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Sky darkens for Qantas tormentors as profits in free fall

Whether you are flying far on cheap fares and a strong Australian dollar, or working for or holding shares in Qantas, the sky has gone deep black with threatening storm clouds as Emirates and Singapore Airlines report imploding profits, and Cathay Pacific cuts its growth forecasts in half and issues a sharply worded profit warning.

These are the three most successful Qantas tormentors in the long-haul flying game out of Australia.

The clearest of signals common to each of them, and Qantas, is that flying is going to get more costly because of fuel, but perversely, there will continue to be fierce outbreaks of price competition in all classes as each defends their respective lines in the sand if they judge they are giving up too much in the fare skirmishes, which will continue, if less frequently.

Emirates has come out the best, despite its year to March 31 profits falling by 72.1% to $US409 million. It almost doubled in size in the past five years, but its fuel bill in its last full year went up by 44.4% to $US6.6 billion, and it says it may start hedging this year, a vexed issue for all carriers since hedging isn’t risk free and the benefits are generally seen as shrinking as fuel goes higher over prolonged periods.

And, like Cathay Pacific, Emirates doesn’t get any benefit from a floating currency. The linking of the dirham to the US dollar means that Qantas with the higher Australian dollar ought to garner a comparative advantage on all financial obligations framed in US dollar minus the costs of currency hedges.

Emirates said that in Australasia and east Asia, its sales rose by 17% to $US5 billion, and in a disclosure that sets it apart from Qantas, Singapore Airlines and Cathay Pacific, made more not less money from premium products.

By comparison, Singapore Airlines and Cathay Pacific reported the same malaise as Qantas in softer premium demand and serious pressures on economy-class margins.

Singapore Airlines’ full-year profit to March 31 plummeted by 77% to $SGD286 million, but in the final quarter it lost $SGD38.2 million, which is almost as much as a lacklustre Qantas group made in statutory profits in its first half year results to December 31.

The excuses offered by Singapore Airlines — more intense competition from Middle East carriers at the quality end — and from low-cost franchises and general fare competition at the price-sensitive end, are meeting some resistance in the city state, and adding to dissatisfaction with its falling contribution to total traffic numbers at Singapore’s Changi airport.

As is the case in Australia with Qantas, Singapore’s liberal trade policy and the benefits of freer trade relationships are valued far more highly than is “looking after” the special interests of national flag carriers.

However, unlike the situation in Australia, marquee Singaporean brands are under intense public and political scrutiny as to how well they perform terms of the national interest, and Singapore Airlines is underperforming and paying a reputational price for substandard management decisions in the recent past.

Singapore’s cost advantages compared to Australia and the rest of the world are also seen as narrowing, notwithstanding a very determined cost reduction program in Singapore Airlines.

The added twist of the knife seems to be that Singapore Airlines’ answer to its problems, to launch its own low-cost, wide-body carrier Scoot from next month, to compete against Air Asia, Jetstar and quite possibly very soon, Thailand’s Nok Air, is considered too late and too little.

Scoot will only have four of its initial fleet of 16 jets in service this year.

Singapore Airlines’ original answer to Air Asia and Jetstar — Tiger Airways — has been a dismal performer, and the airline has long reduced its stake to about 32% from an original 49% equity.

One advantage, however, that Singapore Airlines, Cathay Pacific and Emirates appear set to retain over Qantas in the common battle to deal with fuel costs, is in fleet choices.

While Qantas has deferred two A380s and has no certainty as to when it will get much delayed 787s or whether, when it does, that they will deliver bankable cost savings, its competitors are piling on new but proven Airbus and Boeing types that not only burn much less fuel over comparable missions to aged Qantas 747s and 767s, but are, as Qantas readily concedes, much less costly to maintain.

Qantas is acknowledged as a very shrewd manager of fuel costs through its hedging activities, but nothing overcomes the fuel and maintenance cost disadvantages of older jets compared to newer jets in the current and likely operational environment of higher fuel and better-equipped competitors.

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