost-cutting programme, and has now extended its target to A$1.2 billion by the end of fiscal 2017. Overall, however, it maintains that it holds a 25% CASK advantage over Qantas’s domestic operations.
With both airlines focused on improving their financial metrics, amid a more difficult market, it seems that Borghetti and Joyce will be content to play it cool over the next year ahead.
Source: Cirium Dashboard
