QF's disappointing August results

[Melburnian1]

QF's preliminary capacity statistics for August 2013 must be a disappointment to long suffering shareholders hoping for an eventual interim or final dividend plus a rise in the share price:

http://www.asx.com.au/asxpdf/20131002/pdf/42jrv78m2y7mfp.pdf

Since 'one swallow does not a summer make', it is important to consider the trend for 2013-14 thus far which would struggle to be described as positive.

Although we have to wait until QF issues its interim (i.e. half yearly) results in a few months, the comments about 'lower yields' presumably mean that QF's load factors on its Asian flights are below management's expectations.

This is unsurprising, because QF is competing against airlines that offer much greater flight frequencies and far better service. MH and SQ are two airlines that have not been shy about increasing the number of daily flights, with CX set to do so next year, although in SQ's case it has sometimes been achieved by substituting smaller aircraft for an existing flight number while simultaneously introducing a new flight. This must be attractive to the business market as it means a greater choice of departure or arrival times, especially if a meeting runs overtime or conversely is cancelled.

QF is also suggesting that it has had to take a haircut on average fares charged on the new MEL or SYD to DXB and LHR route (presumably particularly LHR, since that is the destination subject to most competition). QF1, 2, 9 and 10 might be quite full on many days, but if QF is having to lower its fares by five or 10 per cent (or even more) to get passengers to choose it, that is hardly a good sign for route profitability given QF's high costs per available seat kilometre.

QF makes an unexpected comment about poor demand from domestic leisure travellers. This is hardly QF's major market, but like all airlines it needs to fill up the 'back of the bus' as best it can, as flying empty seats around is expensive.

QF did not comment about its Australia - USA routes so I assume that they are still doing quite well.

It is a bit early to conclude that QF's meagre A$6 million profit in 2012-13 will decline into a bad loss for the first half of 2013-14, but the portents are not good.

I previously suggested that QF's DXB-LHR rerouting would be a failure because many of us prefer to travel via southeast or north Asian ports on the way to Europe. Time will tell, although many factors influence it such as the level of competition, the state of the Australian and foreign economies, the relative product offerings of each airline, departure and arrival times and flight frequencies, perceived or actual safety records and the perceived attractiveness of potential stopover cities.

 

[Awesom Andy]

Given the current levels of discounts around the region, I think QF is not the only one suffering.

 

[markis10]

QF's preliminary capacity statistics for August 2013 must be a disappointment to long suffering shareholders hoping for an eventual interim or final dividend plus a rise in the share price:

http://www.asx.com.au/asxpdf/20131002/pdf/42jrv78m2y7mfp.pdf

Since 'one swallow does not a summer make', it is important to consider the trend for 2013-14 thus far which would struggle to be described as positive.

Although we have to wait until QF issues its interim (i.e. half yearly) results in a few months, the comments about 'lower yields' presumably mean that QF's load factors on its Asian flights are below management's expectations.

This is unsurprising, because QF is competing against airlines that offer much greater flight frequencies and far better service. MH and SQ are two airlines that have not been shy about increasing the number of daily flights, with CX set to do so next year, although in SQ's case it has sometimes been achieved by substituting smaller aircraft for an existing flight number while simultaneously introducing a new flight. This must be attractive to the business market as it means a greater choice of departure or arrival times, especially if a meeting runs overtime or conversely is cancelled.

QF is also suggesting that it has had to take a haircut on average fares charged on the new MEL or SYD to DXB and LHR route (presumably particularly LHR, since that is the destination subject to most competition). QF1, 2, 9 and 10 might be quite full on many days, but if QF is having to lower its fares by five or 10 per cent (or even more) to get passengers to choose it, that is hardly a good sign for route profitability given QF's high costs per available seat kilometre.

QF makes an unexpected comment about poor demand from domestic leisure travellers. This is hardly QF's major market, but like all airlines it needs to fill up the 'back of the bus' as best it can, as flying empty seats around is expensive.

QF did not comment about its Australia - USA routes so I assume that they are still doing quite well.

It is a bit early to conclude that QF's meagre A$6 million profit in 2012-13 will decline into a bad loss for the first half of 2013-14, but the portents are not good.

I previously suggested that QF's DXB-LHR rerouting would be a failure because many of us prefer to travel via southeast or north Asian ports on the way to Europe. Time will tell, although many factors influence it such as the level of competition, the state of the Australian and foreign economies, the relative product offerings of each airline, departure and arrival times and flight frequencies, perceived or actual safety records and the perceived attractiveness of potential stopover cities.

I find it ironic that your focusing the discussion on QF International with negative conetations as if its the core of Qantas, reality is QF Int year on year has done well with a significant increase in pax carried and RSKs, yes yields are lower (albeit almost at a statistical anomoly level) but on every metric they are performing better than the Qantas group average. Qantas domestic is suffering while JQ is going well, pretty much the exact opposite of QFi versus JQi, while regional traffic is also hurting with QFlink feeling the ATR presence, indicated by a 6% jump in capacity but no passenger growth and a resultant RSF decline.

 

[Melburnian1]

markis10, QF's international flights carry only a fraction of the numbers carried domestically on QF and JQ (and the other Jetstars) on a combined basis.

The problem for QF as a company, though, is that because the average length of an international flight (excluding Trans-Tasman) is much longer than the domestic operation's flights, any poor performance rapidly erodes profits made domestically. If its flights between Australia and SIN, BKK and HKG have lost much of the previous onward traffic to LHR and other European destinations due to QF's choice to align itself with EK and route QF1/2/9 and 10 through DXB daily and discontinue own metal Asia - LHR or FRA flights, QF must rely on so-called 'OD' passengers on these Asian routes.. It is suggesting with its brief comments that it has not been able to attract sufficient of these passengers.

So if yields are 'lower', this may translate into an increased operating loss in 2013-14 for the international flights despite the progress made in 2012-13 in reducing those losses. If QF domestic is also suffering as QF states, then any profits that the orange cancer makes will be partly or wholly swallowed up by the losses of QF international flights and the lower proit (or even a loss) for QF domestic.

In the past two financial years, QF International has recorded total operating losses approaching $750 million, which is hardly insignificant. QF's talk of lower yields does not tell me that the situation is markedly improving. QF is not stating that the lower yields are a 'statistical anomaly.'

Although I do not know if it is mere puffery, MH recently claimed in the business pages of 'The Age' or 'The Australian' that its yields were good into and out of Australia. It clearly believes that there is room for expansion to our nation, as MH is increasing its flight frequencies to and from MEL as one example.

While VA incurred a disastrous loss of $98 million in 2012-13, its latest similar report to the sharemarket suggests that it may now be doing better on yields, the reverse of what is occurring at QF. VA must also be stealing market share from QF, but the much more important comment is about the amount collected per passenger and the allegedly upwards trend, as that, not mere passenger numbers, determines whether airlines are profitable or lossmakers.

If QF's performance continues to disappoint the market, its CEO may face pressure from institutional shareholders in time.

 

[markis10]

markis10, QF's international flights carry only a fraction of the numbers carried domestically on QF and JQ (and the other Jetstars) on a combined basis.

That was precisely my point, you original post was talking about how poor the performance of QFi was with no mention of the other larger divisions and their performance, when in reality QFi this month is the star with significant passenger growth. Your focus on yield is ill informed, RPKs and ASKs are also a significant health indicator.

Poor performance eroding domestic performance has not been a benchmark of past years results, to the point that makes your statement erroneous, to a large extent the domestic operation is isolated from QFIs performance thanks to codeshare influx and organic growth of pure domestic business.

 

[Melburnian1]

markis10, your analysis is flawed.

QF International's revenue passenger kilometres only rose 0.9 per cent in August 2013 but the number of available seat kilometres rose 1.9 per cent.

Others agree with me:

Cookies must be enabled. | The Australian

It's hardly a good thing for a transport operator to be receiving a lower average fare for each passenger it carries, particularly in the already only marginally profitable or lossmaking aviaition industry.

 

[mannej]

Wow, I hardly believe you are one to label someone's argument flawed considering your history on here.

Not to be sticking up for Markis here, but he does actually have a background in the industry, so has more knowledge than someone who has an armchair interest in the topic.

 

[markis10]

markis10, your analysis is flawed.

QF International's revenue passenger kilometres only rose 0.9 per cent in August 2013 but the number of available seat kilometres rose 1.9 per cent.

Others agree with me:

Cookies must be enabled. | The Australian

It's hardly a good thing for a transport operator to be receiving a lower average fare for each passenger it carries, particularly in the already only marginally profitable or lossmaking aviaition industry.

We will have to agree to disagree then, but I am glad you have removed the yield glasses

 

[Melburnian1]

markis10, thank you for your pleasant comment: indeed we will.

Only two months' results of the financial year have been publicly released by both major Australian airlines, but of the remaining 10 months, November, February and May have historically been regarded as 'slower' months in domestic passenger carriage in Australia (not just in aviation, but for long distance surface operators as well), so both QF and VA plus smaller airlines would want to do well during the Christmas school holidays and at Easter to more than balance out the historically slower months.

Any upturn in consumer confidence given that the Federal election is now over with a clear result will help QF and VA, all other economic conditions being equal. The harder times in parts of the mining industry have the reverse effect, although QF has stated that its charter business (not reflected in the monthly figures discussed in this thread) is doing well as it presumably steals business from others.

Some industry sectors are not doing well. Commercial construction is one, with another builder who went broke this week commenting that times were the toughest in years. Against that, a Dandenong, Victoria manufacturer said in 'The Australian' this week that he had hired quite a few staff in the last month or so. A mixed bag.

mannej, I am merely interpreting statistics. The evidence is in black and white from what QF has chosen to publicly reveal in line with the usual obligations of a public company. However yes, we do have to wait a few more months for a more complete picture - but two relatively poor months make it harder for any corporate entity to 'catch up' later in the year.

Aiirline managements may be happiest when individuals and small or large businesses were at least cautiously optimistic. Whether we are at that stage in the economic cycle is very hard to assess, since housing starts are up and down quite a bit.

 

[Supersonic Swinger]

QF is also suggesting that it has had to take a haircut on average fares charged on the new MEL or SYD to DXB and LHR route

Can you point to where in the release it says that?

 

[Melburnian1]

Supersonic, the document is a PDF so I could not extract its third paragraph under a heading about '2014', but in that QF discusses how its international yields became lower (in August 2013) due to increased competition, which we know from numerous media articles is fiercest on the 'Kangaroo'/ 'Canton'/ call it what you will 'Route' between Oz and Europe.

In the past year, SQ, MH, CZ and CX have either introduced or announced extra flights that connect on to Europe. PR is about to begin MNL - LHR flights that on some days of the week will connect from either MEL, SYD, BNE or DRW to LHR, while subject to fixing the runway at CGK, GA intends to fly to LGW and elsewhere in 2014. EY has said it will up some flights' capacity to A388s, while QR has mooted expansion out of Oz. BI is offering bargain basement fares although it only now serves MEL. EK has also increased capacity ex Oz although it is now heavily involved with QF.

No one has publicly suggested that QF's Oz - USA routes have declined in profitability, as the number of competitors - VA, FJ, DL, UA, HA and NZ are all I can think of - is similar to what it was a year ago.

Of course, QF may also be suffering lower yields on its Asian OD traffic.