Qantas dives as bookings tail off ahead of federal election

Qantas shares fell to their lowest level in seven months yesterday after it reported unexpected softness in demand.

Qantas has cut its domestic capacity growth plans. Picture: Brendan Radke

Investors have welcomed the new rational approach by rivals Qantas and Virgin to adding capacity in the domestic aviation market despite Qantas shares falling to their lowest level in seven months yesterday after it reported unexpected softness in demand.

Qantas shares fell as much as 14 per cent before closing 10.8 per cent lower at $3.62 after the airline cut its domestic capacity growth plans and reported negative revenue per available seat kilometre last month.

The airline said it would boost domestic capacity between only 0.5 per cent and 1 per cent during the remainder of the second half to June 30, down from the planned 2 per cent. Virgin Australia has also been reducing capacity in the domestic market.

“Some softness in demand, related to the upcoming federal election and a 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,” Qantas said in a statement accompanying its monthly traffic statistics.

But the airline said combined capacity across the wider group would increase by 5-6 per cent in the second half, driven by growth from Jetstar’s international B787 Dreamliner and increased use of Qantas International’s fleet.

The group’s Asian markets remain strong, and the airline has shifted more capacity into the region from its core US market, which is being hit by the lower dollar and fierce competition.

The Qantas Group, including its budget offshoot Jetstar, has about 63 per cent of the domestic aviation market, compared with Virgin and its budget carrier Tiger with about 27 per cent.

Balanced Equity Management managing director Andrew Sisson, a long-time Qantas investor, said of the announcement: “You would prefer not to have seen it.’’

“But they are simply adjusting to the conditions in the market,’’ he said, which was a positive compared to the irrational behaviour of both carriers during the domestic capacity war two years ago.

Sean Fenton, who helps manage about $1.1 billion at Tribeca Investment Partners and has been a big winner from the run-up in Qantas’s share price over the past 18 months, said he was not surprised by the news. “The market reaction was a bit aggressive,” he said.

“And it is a concern in the sense that a stronger economy helps drive traffic growth and margins. But the most important thing is matching capacity with demand.

“The fact the competition is a lot more rational and the fact that they are reacting to keep the market balanced should protect margins. Given the strong run (the Qantas share price) has had, I’m not surprised at there being some profit-taking. But I don’t think the Qantas share price is going to fall back significantly.’’

The price still remains below the $5.45-a-share takeover bid in 2007 by the Airline Partners Australia consortium, including the late David Coe’s now failed Allco, private equity group TPG and Macquarie Group.

The weak market was also confirmed by a Deutsche Bank report showing that after three straight quarters of solid growth in 2016, domestic airfares were showing signs of softness during the fourth quarter.

“Our forward booking analysis for the period also indicates flat to low capacity growth versus (the previous corresponding period),” the broker said. “However, we believe lower fuel prices should provide some earnings support.’’

It noted that Virgin “continued to see weak fare growth, especially the economy domestic sector which is lagging peers”.