Pulling out the aviation crystal ball

Article originally appeared in TravelWeekly Australia September 5, 2008

The treacherous economic times have inevitably taken their toll on Australia's two biggest carriers. As Justin Wastnage writes, the future is still very much uncertain and each airline has a different outlook

Whether your glass is half empty of half full is usually a definer of an optimistic temperament. Yet late last month, Australia's two Australia's two largest airline groups, Qantas and Virgin Blue, issued starkly different forecasts for the year ahead, despite both having posted profits.

In fact, their two respective chief executives Geoff Dixon and Brett Godfrey acted out of character. The dour Dixon, who can usually be relied upon to be downbeat, predicted Qantas would make a smaller profit than this year, but still be healthily in the black to the tune of hundreds of millions. Godfrey, meanwhile, junked his usual bouncy demeanour to warn shareholders to expect rough times ahead.

Qantas (which includes low cost carriers Jetstar, Jetstar Asia and Jetstar Pacific in addition to the Australian flag carrier Qantas Airways), posted another record post-tax profit of A$970 million, up 44 per cent on last year's results. The group's gross profit was A$1.4 billion on a revenue of A$16.2 billion, which Dixon said "emphasises the underlying strength of the company."

His counterpart at Virgin Blue, meanwhile, was also celebrating a profit. Godfrey initially announced an "underlying net profit" of A$140.5 million. In fact, more orthodox accounting would have taken off the A$42.8 million the airline has already spent on launching V Australia. This left it with a profit of A$97.7 million, 55 per cent down on last year, but a triumph when taken in the context of analyst reports (possibly encouraged by rival airlines) which predicted a loss. Virgin Blue, which also includes Pacific Blue and Polynesian Blue, last year made A$216 million after tax.

The carrier, which has moved from the low-cost model towards a full service offering, blamed spiralling oil prices against which it has fewer hedges than rival Qantas. Brett Godfrey, Virgin Blue chief executive warned the coming year could be worse, with a loss predicted if fuel does not come down in price. During the launch of trans-Pacific V Australia, the group will incur more start-up costs related to underutilisation of its Boeing 777-300ERs. Godfrey also warned that the next three years could be worse than the aftermath of September 11, 2001 and severe acute respiratory syndrome (SARS).

Qantas's own figures were down around A$8 million, or 2.5 per cent, for the second half of its 2007/8 reporting year and Dixon admitted the group would make only half of this year's record profit, with pre-tax earnings "broadly in line with analysts'' consensus forecast." Pressed, Dixon clarified this would be around A$750 million. Dixon scotched talk of a three-year lull, saying it was impossible even to predict one year in advance.

Giovanni Bisignani, chief executive of the International Air Transport Association was in Sydney on the free day between the two companies' full year earnings announcements and he added gloom to the local outlook, by reiterating his view that globally the industry will lose US$6.1 billion this calendar year. He hinted that a further two dozen airlines would also falter before the end of the year, on top of the 25 that have already done so.

But Bisignani also praised Australian aviation for having transformed itself better than most, cutting costs where other airlines have struggled. This is reflected in both Virgin and Qantas's yield figures. Virgin, for example, saw its yield rise by 0.2 per cent despite the rising fuel prices. On average, the airline was able to charge just over 10¢ per kilometre flown, a rise of 0.7 per cent. Qantas saw its own passenger revenue per passenger kilometre rise to 11.81¢, up 1.2 per cent. But one percent price rises do not cover fuel price rises of almost 20 per cent. Instead, both airlines have managed to slash costs out of their businesses.

When looking into the future, further belt tightening will be required. But that need not mean the glass if half empty, as long as Australians continue to drink from the glass.