High yield

The Qantas Group led off with a record net profit of $719. 4 million despite a 19. 1 per cent increase in its fuel bill to $3. 3 billion.

Outgoing chairman Margaret Jackson said Qantas generated a return above the cost of capital invested in all segments and the result included a $47 million provision against liabilities the company may incur in th

boosted by revenue growth of 11 per cent to $15. 17 billion as demand grew faster than capacity on the back of a robust economy boosted by the resources boom.

In fact the Qantas Group carried 36. 4 million passen-gers in 2006/07, up seven per cent on the previous year, but only increased seating capacity across its network by less than half that – 3. 4 per cent – lift-ing load factor 2. 9 points to 79. 9 per cent. As a result, the all important yield (or profit margin per seat) leapt 6. 9 per cent to 11. 69 cents.

Revenue passenger kilome-tres (RPKs) rose 7. 4 per cent to 97. 62 billion compared to available seat kilometres (ASKs) of 122. 12 billion.

Expenses rose 8. 5 per cent to $14. 06 billion and operating profit soared 57. 6 per cent to $1. 1 billion from $698. 6 million. The airline’s ongoing ‘Sustainable Futures’ cost cutting program contributed net cost savings of over half a billion dollars for the year, with labour savings of $238 million, distribution savings of $192 million and $323 million in fleet, product and overhead initiatives (minus $221 million in restructuring costs).

Star performer in the group was Jetstar Airways, where passengers jumped 31. 8 per cent to 7. 6 million and load factor climbed 1. 2 points to 75. 25. In fact Jetstar made a fantastic profit – Qantas says Jetstar domestic, trans- Tasman and short haul international A320 operations contributed a profit before tax of $112 million on passenger revenue of $269 million.

Profit before tax contrib-uted by Qantas mainline domestic, international and QantasLink regional opera-tions totalled $773 million, up $233 million or 43 per cent on the previous year.

The airline’s ongoing ‘Sustainable Futures’ cost cutting program contributed net cost savings of over half a billion dollars for the year, with labour savings of $238 million, distribution savings of $192 million and $323 million in fleet, product and overhead initiatives (minus $221 million in restructuring costs). Fuel costs were up $535 million to $3. 3 billion.

CEO Geoff Dixon said the overall result and Qantas’s strong operating po-sition were underpinned by the two-brand strategy. “We believe the transfer of 15 per cent of marginal domestic and trans-Tasman flying from Qantas to Jetstar, the transfer of Qantas capacity to better performing domestic routes and increased investment in the Qantas product have improved the Group’s [pre-tax] bottom line over the past three years by $250 million,” he said. And clearly there are going to be more routes transferred to Jetstar with indications from manage-ment of another large order for A320s due shortly.

Going forward, Dixon as usual, warned of “increasing levels of competition, with state-owned Middle East hub carriers poised to increase significantly their Australian capacity, new low-cost labour entrants Tiger Airways and AirAsia X, and Virgin Blue commencing trans-Pacific services in 2008. ” Dixon told media that an extension of Qantas’s successful segmentation program, a process that was accelerated following the unsuccessful Airline Partners Australia private equity bid, will be a major focus going forward. “We believe we can unlock further value from our individual businesses and work is underway across the company, most notably in our frequent flyer, freight, fleet and holiday divisions. We are looking at potential new own-ership structures and strategic acquisitions and we expect to make announcements during the current financial year. ” Within a month of the result, Qantas acquired 100 per cent of Asia-based express freight operator DPEX Worldwide for an undisclosed amount and the purchase fits neatly into the group’s Asian presence, which includes its new 30 per cent stake in Vietnam’s Pacific Airlines, to be remod-elled as a low-cost carrier.

Also within weeks of the results announcement, Qantas went on the offensive in the West responding to scathing criticism of the overcrowded Perth domestic terminal and Australia’s worst on-time record, announcing that it would spend $50 million on a terminal upgrade and move all transcontinental flights connecting Perth to Sydney and Melbourne to A330s and 767s within two years.

For the 2007/08 financial year, Dixon forecast a 30 per cent lift in operating profit given “no major deterioration in market conditions. ” Shareholders were the big winner from the bumper result, Qantas declaring a fully franked dividend of 15 cents per share, plus revealing a $1 billion share buyback, of approximately 10 per cent of the airline’s stock.

In contrast staff and Qantas unions will be looking at the record result with understand-able envy and the prospect of a change of government at federal level could set the scene for a very difficult 2007-08 for the airline.

Staff morale remains a point of contention at Qantas, with rumours of mass resignations by casual flight attendants to join Tiger Airways and Emirates and ongoing discontent among the pilot and engineering workforces (see Contrails).

If staff morale is Qantas’s biggest internal challenge, Virgin Blue is its biggest external test. Virgin Blue too posted big improvements in revenue and yield driving its bumper 92. 9 per cent surge in net profit to $216 million for the 2006/07 year.

Revenue rose 16. 3 per cent to $2. 16 billion and yield lifted 8. 1 per cent to 11. 57 cents, while expenses climbed 9. 3 per cent year on year to $1. 84 billion, reflecting an increase in flying and a 7. 9 per cent rise in fuel price. Operating income soared 41. 2 per cent to $548 million with $16 million in one-off expenses dragging on a bottom line that otherwise would have been even more impressive.

“This result . . . is the strong performance we were aiming for and progress at the rate planned under our New World Carrier strat-egy,” CEO Brett Godfrey told media. That strategy has shifted the airline’s focus from “low cost to great value,” he added, targeting the business market with new lounges, launch of the Velocity frequent flyer program and the rollout of in-seat satellite TV. The carrier credited the shift for a 14. 2 per cent profit margin that it claimed was more than double that of Qantas.

Virgin Blue flew 17. 6 billion RPKs during the year, a 7. 3 per cent increase, against a 2. 9 per cent lift in ASKs to 21. 6 billion that boosted load factor 3. 3 points to 81. 2 per cent. Passenger numbers rose 7. 7 per cent to 15. 3 million. Unit cost grew 6. 1 per cent to 8. 52 cents.

Godfrey told media that the next two years will be marked by steady expan-sion including entrance into the New Zealand domestic market, introduction of the E-170/190 and addition of the 777-300ER on trans- Pacific services.

“It is acknowledged that during this planned develop-ment phase as Virgin Blue invests for higher yielding returns and gears up to establish major new airline operations the company will accommodate a period of controlled increase to the cost base,” Virgin Blue’s profit announcement statement reads. “Management view this transitional adaptation of business model as short term investment prior to entering higher yielding domestic and international markets. ” The group’s fleet will grow from the current 53 737NGs to 58 737NGs, 20 E-170s/190s and three 777-300ERs by June 2009. It is also planning to introduce new seating to enable quick configuration changes to match Jetstar’s and new entrant Tiger Airways’s higher density cabins on some routes.

Shortly after the results announcement, the airline opened its Canberra lounge – the fifth lounge in the airline’s network. Virgin Blue has lounges in Adelaide, Melbourne, Brisbane and Sydney as part of the New World strategy to lure high-yield passengers. That strategy is focused on small to medium businesses but Virgin Blue is targeting corporate and government customers and is expected to use its new E-170/E-190s as part of its strategy into Canberra, which seems likely to include a return to the Canberra-Sydney route. When Virgin Blue started in 2000, it failed spectacularly to gain government busi-ness, but now armed with a frequent flyer program and lounges it can expect to make inroads into what has been Qantas’s domain.

The airline took delivery of its first E-170 in Brazil on September 3 and while it is yet to announce routes for the aircraft, it is expected that the airline will nurse the aircraft for some months as it gets comfortable with the jets – both a new type and a new manufacturer for the airline.

At the same time as open-ing the lounge in Canberra, the airline came good on its promise to enter the already overcrowded New Zealand market by announcing a November 15 start up with two Pacific Blue branded 737-800s. The aircraft will be employed on services between Auckland, Wellington and Christchurch with promotion-al fares from NZ$39 (A$33), while normal fares will be equal to or above those of Air New Zealand. In fact, New Zealanders enjoy some of the world’s cheapest airfares such as NZ$59 (A$50) on a major trunk flight between Christchurch and Wellington.

This move is being closely watched by the born again Air New Zealand, which on August 29 announced its best result in a decade, with a net profit of NZ$214m (A$180m) which was up 123 per cent over the prior year’s NZ$96m in earnings. The result was built on a 13 per cent rise in revenue to NZ$4. 3bn (A$3. 6bn), with passenger numbers up 4. 9 per cent to 12. 5 million and yield ahead 7. 5 per cent on short-haul flights and 8. 8 per cent on long-haul. Fuel continued to be the biggest cost and grew by NZ$165m (A$139m), while overall expenditure rose 10. 2 per cent to NZ$3. 43bn (A$2. 89bn). Operating profit was NZ$283m (A$238m), up 91. 2 per cent from NZ$148m in the previous fiscal year. The airline flew 26. 87 billion RPKs during the 12 months, up 5 per cent, against a 3. 1 per cent increase in ASKs to 35. 11 billion that lifted load factor 1. 7 points to 76. 7 per cent.

The result was even more impressive set against a reduction in domestic airfares of up to 26 per cent since February, which helped boost domestic travel by 42 per cent to 5. 5 million passengers, and the launch of new routes to Shanghai and to London Heathrow via Hong Kong.

The profit also comes as the airline is digesting the massive cost of restructur-ing and the introduction of three new types – the A320, 777-200ER and Q300 – in three years while adding a radical upgrade in its regional and long haul product.

The ongoing business transformation program delivered a further NZ$128m (A$108m) in revenue, produc-tivity and cost benefits, with labour costs falling to 20. 6 per cent of overall expenses, an improvement of nine points.

“This is the strongest result in the past decade and comes off the back of significant growth in passen-ger revenue and a continued reduction in unit operating costs,” chairman John Palmer told media in Auckland. CEO Rob Fyfe added that “the past year will go down as one of the most pivotal and exciting in Air New Zealand’s history. All the hard work of New Zealanders over the past few years to shape an airline that the nation can really be proud of is starting to pay off. ” e US for its alleged involvement in a freight cartel.

This year’s profit was up 50 per cent on the previous year’s $479. 5 million and was

Looking forward, Air NZ warned that currency fluctuations and fuel prices continue to have a signifi-cant influence on its finan-cial performance, although its has taken hedge positions on both currency and fuel, and spikes notwithstanding, expects a better result for the 2008 fiscal year.

With outstanding results behind them and substantial restructuring completed, the region’s airlines are well positioned for the significant challenges ahead. For Qantas, it is increased international competition in the form of V Australia and a revitalised Air New Zealand plus greater access for Middle East giants Emirates and Qatar.

And while Singapore Airlines’s aspirations for the Australia-US routes have been kept at bay, the recent appointment of former Northwest Airlines CEO, Richard Anderson, to the helm of Delta Air Lines is likely to have implications for the Asia Pacific industry.

According to the Centre for Asia Pacific Aviation, outgoing Delta CEO, Gerald Grinstein, made explicit reference to Anderson’s understanding of the Asia Pacific region “which are among Delta’s next growth opportunities. ” CAPA suggests that “Delta has been the US industry’s most aggressive practitioner of international expansion in the past 18 months, stead-ily adding overseas routes, frequencies and aircraft in an attempt to diversify away from the highly competitive domestic US market. ” It has six Boeing 777-200LRs on order – capable of operating from Atlanta to Sydney or Singapore.

On the domestic front, Tiger Airways looms as a major combatant for Jetstar and Virgin Blue, eyeing off the attractive yields Australia’s domestic airlines are generating.

“The Qantas Group posting of a 50 percent lift in annual earnings demonstrates there is plenty of room in the Australian market for Tiger Airways Australia,” reads a Tiger Airways media release issued after Qantas’s billion dollar result. Tiger Airways CEO Tony Davis must be salivating at the prospect of the profit margins available to domestic airlines in Australia at the moment.

Complicating matters for Qantas is Tiger’s push to link capital city airports, rather than use secondary ones as Jetstar has done to insulate Qantas from its fare levels. The Qantas Group also faces the dual challenges of intro-ducing both the 787 in Jetstar colours and A380 as Qantas’s flagship, which are set to test the airline’s resources.

Jetstar and Jetstar Asia face increasing challenges in the form of AirAsia which will fly to Australia and is expanding aggressively within Asia with a JV just signed with Vietnam Shipbuilding Industry Group, one of the largest state owned corpora-tions in Vietnam, to form a low cost airline based on the AirAsia model.

The signing ceremony was hosted by the Prime Minister of Vietnam, Nguyen Tan Dung giving dimension to the importance of the deal and would leave Qantas executives wondering about the standing within the government of its recent 30 per cent buy into Hanoi based Pacific Airlines. The Air Asia led airline, which will be based in Hanoi, will serve domestic, regional and international routes, but no date was given for a start of operations.

While the Qantas Group has plenty on its plate, Virgin Blue doesn’t escape lightly either. It must now morph into both a regional and a long haul international airline and while it can be argued that it is just a matter of scale, there is a great deal more in-volved as it moves away from the golden rule of low cost carriers – one aircraft type. September saw the arrival of the first of 20 Embraer E-Jets and in 12 months, the first of 14 777-300ERs touches down in Brisbane.

Air New Zealand’s fairy-tale rise from the ashes of the Ansett debacle is set to continue, despite the entry of Pacific Blue onto domestic routes. The airline has shown itself to be flexible, innovative and above all in touch with what passengers actually want.

All airlines will be care-fully watching developments in Asia, which offer both opportunities and challenges. ASEAN countries are due to implement “capital city” liberalisation next year which, according to CAPA’s COO Derek Sadubin, aims to drop restrictions on passenger services between the capital cities of each member nation. However, Singapore and Malaysia appear unlikely to move to open access on the tightly controlled Singapore- Kuala Lumpur route ahead of the end-2008 deadline, while Indonesia may just opt out completely.

The lure of Asia is the enormous and largely un-tapped customer base but is fraught with difficulties as even KL based AirAsia has found in getting access to Singapore.

The dilemma facing these airlines is whether in fact their future is intra-Asia or medium haul from Australia and New Zealand into Asia developing new point to point services. o