Qantas warns on capacity freeze

QANTAS chief executive Alan Joyce has not ruled out extending a freeze on domestic capacity growth.

Qantas CEO Alan Joyce at a business lunch where he is speaking, Perth Convention Centre.

QANTAS chief executive Alan Joyce has not ruled out extending a freeze on domestic capacity growth to help the airline’s bleeding bottom line.

Mr Joyce announced last month that Qantas would freeze capacity growth across Qantas Domestic, QantasLink and Jetstar in the first three months of the coming financial year, signalling an end to the so-called capacity wars that have helped push the nation’s two major carriers to an expected combined loss of about $1 billion.

He said yesterday that the airline was continuing to monitor the impact of market weakness and consumer confidence on forward bookings before making a decision on growth for the rest of the year.

“We’ve been seeing a little bit of weakness appearing into the domestic market and I think after the budget we also saw a dip in consumer confidence, which has very clearly come out with the austerity measures implemented,’’ Mr Joyce said while attending the International Air Transport Association’s annual meeting in Doha.

“We’ve also seen some significant drops in terms of activity in Western Australia. So if you look at the demand drop ... in the intra-WA routes there’s been some significant pullback (by) the resource companies.

“So given all of those we thought it was prudent at this stage to take capacity out of the domestic market.’’

Mr Joyce said the capacity freeze would be across the board, and he expected a fall at Qantas main line and slight growth at Jetstar. It included taking out flights from the east coast to ­Karratha and from some WA markets. Qantas would maintain its flexibility so that it could ­extend the capacity freeze or put it back into the market “depending on what happens to demand and what happens with the ­competitor”.

Mr Joyce said the carrier had moved after seeing Virgin Australia take out capacity, and said he expected to maintain a market share of about 63 per cent while keeping its competitive ­advantage.

Asked if the freeze could be extended beyond the three months, he said: “Definitely.’’

Mr Joyce said he hoped the capacity reduction would see ­average fares increase and planes flying fuller, but he said the group would continue to offer low fares to stimulate demand. Domestic fares in Australia have dropped by 21.6 per cent in the last 10 years as competition has increased and low-cost carriers have boosted their footprint.

He said it was not a case of increasing lower fares but getting people to “buy up the chain” to more expensive airfares and ­allowing the airline to better yield manage.

Elasticity in the market meant that pushing fares too high would have an impact on demand and the airline would be worse off.

“Revenue demand is quite ­dynamic and you’re always trying to balance that up,’’ he said.

“Where you have problem, though, is where you have an oversupply. So the market has an underlying growth of 4 per cent or 5 per cent.

“In the last year, for example, you’ve had 8 per cent capacity growth and what that has meant is that roughly for every percentage over the demand you’ve taken a 1 per cent hit on yield, because that’s what it particularly does,” Mr Joyce added. “And that’s why our yields have been down by about 4 per cent. So if you get cap­acity and demand aligned, you should have no deterioration in yield and should be able to fill up the seats that are there.’’

Asked about confidence among business travellers, Mr Joyce said a lot of its customers worried about consumers and there had been a significant pullback in resources industry traffic, with intra-WA demand down by about 16 per cent.

He is also expecting some impact from public service cuts, although he noted the airline had exposure to every sector through its strong market share.

Acknowledging criticism of the Qantas move to maintain its market share, Mr Joyce defended the airline’s push to keep its competitive position as well as its frequency and network advantage.

He said this remained important and was the reason Qantas still had 80 per cent of the corporate market by revenue share, but it was clear the capacity situation had hit everybody’s profitability.

“For Qantas, it’s very clear that if we’d lost our competitive advantage in the corporate market, that would have resulted in long-term pain,’’ he said.

“I think that’s clear for anybody that looks at it. And it’s something you can never get back.’’

Mr Joyce declined to say when he expected the airline to climb back into the black, but its plan to cut $2bn over three years was on track, with $800 million due to be saved in the next financial year, with increased aircraft utilisation on domestic and international routes among the 250 initiatives being implemented across the market.

Qantas was still working on a potential sale or selldown of its frequent-flyer program, but he would not give a timeframe.

“That’s a review that’s ongoing and once we’ve completed it and done all proper work on it, we’ll make an announcement to the market,’’ he said.

Mr Joyce also reiterated his determination to see through his plan to turn around Qantas.

“I have the full support of the shareholders, the board, the management behind it, so we’ll just continue with that,’’ he said.

“This is a very important transformation. It’s very important for the company that we do it and I’m very committed to that’’.

Steve Creedy travelled to Doha courtesy of IATA.