Qantas: A Woolworths Airline?

Qantas A380


A Qantas A380 departs Heathrow for Sydney via Singapore. Photographed by AirSpace user apgphoto.


Except for the shareholders who won’t be receiving a dividend, the Qantas Group’s fiscal year 2010 annual results, announced today, seem magical.

The Group brought in $610m less revenue than last year but made (after taxes and interest) $277m more in profit. But delving deeper concerns are aplenty.

Qantas (the airline) had a much better result, contributing $67m to the year’s pre-tax and interest profit compared to last year’s $4m. But Jetstar once again was the breadwinner, contributing $131m to the year’s pre-tax and interest profit compared to last year’s $107m. Proponents would argue the results vindicate the Group’s two brand strategy and poise Jetstar to reap higher benefits once B787s join the fleet and the carrier expands further, which they do.

The problem is the future. While the Group increased its overall profit, it did so on passenger yields falling 7%. Costs were mitigating factors: fuel cost decreased, as did “manpower” (read: redundancies and off-shoring maintenance and other services), and the carrier’s financial savings programme QFuture delivered an impressive $533m in savings. But that cannot go on forever.

Anymore off-shoring and CEO Alan Joyce will end up in India, QFuture only runs for two more years, and oil’s rollercoaster ride (more thrilling than a 747 flying with a hole) is making evident now more than ever that alternative fuels are necessary but airline pickup is not fast enough.

Airline yields are constantly decreasing, hence the need to cut costs. New B787s and other fuel-efficient aircraft will help but not go all the way. Within the Group’s results is a hint of the future: Michael O’Leary is right.

The Ryanair chief wants to one day have $0 fares but be profitable from ancillary revenue. While on Qantas window shades may remain and pay-as-you-go loos remain far away, Qantas has found its ancillary revenue in a partnership with the Woolworths Group, known primarily for their namesake supermarket.

The agreement with Woolworths, under which Qantas Frequent Flyers earn points for their purchases at the supermarket and other outlets, helped the Qantas Frequent Flyer programme contribute $328m of the Group’s $468m pre-tax and interest profit. That’s 70%. The remaining 30% came from the supposed stalwarts, the carriers Qantas and Jetstar, and also freight and travel agency services.

In America, US carriers brought in more than $2 billion in revenue from bag fees last year, but there’s an argument they are not true full-service carriers. In the face of decreasing yields, how will the Qantas Group continue to bring in LCC’s trademark ancillary revenue while still maintaining full-service? How will other carriers do it?

After last year’s financial results, in which Jetstar far outperformed Qantas, Steve and Grant over at Plane Crazy Down Under joked Jetstar wasn’t a Qantas airline but rather Qantas was a Jetstar airline. Now that the Woolworths partnership and the Frequent Flyer programme in general have outperformed the carriers, is it time to ask if Qantas is a Woolworths airline?

, ,

2 Responses to Qantas: A Woolworths Airline?

  1. Grant McHerron (aka Falcon124) August 12, 2010 at 6:36 am #

    Qantas isn’t the Woolworths airline although that’s a very good comment given their frequent flyer program being such a major contributor :) The “Woolworths principle” is to move lots of product on small margin to make profit through volume. I’d almost say that describes Emirates (low fares, lots of volume) but I think their margins aren’t too bad thanks to their tax-exempt status.

    As Ben Sandilands noted at Plane Talking (http://blogs.crikey.com.au/planetalking/2010/08/12/qantas-fy-10-hit-a-rough-patch-late), a big issue inside the Qantas results is that they made most of their airline profit (as opposed to frequent flyer program profit :) in the first half of the year. The last half has been terrible.

    So much for all the “super positive spin” media releases that Qantas were releasing when VB downgraded their expected profit.

    As many of us pointed out, a softening of the market (& Tiger prowling around the bottom end) would affect JQ & QF just as much VB. These latest results are definitely showing that.

    Thanks heaps for the plug to our podcast :)

    Cheers,

    Grant

  2. Will Horton August 12, 2010 at 6:54 am #

    My point with Woolworths wasn’t operating model (although I now smile at the thought of DXB being the check-out conveyor belt moving passengers all over the world) but rather which company was more important, the way Jetstar has been more profitable compared to Qantas.

    The softening market in the second half of the year is certainly an issue, but Qantas had to contend with the volcanic ash (VB didn’t) and also unrest in Thailand (QF more than VB, if at all). Qantas has pegged a figure of $46m to lost revenue and incurred expenses because of the volcanic ash but it’s not clear how much was expense (and could boost second half earnings) versus merely lost revenue (only a fraction of which would contribute to bottom line profit). I’m

    It will be interesting to see how Virgin Blue ends up pulling through for the second half compared to Qantas, and if they are ready to comment on next year’s outlook.

Leave a Reply