Virgin capacity cuts puts cosy airline duopoly back on track

The airline duopoly is alive and well with Virgin Australia opting to cut domestic capacity this year in the wake of a weakening economy.

The need for a change was demonstrated effectively by Qantas’s first-quarter earnings statement, which underlined the weakness in consumer spending, with discretionary spending down.

This is further evidence the RBA rate cuts have had little impact on the economy and underline the need for actual long-term productivity reform from federal and state governments.

Qantas holds its annual meeting Thursday and Virgin next week with the latter likely to provide an update on chief executive Paul Scurrah’s network review.

This will include a reduction of up to 3 per cent in capacity.

Routes advertised now show Virgin was planning an increase of as much as 3 per cent capacity in the second half, but this will not happen.

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The rate cards are not always a reliable indicator, but the evidence was there of a planned increase at a time when Scurrah is busily cutting costs. The happiest person hearing the capacity cut news will, of course, be Qantas’s Alan Joyce, who on Thursday ­released a downbeat commentary on first-quarter sales showing, outside the resources market, the local conditions have worsened.

The domestic airline market is a cosy duopoly and, with the ­exception of the odd capacity war, is a stable market with capacity moving in line with demand.

That is exactly how Joyce likes it, which in part explains the downbeat commentary in Thursday’s first-quarter release.

The company has its annual meeting on Friday and, depending on whether Virgin say ­something beforehand, we can expect that commentary to be stepped up.

It’s a great way of signalling to your competitors what you are thinking without actually doing it — if you know what I mean. Joyce is a past master of the tactic.

Thursday’s first-quarter release shows international flights holding up well, along with the resources sector, but weakness particularly at the budget end.

This is the sector that affects Virgin most.

International capacity is being withdrawn, which is helping Qantas’s revenue in the sector.

Brookes breach

Judge Jonathan Beach has found former Myer boss Bernie Brookes had breached continuous disclosure rules, but concluded the complainants failed to prove that the breach resulted in the stock price fall and hence failed in their action.

In doing so, Justice Beach raised the bar somewhat in trying to prove damages against a company when clear statements from the chief executive were shown to be demonstrably wrong.

The company also failed to correct the statements when the facts became clear.

If a shareholder can’t trust a chief executive about the company’s future then who can it trust?

The case centred on a profit forecast from Brookes in September 2014, when he said the next year’s profit would be above the previous year’s. In fact it was 23 per cent below and Myer didn’t correct the statement when the extent of the profit became clear.

In coming to his conclusion, Justice Beach figured the market didn’t take a lot of notice of what Bernie said.

The fact the stock is now selling at roughly one third of 2014’s levels tells you something about the retailer’s fall from grace.

Justice Beach said “there was no evidence that the contravention caused any loss or damage to the applicant”.

In practical terms, Justice Beach’s conclusion may make some sense because the Myer stock price was falling because the business model was failing.

In this sense it wasn’t simply Brookes’s comments that were at fault. But those seeking to hold executives accountable for demonstrably false statements have taken 10 steps backwards in their cause.

Fortescue forges ahead

Slowly but surely Fortescue Metals is improving the quality of its iron ore output, which means it earns a higher percentage against the benchmark.

At $US85 a tonne and costs of just $US12.95 a tonne, the company is travelling smoothly and predictably well.

Net debt now stands at $1.6bn, which is below 2014’s levels before first production started.

China steel production at 1 billion tonnes this year and a forecast 928 million tonnes next year suggests the iron ore price will stay higher for longer.

Chief Elizabeth Gaines is making constant adjustments to maximise output, which at 42.2 million tonnes was 5 per cent above a year ago’s levels and puts it on track to reach full guidance of 170-175 million tonnes.

She recently opened a Shanghai trading post, which is aimed at selling excess inventory but according to FMG will trade at no more than 5 per cent of output. As things stand, that puts it in a different league to the Asian trading arms used by BHP and Rio Tinto, which handle all their trade and have come under ATO scrutiny.

Share purchase success

Ratemyagent has provided the first confirmation of the success of ASIC’s move to increase the maximum subscriptions under share-purchase plans for retail investors.

ASIC increased the limit from $15,000 to $30,000 to help the big retail shareholders who were ­effectively locked out of taking up their full entitlements.

Ratemyagent raised $10m at 20c a share, with $9m from the big end of town and $1m from the ­retail punter.

Some 17 per cent of shareholders took up the offer with an average investment of $20,000.

A full entitlement offer remains the preferred course for non-dilution, but if share-purchase plans are to be used the higher limit gives retail holders the ability to buy at a discount and avoid dilution.

Signs of AMP light

AMP’s Francesco De Ferrari is at pains to say he is on a three-year turnaround because yesterday’s cash flow figures show the pain continues.

In the year ended September, AMP has had net outflows of $6.6bn, or 5 per cent of assets under management.

AustralianSuper over the period has had net inflows of $16.2bn and its funds under management totals $170bn, against AMP’s $133.2bn.

Its North platform and bank are performing well, but the North winnings come at a lower margin than the advice-driven funds, which have walked since the royal commission.

Still, the problem in months past has been lack of inflows and at $7.1bn in the past quarter these have improved, so there are signs of light for De Ferrari.

Kane under fire

Mike Kane has led a revolution at Boral with the US reversing losses, Australia free of bricks and an extended Asian plasterboard base. But shareholder returns over the period of his tenure from 2012 at 92.2 per cent have lagged the market at 130.2 per cent by some 38 percentage points.

Last year, the US business was boosted through the $US2.6bn Headwaters acquisition, and the Knauf joint venture in Asia cost another $US33m.

There is a sizeable section of the share base which, accordingly, the business is not too impressed with over the fact that two years ahead of his planned retirement Kane jumped over to the Sims Metal board.

Just how sizeable will be seen on November 14, when the board appointment is put to Sims shareholders. The Boral annual meeting is November 6.

Chair Katherine Fagg noted the concerns in her comments in the Boral annual report, but she gave the move her full endorsement noting the company’s ­succession plans were well progressed. Kane says he will be willing to take on an outside board seat without compromising his day job and, further, that such a move was potentially beneficial to his role as chief executive.

Sims and Boral have some overlapping shareholders so that view will be tested at the Sims meeting where a big protest vote can be expected.