The International Air Transport Association’s latest analysis of the global aviation passenger data contains some good and bad news for a beleaguered Qantas.
The good news is that the global aviation market is exhibiting strong growth, with passenger volumes rising eight per cent in January compared with the previous year and the growth rate accelerating.
The bad news is that Australia’s domestic market is the only developed market where capacity growth is outstripping volume growth, which underscores the impact of the capacity war between Qantas and Virgin that is occurring within the context of a softish economy.
In the broader Asia Pacific region, growth in revenue passenger kilometres of 8 per cent was ahead of the 7.5 per cent growth in capacity, but in the Australian domestic market revenue passenger kilometres growth of 3.1 per cent was below the 4 per cent growth in capacity.
The Asia Pacific numbers do, however, appear to be softening, with a slight downturn in January’s volumes compared with December’s, which IATA said could reflect a slowdown in China’s economic and export activity.
Qantas’ international business, which had been reducing its losses, suffered a massive reversal in the December half, losing $262 million despite that backdrop of global growth. Its problems relate to the amount of capacity competitor airlines have focused on the Australian market and the continuing growth in that competitive capacity.
The release of IATA’s data coincided with an analysis of the global aviation market by Goldman Sachs’ analysts that forecasts an acceleration in global growth from the 4.9 per cent compound annual growth rate of the last decade to 6.6 per cent a year between 2013 and 2017, with Asia Pacific growing at 8.4 per cent a year.
Unhappily for Qantas, however, the analysts see low-cost carriers and emerging market-exposed carriers benefitting most as their cost-advantages compound. They also say they don’t expect capacity discipline to hold within an improving economic environment and therefore conclude that legacy carriers will have to take decisive action and restructure if they are to compete effectively over the medium to long term.
It is the interaction between Qantas’ legacy cost base and the excess capacity on both its domestic and international routes that has accompanied the growth of “new age” lower-cost carriers within its traditional markets that has decimated its profitability and has ultimately forced it to embark on an attempt to cut $2 billion from its cost base over the next three years.
The growth and the prospects for the future within the Asia Pacific region also explains why Qantas has tried to establish a low-cost-carrier presence within the region through Jetstar Asia and the series of Asian joint ventures Qantas has entered using the Jetstar brand.
For the moment, that strategy is half-formed and frozen as losses from the Asian exposures have mounted, but there is a logic to Qantas seeking to create a low-cost regional presence in an immature and fast-growing part of its own wider region to offset the pressure on the Qantas brand created by the structural changes to the global industry.
It’s not just low-cost carriers that are creating that pressure, but the emergence and rapid growth of lower-cost but full-service airlines from the Middle East and Asia.
The Qantas board and management have been attacked from all sides, with a multitude of calls for them to be replaced and it is possible that a different leadership might have responded differently or more effectively to the challenges created by the big structural shifts in the sector that have accelerated since the financial crisis.
It is those macro developments, however, more than the tactical responses of a legacy carrier that Goldman Sachs’ analysis puts at the higher end of the industry cost curve, that has destabilised Qantas and will continue to destabilise it unless and until it can create a more competitive cost base.
The plunge into losses of its international operations since the financial crisis (which caused a lot of capacity to be redeployed from developed market into the Asia Pacific region and onto Australian routes) also made Qantas far more vulnerable to the attack on its domestic dominance and disproportionate profitability by Virgin that has been funded by three of its international competitors.
It is, at face value, a peculiar set of outcomes that the growth in the global industry has returned solidly and that the Asia Pacific region is one of the strongest aviation markets yet Qantas has been destabilised by the extent of competition in its international and domestic markets -- unless one overlays the structural shifts occurring, the growing impact of the “new age” and low-cost-carriers on legacy carriers, the responses of legacy carriers to that impact and the long-standing economic irrationality that characterises the aviation industry.
While boards and managements always have to take responsibility for the performance that is produced on their watch, it would appear Qantas shareholders have, at least until this point, had a better appreciation of the big structural changes occurring within the industry than many of Qantas’ critics.
Given how protracted and difficult to task of re-engineering Qantas will be, their patience and their willingness to maintain support is, however, going to be tested.