The key to Qantas being able to better its 2017’s “second-highest ever’ result this year is in some respects out of its hands.
This statement will probably see its chief executive, Alan Joyce, roll his eyes with frustration – given he has just finished what is probably Australia’s largest ever corporate overhaul to transform the airline from a loss-making and deeply troubled business to one that is now booming by most financial measures.
But the vast majority of that hard work is now done. Over three years the company has eviscerated its cost base, improved service, resurrected the balance sheet – just as a start.
Qantas has taken plenty of risks, in particular with establishing Jetstar in Asia. And it’s about to take another – but back to that later.
Most importantly, the management has stabilised its earnings – future-proofing them against most things other than those external shocks that airlines can be exposed to, like terrorism and pandemics.
So why was this the second-highest profit ever, and not a record profit?
Mainly because the competition from international airlines coming to Australia is greater than it has ever been as other airlines have taken advantage of cheap fuel to add new routes or new capacity.
This is particularly the case with Asian airlines, especially from China, where tourism is thriving.
The influx of competition makes it harder to fill seats – the response to which is to reduce fares. This is the thing that Qantas and Joyce can’t control.
(Of course Qantas also gets hundreds of millions of dollars worth of benefits from cheaper fuel, so it can’t complain about that.)
Yet for Qantas to beat its 2016 ‘biggest ever’ profit, it needs to see some easing in the capacity growth from international competitors. In the June half, there was some softening of that growth, but it remains to be seen whether these early signs continue.
On the domestic front, Qantas reported a stronger profit than last year, which had been marred by the election campaign.
But the general consensus from the management of Qantas’ domestic division and its low cost carrier, Jetstar, is that the business and leisure markets are strong and even the slump in routes to mining towns has started to ease.
The airline doesn’t seem to have been hit by the consumer confidence malaise that retailers and other discretionary businesses are feeling.
The frequent flyer division is improving nicely and should continue that trajectory. The only real disappointment was the freight division, whose profits declined.
Thus Qantas looks like a company that is relatively low risk – certainly when compared with other airlines around the world.
A massive increase in the oil price is always potentially problematic, but Qantas has that financially hedged, and in a structural sense oil is more likely to fall over the medium to long term.
So where to from here for Qantas, and its future strategy? Long journey
Well, this brings us to its plan to run a non-stop flight from Perth to London and to Friday’s announcement to apply the blow torch to aircraft manufacturers, Boeing and Airbus, to develop and modify the next generation of aircraft to be able to fly from the East coast of Australia non-stop to London or New York.
Joyce said both airline manufacturers were pretty keen to get on board, and there is no doubt that fewer stopovers will lower the cost for Qantas. But will passengers go for it?
Having conducted my own very limited straw poll of travellers from Sydney and Melbourne, most are less than enthusiastic about flying to London via Perth – firstly because they don’t want or need to go to Perth and secondly because being confined in an airline seat for 17 hours could be unpleasant.
Qantas says, however, that forward bookings for this service are solid, so maybe I was asking the wrong people.
Fly from Sydney or Melbourne, and the extended duration of a flight to London would be even more arduous. It remains to be seen whether the 3 hours and 45 minutes saved in overall travel time will be enough to offset this, even if the new aircraft are designed to improve passenger space.
Joyce pointed me to a couple of other factors that make the long journey attractive – such has not having to choose when to sleep, not having to offload then reload the kids, and even not having to interrupt movie watching.
The way Qantas sees it is that the public is evolving to become more acceptable of longer journey legs.
They say that when non-stop flights to LA (previously they had gone via Honolulu) were introduced passengers complained it was too far – but gradually they got used to it.