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Tuesday, June 5, 2012

Qantas Faces Price War as Losses Widen

 That's a harsh reaction because management's profit "update" simply confirmed what we all knew: the international arm is a basket case and the domestic arm is a duopoly jewel.

Qantas this year expects to make a mere $50 million-$100m pre-tax underlying pre-tax profit. Given the airline made $202m in the first half, this means the second half is redder than its famed livery.

Analysts had expected an average $207m after tax. But the estimates varied from a $64m reported loss (Deutsche Bank) to a $306m pre-tax profit (Morgan Stanley).

With more moving parts to Qantas than a Pratt & Whitney turbofan, the divergence is understandable.

With the Qantas domestic and Jetstar both flying high -- they'll deliver EBIT of more than $600m -- it's easy to see why management has opted to spin out the gangrenous international arm, which will drop a lazy $450m.

“Domestic is really the bigger concern,” Peter Harbison, executive chairman of CAPA Centre for Aviation, said by phone from Sydney. “The question becomes, who is prepared to lose the most blood?”

Qantas plans to add 25,800 seats a week between the nation’s biggest cities, as Virgin (VAH) Australia rolls out business- class services to lure corporate fliers and budget carrier Tiger Air ramps up flights for leisure travelers. The competition may have already caused Sydney-based Qantas’s domestic yields, a measure of fares, to fall for the first time in 15 months in April, Macquarie Group Ltd. said in a May 31 note.

“When supply and demand is unbalanced you do see this impact on yield,” Qantas Chief Financial Officer Gareth Evans said on a conference call yesterday. An index of restricted economy fares on Australian domestic routes fell to its lowest- ever level in February.
Etihad-Virgin

Virgin Australia also yesterday won renewed support for its push to challenge Qantas as Etihad Airways PJSC announced that it had accumulated a 4 percent stake. The Abu Dhabi-based carrier said it may eventually increase this to 10 percent. The deal cements a partnership that helps Virgin extend its marketing and sales reach overseas.

Tiger Air is challenging Qantas’s budget arm Jetstar by opening a second Australian base in Sydney next month. The carrier is rebuilding operations in the country after halting services for six weeks last year and then cutting its timetable following safety violations.

Qantas plunged yesterday, wiping out about $600 million of market value, after saying underlying profit may slump to as little as A$50 million this fiscal year. That’s a drop of as much as 91 percent. The carrier attributed the decline to the international unit and fuel costs rising about A$700 million to a record A$4.4 billion.

The airline closed at A$1.16. Virgin, backed by billionaire Richard Branson, rose 2.4 percent to 42 Australian cents. Jet fuel has averaged $127.50 a barrel in Singapore trading since June 30, 19 percent higher than a year earlier. Prices have fallen about 18 percent over the last two months.


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