What profit or loss after tax will QF and VA record for 2012-13?

[Melburnian1]

Those of us who follow the stockmarket will recall that on 15 May 2013, Virgin Australia Holdings issued a 'trading and market update' for April 2013 in which it said that it expected its underlying profit before tax for 2012-13 to be below that of 2011-12.

For the professional or amateur analysts among us, what profit or less (net, after tax if applicable) do we expect Virgin and its competitor Qantas to report for 2012-13?

I won't give a tip for those (as I am not sure I have sufficient information) but I am prepared to stick my neck out and suggest that neither airline will pay a dividend, which might annoy Qantas' long suffering shareholders in particular.

Those of you with more knowledge might like to throw in a prediction for Regional Express and a (loss) prediction for Tigerair (though with VA's recent gaining of Government approvals for its 60 per cent owneship of TT, the latter probably isn't as relevant now, at least in Australia).

One thing I find amusing is that airline senior managements give the public the impression at times that they (the managers) are extremely smart and that they 'know everything', yet the industry as a whole, including in Australia, seems to have an enormously difficult time in achieving sustainable profits - or sometimes any profit at all.

Of course, there are huge fixed costs (staff salaries and wages, fuel, aircraft leasing or purchase costs, safety training, maintenance of the fleet and airport charges among many others) but despite a company such as QF charging several hundred dollars for a business class single fare from MEL to SYD and often more than $200 for an economy class one way fare between these airports (although less if one purchases in advance most of the time), it cannot generate good returns on its capital. Perhaps our old friend 'competition' is to blame; perhaps it's that old man 'the sick economy' but irrespective as to whether there's a mining boom, a spending boom by consumers, a construction downturn, a pink batts installation program or whatever, our major airlines' inability to turn a decent profit has been pretty much a constant in recent years.

For both, I am including all their operations as one generated profit or loss: frequent flyer divisions, road or air freight or couriers, air fares and anything else should all be luimped in. It's the overall financial result that matters.

 

[cove]

Once the carbon tax is gone QF will save a lot. Was it 150 million each 6 months so looking ahead is that some blue sky we see.
Rex has always been ok.
Virgin had to do the rescue share issue at 20 cents.

 

[Melburnian1]

Rather earlier than I expected, VA has today answered half of my question, in expecting a $95 to $110 million after tax loss:

Virgin warns of $110 million loss

Hopefully the unnecessary carbon tax that is set to cost VA $45 to $50 million (and QF much more due to the latter's larger size) this financial year will disappear fairly soon after 7 September 2013.

 

[cove]

That's about 2 million dollars a week that Virgin is tubing.

 

[Melburnian1]

True cove, but it's a little more than A$1 million a week if a new Coalition Government removes the carbon tax (assuming nothing goes in partial place of that).

Not insubstantial. Is Virgin Australia really an altruistic entity set up (in order) to benefit its management, staff and travellers? 'Shareholders' don't feature.

 

[cove]

I am glad I don't have a lot of airline shares at the moment.
It may take a while for the carbon tax to get fully cut.

 

[yohy?!]

seems like the carbon tax is working exactly as intended - both airlines have signalled price increases to the market that will likely moderate demand for air travel. whether it happens now or in a couple of years with an emissions trading scheme it's likely going to happen one way or another.

 

[Melburnian1]

After the release of profit results that were very poor for QF and abysmal for VA during the week, both airlines must be cheering for the likely election of a carbon tax eliminating Coalition Government next Saturday, given the positive effect that nonsensical tax's abolition will have on the bottom lines of both.

QF and VA's results are in stark contrast to NZ which released an impressive set of numbers.

QF must be fretting about what to do with its Asian schedules. A number of these routes must be incurring losses. There may be few connecting passengers now on QF flights to and from SIN and HKG as it is more logical for travellers to use SQ and CX, both of whom have greater Australia to home airport frequencies and offer a myriad of connecting flights.

QF is still losing far too much money on its internatnal flights. A dividend for shareholders is still not being paid; with its high fixed costs, QF must be vuknerable to any further consumer downturn.

QF recognised some passenger revenue due to tickets having passed their scheduled date of travel. This was an accounting standards charge but begs the question: if passengers claim refunds and are partly successful, such as where there was a family death, is a liability in the accounts then created?

VA's result included a small profit on its small number of internatinal flights but $44 million losses on its domestic flights.

Perhaps to ensure sustainable profitability QF should only fly domestically and VA internationally!

One wonders how much worse both's results would be if Australia had true fast trains between MEL, SYD and BNE.

It's a good strategy not to buy airline shares. The staff seem to 'capture' most of what could otherwise be profits.

 

[Mattg]

After the release of profit results that were very poor for QF and abysmal for VA during the week, both airlines must be cheering for the likely election of a carbon tax eliminating Coalition Government next Saturday, given the positive effect that nonsensical tax's abolition will have on the bottom lines of both.

Assuming the coalition win and the carbon tax is finally abolished, do you think that airlines will reduce their prices accordingly? I would like to think so, considering that, especially QF, increased their prices when it was brought in, but the skeptic in me says that they will keep prices as is and enjoy a little more revenue..

 

[Melburnian1]

Mattg, as always, competition will determine this.

Australia is essentially back to a duopoly with its domestic airlines, but both QF and VA have more seats to fill on some major routes than was the case a year ago, so if one airline can reduce its fares partly as a result of an end to the 'carbon tax' or 'high fixed price emissions trading scheme' - call it what you will - this may well start a price war.

Ideally for their operations, both airlines might like to reduce their weekly capacity to try to lower costs, but QF for instance constantly refers to how it wants to maintain what it claims is a 'profit maximising' 65 per cent domestic airline seat market share, so the trend has been for one airline to increase capacity and the other to match it.

It's hard to know how consumer spending will go in the next year. The election of a new Federal government and an end to 'minority government' may trigger optimism and hence increased spending, especially if the Coalition wins control of the Senate (which will be difficult to achieve), and house prices are starting to again rise in some capital cities, but against this Australia has unemployment and underemployment, high fixed costs in most industries, jobs being still lost in some industry sectors and pretty low economic growth. Some travel by air (meetings, some leisure travel) is discretionary, meaning that when wallets close, air travel numbers suffer (or do not grow as fast as they had been).

 

[Mattg]

Mattg, as always, competition will determine this.

Australia is essentially back to a duopoly with its domestic airlines, but both QF and VA have more seats to fill on some major routes than was the case a year ago, so if one airline can reduce its fares partly as a result of an end to the 'carbon tax' or 'high fixed price emissions trading scheme' - call it what you will - this may well start a price war.

Ideally for their operations, both airlines might like to reduce their weekly capacity to try to lower costs, but QF for instance constantly refers to how it wants to maintain what it claims is a 'profit maximising' 65 per cent domestic airline seat market share, so the trend has been for one airline to increase capacity and the other to match it.

It's hard to know how consumer spending will go in the next year. The election of a new Federal government and an end to 'minority government' may trigger optimism and hence increased spending, especially if the Coalition wins control of the Senate (which will be difficult to achieve), and house prices are starting to again rise in some capital cities, but against this Australia has unemployment and underemployment, high fixed costs in most industries, jobs being still lost in some industry sectors and pretty low economic growth. Some travel by air (meetings, some leisure travel) is discretionary, meaning that when wallets close, air travel numbers suffer (or do not grow as fast as they had been).

I would like to think that competition will force prices down, but this "price war" is already happening, with the consequences for Virgin outlined by their loss. In fact, Mr Borghetti has said that the carbon tax was "unrecoverable" in the volatile air travel market as it would do, well, exactly as it is intended, further reduce air travel demand. As such, he claims that they have been unable to pass on the carbon tax cost to customers, and if this is true then I don't see them lowering fares once it goes.

Qantas on the other hand did raise prices when the tax was introduced (and has continued to do so gradually since) so has no real excuse to not lower fares.

As an aside, it makes me wonder why they offer you the opportunity to pay more money to offset the carbon emissions from your flight if the carbon tax is already included in the ticket price. As a result, I'm less likely to pay the $1 or whatever it is to offset my emissions as I feel like I'm paying twice for the externality.

 

[Melburnian1]

Perhaps some 'bright spark' will in time complain to the ACCC if QF does not (in time) lower its fares should the carbon tax be abolished.

 

[robbie1984]

Assuming the coalition win and the carbon tax is finally abolished, do you think that airlines will reduce their prices accordingly? I would like to think so, considering that, especially QF, increased their prices when it was brought in, but the skeptic in me says that they will keep prices as is and enjoy a little more revenue..

Virgin didn't increase fares, hence why they couldn't cover the carbon tax. So i wouldn't expect any reduction if it is abolished.

 

[Mattg]

Virgin didn't increase fares, hence why they couldn't cover the carbon tax. So i wouldn't expect any reduction if it is abolished.

That seems fair enough. QF can't say the same though.

 

[Melburnian1]

Here is some financial analysis, albeit written in a semi-populist style:

Qantas takes a financial flight of fancy on accounting winds

The nature of travel providers is that they will always receive revenue in advance. A big worry for all airlines, not discussed in the above article, is funding fleet renewals as aircraft that are older cost more to maintain. QF cancelled some of its planned plane purchases to decrease its capital expenditure.

 

[Melburnian1]

This respected website has some recent analysis of QF. The final paragraph suggesting that QF is a 'low quality business...not worthy of investment consideration' is ominous (although QF has significant cash reserves):

Value Investor: Qantas flying into headwinds | Business Spectator

With the uncertainty about how long (if it occurs) it will take the new Federal Government to abolish the carbon tax (which would be a bonus to QF and VA, but one that arguably has been fully taken account of in airlines' share prices), when will Alan Joyce be given a 'tap on the shoulder' by QF chairman Leigh Clifford as those institutional investors who have rarely been known for patience get edgy at the continued lack of a dividend and the gradual reduction in the share price?

At least VA has three international airlines with deep pockets behind it, although its financial situation is if anything worse than QF's.

If it's good enough for Mr Buffett to treat investing in airlines as akin to inviting the bubonic plague into one's home, it should be good enough for many of us who want any investments we have to perform.