Analysis: Qantas more than doubles full year profit as rival Virgin Australia loses money

by Vinay Bhaskara

Image Credit: Paul Spijkers

Australian airline group Qantas Group has reported an underlying pre-tax profit of AUD 192 million (US $171.5 million) for the year ended 30th June 2013, more than doubling from AUD 95 million for the year ending 30th June 2012.

Broken up by segment, profit for Qantas mainline domestic fell 21% year-over-year (YOY) to AUD 365 million thanks to a fare war with Australia’s second largest airline, Virgin Australia. Profits also fell 20% YOY at Qantas freight on Asian demand weakness to AUD 36 million, while Jetstar Group saw a deep 32% YOY decline in profit to AUD 132 million thanks to the start up costs of Jetstar Japan and Jetstar Hong Kong. Profits at the loyalty (frequent flyer) division remained strong, rising 13% YOY to AUD 260 million, but the biggest improvement came from the reduction in losses at Qantas’ international division, with losses halving to AUD 246 million from AUD 484 million YOY.

Group operating revenues rose 1% to AUD 15.9 billion while operating costs remained essentially flat thanks to a 2% reduction in fuel costs. This contributed to a 5% reduction year over year in unit costs excluding fuel (cost per available seat kilometer – CASK ex. fuel), which was partly offset by a 2% decline in yields.

For the year, capacity as measured by available seat kilometers (ASKs) was essentially flat YOY, while passenger traffic in revenue passenger kilometers (RPKs) was down around 1%. However, passengers carried actually grew 3% YOY to 48.3 million as the Group re-balanced capacity towards shorter haul routes.

For Qantas, the strong improvement in its international results was a partial validation of the turnaround plan announced last year with an eye towards returning the international division to profitability by fiscal year 2015. The biggest part of that turnaround plan, a tie-up with Emirates, has also been partially validated, as it contributed to the results via a doubling of bookings onto code share services to Europe (versus the previous partnership with British Airways). And the partnership’s contribution should continue to improve into FY14 as much of the partnership has not been fully implemented and FY13 had to deal with the start-up costs of launching operations in Dubai.

Moreover, the cost-base on international operations improved 5% thanks to reduction of loss-making routes, aircraft retirements, and the reconfiguration of 9 Boeing 747s and 12 A380s improving fleet economics. Qantas International has certainly paid the price for poor strategic vision in the sense of not taking advantage of the rise of Asia over the past decade. But the decision to join hands with Emirates and cut loss-making routes from the international network was the right decision. Bigger is not always better. By reducing some of the lower yielding destinations like Frankfurt and Buenos Aires, Qantas has cut its way towards profitability.

And the turnaround domestically has allowed Qantas to re-focus efforts on the group’s primary profit center; Domestic. As Qantas struggled to re-make its international operations over the past few years, Australia’s second largest carrier, Virgin Australia evolved from a low cost nuisance into a true full service rival. Having reconfigured its short haul fleet of Boeing 737s and Embraer E190s with a business class cabin, Virgin Australia even took a major shot across Qantas’ bow by introducing Airbus A330-200 aircraft with lie-flat business class seats on lucrative transcontinental routes from Perth in 2011.

New Qantas A330-200 business class – Image Credit: Qantas

But Qantas now has the funds and shareholder confidence to fight back. Earlier this month, they announced a new updated product on its own fleet of 10 transcontinental A330s with lie-flat suites aimed at clawing back market share from Virgin Australia. Qantas also announced a new premium product for five Boeing 717-200s, to be flown by subsidiart QantasLink in competition with Virgin Australia Embraer E190s out of Australia’s capital Canberra.

Even as Qantas is revving up for a fight, Virgin Australia continues to struggle. With a jumbled strategy of acquisitions aimed at modeling Virgin Australia Holdings after Qantas Group (including the transformation of regional provider Skywest into Virgin Australia Regional and the purchase of a 60% stake in ultra low cost carrier [ULCC] Tigerair Australia) weighing on results, Virgin Australia reported a post-tax loss of AUD 98.1 million for FY13. The competitive tide in the Australian market, for the moment, appears to have shifted back in Qantas’ favor.