Qantas' financial future

[Melburnian1]

In the past couple of days I'd read about QF's at face value contradictory plans: to grow profits while in some cases operating with less passenger (and perhaps freight) capacity. I assumed it was all about increasing yields.

This article is a good summation:

The big squeeze: Qantas planning to grow and shrink at the same time

After its celebrated turnaround, some have been wondering if this is as good as it gets for Qantas.

www.watoday.com.au

None of us have a crystal ball for the next five years, but on present indications, I'd be a member of the AFFer JohnK school that 'consumers - including business - have some reluctance to pay fares that continually increase more than CPI.'

The economy is sluggish, with leisure travellers - maybe not QFd's major profit focus - fairly reluctant to spend, and acknowledged travel softness among some business sectors such as construction and finance, the latter not helped by APRA/ASIC regulatory crackdowns, breeding a new sense of caution among our 'big 4' banks. Against this, the WA-based resources industry looks to have improved.

QFi charges a high premium on many sectors so in the current economic environment for Oz-originating passengers, that's probably not a plus.

Weather may be a minor factor but the continual unpunctuality of QFd (and its competitors) must have at least a minor adverse effect on QFd profits.

Against that, VAd (and the basket case that is some of VAi) is perceived as a weakened competitor, but it has a new CEO who is determined to cut costs (although how much he is hidebound by previous signed contracts, heaven only knows).

A further plus for QFd may be the appalling performance of TT. With the latter always a candidate for closure, it may 'gift' even more passengers to JQd, allowing the latter to raise median fares.

Mind you, if QFd reduces its capacity by say another two per cent, there's never any talk of staff retrenchments. It doesn't make sense to me that staff turnover completely takes care of this, so is QFd in danger of becoming a little featherbedded?

Lastly, there's the overhang of QFd's failure to renew its fleet of 75 ageing B738s that has been discussed recently on AFF. Gradually costs per seat kilometre must logically rise due to increased maintenance expenditures as these heavily utilised aircraft continue to age.

 

[cove]

Qantas has been swamping the market with frequent flier points as they cost bugger all to issue thru their computer. It really only costs them when a points redemption is done using one of their One World partners. The point redemptions mostly fill the Qantas economy seats that haven't sold so the cost of this is quite low.

 

[juddles]

Melburnian, I let this thread go past me earlier, as was unsure how to respond.

My initial take on the thread was that it was a general opinion piece that quoted yet another general opinion piece. Hence hard to enthusiastically address as there is really no new content. We debate these things ad infinitum

But in the spirit of friendship and in the always desirable wish to indulge in online chit chat, I have found a few opinions within myself here. (Because I, just as you do, post heaps of coughpola when I am pondering - and getting ANY response is better than silence )

A big thing I took from the link, not so much from the author but rather AJ's opinion, is that it appears that just maybe, airlines are slowly morphing into serious businesses. That they are starting to get a semblance of control that allows them to predict and plan and manage costs. If this is true, all the old school opinions about airlines are going to be meaningless. I have always seen airlines as a different sort of enterprise - mainly driven by passion and hope and subsidies - never by real and solid financial success. Maybe, just maybe, this has taken a turn for the better....

If this is true then airlines have gained the skills to actually manage them as a real business - ie one that makes money.

As I have always said, Qantas is on a tough gig internationally - such an uneven playing field combined with tiny home market and intense geographical isolation (read that as intense fuel and staff cost burn) And I do see that Qantas is trying to compete here on the only two things it can - nationalism/Qantas safety brand, and the new ultra long flights that are planned. I wish them well. The other side of the coin (actually there are four sides) is domestic. An affluent society, long distances, and very strong industries that require long distance (domestic) travel. Hence great cash spend. And being a small country, there is only room for one or two competitors, and at the moment Virgin are just plain sucking/sufferring.

Maybe think outside the square, and get back to basics. Air travel is an absolute necessity for modern life - both business and tourism (I personally lump government travel under the tourism side) Australia needs an airline, at least one. We have just Qantas and Virgin. Aussies being who we are, will always want an under-dog to support, so either Virgin or another newbee will always exist - the vacuum would otherwise be too great. And likewise Qantas will always stay alive. You can throw stones at their day to day economics and planning, but seriously, they just have to exist - or what is your thoughts for a replacement on this vital part of modern society?

Yes, there will be glitches - strikes by pilots, fare hikes, FF "enhancements" etc. But they fill a role that is needed and cannot be easily replaced. As I posted in another thread, I feel that the Qantas share price has almost reached its zenith, but I likewise feel they are positioned well to carry on fighting....

 

[juddles]

Qantas has been swamping the market with frequent flier points as they cost bugger all to issue thru their computer. It really only costs them when a points redemption is done using one of their One World partners. The point redemptions mostly fill the Qantas economy seats that haven't sold so the cost of this is quite low.

Cove, in the interests of discussion, I wish to challenge what I perceive as some central points here. Because I see them as assumptions, not as real arguments or opinions backed by facts....

You say that it costs Qantas "bugger all" to issue frequent flyer points. You also say that these points become expensive to the company when they are used to redeem flights on other airlines. And yet you also say that when such points are redeemed for flights on Qantas their cost is "quite low"?? How do you say this?

Surely those third party airlines only allow redemptions when their own planes are not full - so using your own logic (which I agree with) these awards seats fill otherwise empty spots.

 

[Melburnian1]

...Air travel is an absolute necessity for modern life - both business and tourism (I personally lump government travel under the tourism side) Australia needs an airline, at least one. We have just Qantas and Virgin. Aussies being who we are, will always want an under-dog to support, so either Virgin or another newbee will always exist - the vacuum would otherwise be too great. And likewise Qantas will always stay alive. You can throw stones at their day to day economics and planning, but seriously, they just have to exist - or what is your thoughts for a replacement on this vital part of modern society?

Yes, there will be glitches - strikes by pilots, fare hikes, FF "enhancements" etc. But they fill a role that is needed and cannot be easily replaced. As I posted in another thread, I feel that the Qantas share price has almost reached its zenith, but I likewise feel they are positioned well to carry on fighting....

I agree that "replacements" such as video conferencing have only been useful to a small minority. People want (and need) to interact face to face, not over a screen, and then in the background for many there's the lure (however false it may turn out to be when one can't redeem a J seat when one wants to travel) of the FF schemes.

The history of 'second' (or third. or fourth) domestic airlines in Oz has been unhappy or financially disastrous in the main. Ansett, Compass I, Compass II..maybe Impulse and Virgin Blue were exceptions in their day.

High speed rail is a replacement (and a terrific one!) for the lower east coast 'golden triangle' (for BNE - SYD, OOL - SYD, BNE/OOL -NTL, MEL - CBR/SYD, ABX/BNK/CFS/GFN/WGA - SYD and so on, but not for businessmen BNE - MEL and perhaps not for BNE - CBR.) Sadly our politicians won't build it. Yet it'd be a game changer.

Interesting point about airlines becoming 'serious businesses.' I don't like him but Mr Buffett has finally invested in airlines, a major reversal for him. But 'proper businesses' plan for capital expenditure, and ideally don't let major assets become aged/run down/in dire need of refurbishment as many airlines do with their aircraft.

The QF share price seems high as one worry is its rise has not accounted for the capital expenditure (essentially in US$ iIIRC) necessary to replace the fleets. Who knows if the A$ will stay "low", but it's showing little sign of rising. Ah for the days when A$1 = US$1.15....

 

[cove]

Qantas has charges when you redeem points for an economy flight so those flights booked are not too expensive for them. It is much harder for a non status passenger to get a redemption business or first class seat.
Many try out 353 days to secure those scarce seats.
Next many buy toasters or equivalent.
Frequent Flyer schemes can make serious profits and Virgin have had to buy back the chunk they sold so that they can copy the Qantas approach.

 

[ozfflyer]

as long as QF keeps flicking staff (middle management like at VA) & cuts thin routes or gets QQ to operate them, just like VA do, then QF domestic will continue to subsidise QF int (see other post on QF dumping seats in Jan school holidays eg. $896 ADL/MEL/LAX/MEL/LAX is crazy & then kids fares must be around $670

 

[eastwest101]

That they are starting to get a semblance of control that allows them to predict and plan and manage costs. If this is true, all the old school opinions about airlines are going to be meaningless.

That's actually a good point about planning and managing costs - or as you call it - being a 'real business' or as others might say being a 'disciplined business'. As much as the spin machine may like to show how their data management and understanding of the business and its customers may be refining the business model so they they can squeeze out more/higher margins and profitability with less assets, airlines are still very capital intensive and unpredictable businesses, just think of the impact of exchange rates, price of jet fuel, highly elastic and competitive demand from tourism, competitor impacts on yields and the very large lumpy capital requirements of fleet renewal, and that before you even consider the other entirely unforeseen black swan events that airlines have absolutely no control over - like a 9/11, civil unrest or say an aircraft type grounding etc that can blow the most finely tuned plans out of the water in weeks.

There is a certain amount of truth in the comments that some travel spend is inelastic and necessary - i.e. spending other peoples/taxpayers money is an example - especially in Australia with vast distances and a smallish population so the Qantas group (and to some extent the Virgin group) have already mounted the high barriers to entry involved in getting flying so it will require a new or different business model for another competitor to have a chance to enter the market. So there is always going to be a certain amount of flying happening that will accept the higher yields and fares, but outlandish profits tend to create their own issues as we have seen in othor industries - like increased regulation and taxation.

I still think the demographics/pilot/crew shortage is something that will hit all airlines in the future, and Qantas in particular due to its IR history and the fact it operates in Australia.

 

[Melburnian1]

Melburnian, I let this thread go past me earlier, as was unsure how to respond....

Yes, there will be glitches - strikes by pilots, fare hikes, FF "enhancements" etc. But they fill a role that is needed and cannot be easily replaced. As I posted in another thread, I feel that the Qantas share price has almost reached its zenith, but I likewise feel they are positioned well to carry on fighting....

How three or four months makes a difference.

To describe coronavirus an an 'enhancement' would be stretching things.

juddles was prescient in discussing the QF share price having reached its 'zenith!'

 

[Franky]

How three or four months makes a difference.

To describe coronavirus an an 'enhancement' would be stretching things.

juddles was prescient in discussing the QF share price having reached its 'zenith!'

I've probably missed something here from one of Juddles posts, but I thought nadir would be the right word for QF shares at the moment?

 

[Melburnian1]

I've probably missed something here from one of Juddles posts, but I thought nadir would be the right word for QF shares at the moment?

juddles, IIRC, was discussing a previous 'high' for QF shares. You've moved forward to the last couple of days and believe that it's reached the bottom as far as its share price goes. Hopefully we're all on the same page.