Airlines batten down the hatches as cycle turns

The soft belly of Australia’s aviation sector has been laid bare.

Qantas and Virgin blamed their results on soft demand for domestic air travel. Picture: John Grainger

The soft belly of Australia’s aviation sector has been laid bare: Qantas and Virgin have posted disappointing first quarter results that show Australians have been spooked from flying.

Qantas and Virgin blamed their results on soft demand for domestic air travel that forced the Flying Kangaroo to warn of a profit fall and its rival to post a loss that will hurt its ambition to bounce back into positive territory for the full year.

The malaise infecting domestic demand for air travel was underlined yesterday when Flight Centre issued a warning that its profits could fall short.

The lacklustre results come as figures from the Bureau of Infrastructure, Transport and Regional Economics show that the number of passengers flying domestically grew by only 1 per cent in July and August, far below the historic average of about 5 per cent a year.

So why aren’t people flying as much as they used to? For Virgin chief John Borghetti, it’s a combination of reasons that include rising house prices, election uncertainty both here and in the US and global economic jitters.

“If you could pinpoint one issue you’d try to fix it but you can’t because it’s a culmination of different things out of our control,” Mr Borghetti told The Weekend Australian.

“Clearly, the general mood and feeling of people and the inputs that affect confidence like media stories about America possibly going into a recession and the general negative sentiment around the economy, is having an impact. The political climate is not helping either.”

JP Morgan analyst Guy Bunce agreed with Mr Borghetti, saying weak consumer and business confidence was exacerbated by uncertainties fuelled by this year’s federal election, employment worries, rising house prices and stock market volatility.

“It’s a combination of elements; there’s no one thing that can be singled out as the driver of the weakness in passenger demand during the period,” he said.

But Mr Bunce also believes the nation’s airlines might have compounded their pain by underestimating the impact of the continued slide of mining-related travel and the federal election, which cost Qantas and Virgin more than $100 million in potential airfares. “It’s hard to quantify the impact of these two factors, although in the case of Qantas Domestic, the company suggested it had seen a $28m reduction in resources-related revenue and we estimate the federal election may have cost it between $50m and $100m,” Mr Bunce said.

“We think the latter had a bigger effect on first quarter trading than the former. It’s not just airlines that felt the impact of the election. You only need consider other industries such as retail where according to the ABS, store sales fell 5 per cent in July and 3 per cent in August.”

According to Mr Bunce’s numbers, capacity across the two key markets of Golden Triangle (Sydney-Melbourne-Brisbane) and transcontinental, which combined represent about 70 per cent of domestic available seat kilometres, fell by 2 per cent in the September quarter. “Because the airlines underestimated the slowdown in passenger growth, they probably left too much capacity in the sky,” he said. “With the benefit of hindsight, the airlines would have been better off cutting capacity by more than this.”

Mr Borghetti remains confident that tight cost controls, ­capacity control and flexibility in airfares will counteract soft demand. “This is not new. It happens from time to time and the cycles of aviation are well known. So what you have to do when this happens is react as quick as you can and that’s what we are doing by managing our capacity,” he said.

Mr Bunce also believes there is hope on the horizon if domestic demand picks up and airlines can quickly manage their capacity to make the most of the opportunity when it comes. “The good news to come out of the first quarter is that according to Qantas, September saw a return to more normal trading conditions. This seems to correlate with a slight improvement in confidence readings for the broader economy,” he said.

“We view the first quarter weakness as a cyclical rather than structural issue, and believe we will see domestic passenger growth once again reach its historic levels of 5­ per cent.”