The spectre of low passenger numbers rather than low cost airline is coming into focus. Outgoing Qantas CEO Geoff Dixon has warned that demand is falling in all classes.

That is the most straightforward statement made by any Australian airline CEO about the consequences of the financial crisis, but he’s gone at the end of next month and has no need to spin the situation like Tiger, Jetstar and Virgin Blue.

The operating statistics filed with the ASX by the Qantas and Virgin Blue groups are disturbing. And they don’t even cover this month, when the real crisis hit.

Virgin Blue actually had better recent domestic traffic and capacity reports than the Qantas group, but finds itself on the rack over the V Australia trans Pacific venture, which is compromised by delayed jets, hostile travel agents and a shrinking market.

Tiger has just released a statistical analysis of traffic growth in Australia since last August, three months before it began flying locally, in which it claims credit for an aggregate growth of 14.9% on routes it flew for part of that time, compared to a rise of 1.9% on those it hasn’t entered.

The Tiger spiel does prove that with only four jets it exerted negative pricing power on the established carriers with a combined domestic fleet of around 150 jets.

But it lost at least $23 million in its first four months of service in so doing, and since then must have cost its Singaporean stakeholders far more, all during a period when Qantas, Jetstar and Virgin Blue made money on their domestic networks.

The issue with Tiger’s announcement, as well as the vague good vibes stuff from new Jetstar CEO, Bruce Buchanan, about the world being his oyster in tame interviews in today’s newspapers is that both count for nothing when demand is falling across the board.

Low passenger counts are bleeding the life out of low cost airline business models that assume continual growth.

The financial crisis throws cold water over the popular low cost airline strategy of dealing with downturns by aggressively expanding market share through capacity dumping or mergers and acquisitions.

These almost traditional strategies for the low cost sector involve finance, or lots of cash, with the former suddenly much harder to obtain and the latter that much easier to loose.

However Qantas, Jetstar and Virgin Blue have advantages that Tiger hasn’t. All of them have scale and cash in measures unavailable to Tiger in the near term. Virgin Blue has a substantial part of its fleet on leases that could be allowed to expire if demand slides badly. The Qantas Group has already cashed up on the late delivery of A380s and Boeing 787s that it mightn’t need in volume for growth but continues to need for the replacement of older less efficient capacity.

In these respects Tiger looks trapped by the low passenger carrier effect. The only way to avoid the immediate humiliation of yet another Australian investment disaster like the Air New Zealand/Ansett fiasco is to invest heavily in expanding into a stricken and hostile market, with funds that might be very hard to raise, and for an operation that seems dedicated to serving only those least able to afford to fly in hard times.

See ‘Your fright is airborne’ in the Crikey blog, Plane Talking.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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