Airline Weekly - May 18, 2015
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Airline Weekly - May 18, 2015

Qantastative Easing: Why are Qantas shares surging? Because overnight, the airline has gone from gloom to boom

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Cover Story

Qantastative Easing: Why are Qantas shares surging? Because overnight, the airline has gone from gloom to boom

Few amusement parks can match the thrill of investing in Qantas. This time last year, the airline’s shares were down by nearly a quarter y/y. Then came spring in the southern hemisphere, when they began a sharp ascent after CEO Alan Joyce declared: “We have now come through the worst.” Another encouraging set of financial results announced in late February sustained the momentum, and a bullish investor day presentation last week lifted shares another 7%. By Friday, they had nearly tripled from a year ago, an appreciation in value unmatched by any other airline in the world except China Southern.

As discussed in Airline Weekly’s Sept. 1, 2014, cover story (“Thunder Down Under”), Qantas had suffered through one of its most troubling periods during the first half of that year. Australia’s economy was slowing and the Australian dollar was weakening, making then-still-high fuel prices all the more so for Qantas. Foreign competitors, including longhaul LCCs like AirAsia X and Scoot, were flooding the market with waves of new capacity. At home, Virgin Australia was growing aggressively. Suddenly even Jetstar was losing money. So was the perennially profitable mainline domestic operation. And the mainline international operation? Losses amounted to more than $200m in just those first six months of 2014.

But that same cover story identified a plethora of lesser noticed but just as significant green shoots heralding a turnaround. Major cost cutting was taking root, a carbon tax had been repealed, depreciation costs were dropping and competitive capacity was easing significantly. The weak Australian dollar, although inflating fuel costs, was also discouraging foreign carriers from serving the market: better to send longhaul planes to the U.S. and earn strong U.S. dollars. Virgin Atlantic was one airline that had exited Australia while expanding to America. In the meantime, just as in the U.S., consolidation was leading to fare increases at home—Virgin Australia and Tigerair were now one.

Qantas itself froze capacity at home and cut some overseas routes like Perth-Singapore. It boosted aircraft utilization by reducing aircraft turn times, modernized its maintenance practices, secured wage freezes from most work groups, retired older fleet types (B767s and B737-400s), densified B737s, paid down debt, sold non-core assets like airport terminals, suspended Jetstar growth overseas, began flying B787s at Jetstar, formed marketing partnerships with China Eastern and China Southern and developed joint ventures with American, Emirates, Japan Airlines, Vietnam Airlines and China Eastern (the last three... (423 of 1,690 words)

Also Inside this Issue:

Stop the presses! easyJet made money during the winter half, a rare feat in Europe’s highly seasonal shorthaul business. The continent’s leading LCCs, it seems, are benefiting greatly from efforts to make their networks, products, fares and distribution—if not their legroom—more corporate friendly, all while rival legacy carriers frustrate customers with strikes. Ironic, isn’t it? Europe’s LCCs are chasing business passengers (i.e., easyJet’s Flexi fares and Ryanair’s Business Plus) while legacy carriers chase leisure travelers (i.e., Lufthansa’s Eurowings and Air France’s Transavia expansion).

Profiting during Canadian winters is no less difficult, but Air Canada did so in Q1, ex special items, anyway. Profiting in much of the ASEAN region was nearly impossible last year, but this year’s first quarter saw big turnarounds in Thailand and Indonesia, if less encouragingly so in Singapore. And profiting in South America right now is quite a feat, so give credit to LAN/TAM and Gol. Cheaper fuel, of course, was instrumental in most of this profit-making, overwhelming a tide of revenue declines. 

Korean Air and Asiana enjoyed a similar fuel-fueled profit party, Turkish Airlines did okay for the off-peak period and Air Berlin... well, that’s another story.

The story in the U.S. market, of course, is one of overwhelming profits. But with each passing week, worries mount about overcapacity, even in the domestic market. Giving voice to such fears is American, while smaller carriers like JetBlue and Alaska expand rather rapidly. U.S. carriers might have more to say at a Wolfe Research investor event in New York this week.

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