Qantas May Add Routes to Keep Long-Haul International Business `Relevant'

>> Sunday, February 6, 2011

Qantas Airways Ltd., the worst performer last year among the 29 stocks in the Bloomberg World Airlines Index, is preparing to revamp international operations and may add routes to regain market share from rivals Emirates Airline and Virgin Blue Holdings Ltd.

Chief Executive Officer Alan Joyce has formed a task force of about 20 people to look at “all options” for the international business, he said in a Feb. 3 phone interview. The division won’t be “relevant” if it keeps losing market share, he said.

More fuel-efficient aircraft, including on-order Airbus SAS A380s, would underpin the new routes, said Joyce, 44. An alliance similar to Virgin Blue’s venture with Etihad Airways for long-hauls from Australia may also help Qantas, the nation’s biggest airline, expand while controlling costs.

“They’ve got very limited options, as Australia is a small market of 22 million people at the end of the world,” said Peter Harbison, managing director at Sydney-based industry consultant Centre for Asia Pacific Aviation. “The real key is they’ve got to develop a relationship with another carrier.”

Qantas’s long-haul international traffic to and from Australia dropped about 8 percent in the year ended June 2010, leaving it with a 20 percent market share, compared with 35 percent in 2000, according to government data.

Eroding Dominance

The carrier’s budget unit Jetstar had an 8.1 percent share last fiscal year. Emirates had 7.9 percent of traffic, according to the government’s Bureau of Transport & Regional Economics.

Jetstar contributed A$131 million in earnings before interest and tax, while its frequent flyer program added A$328 million to group profit in the year ended June 30. The Qantas-branded carrier, which includes long-haul services, added A$67 million.

Qantas “isn’t returning its cost of capital, and the other businesses have been compensating for it for some time,” Joyce said. “That can’t continue, and we need it to grow.”

The carrier scrapped a potential merger with British Airways Plc in December 2008, less than a month after Joyce became CEO. Talks on a tie-up with Malaysian Airline System Bhd. also failed.

Dreamliner Routes

Deliveries of the first of Qantas’s 50-plane order of Boeing Co. 787 Dreamliners in 2012 will also help the airline add routes, Joyce said. The carrier has options for a further 50 Dreamliners and plans to use the 787 on Jetstar and Qantas routes so it can retire less efficient 767s.

“We will utilize the 787 a lot for new destinations, and that will depend on the arrivals of the aircraft,” Joyce said in the interview. “We also need to think about how we partner with other airlines.”

Qantas agreed last month with AMR Corp.’s American Airlines to expand an alliance for services to North America and to add flights to Dallas after Virgin Blue sought a similar tie-up with Delta Air Lines Inc. Both airline agreements are subject to regulatory approval.

The route across the Pacific Ocean was once Qantas’s most profitable, when it only competed with United Continental Holdings Inc. Since 2008, Virgin Blue and Delta have added trans-Pacific flights from Australia.

Share Performance

Qantas gained 0.8 percent to A$2.43 at the 4:10 p.m. close of Sydney trading, and have declined 4.3 percent this year compared with a 2.6 percent gain in the benchmark S&P/ASX 200 index. The stock fell 15 percent last year.

Net income for the six months ended Dec. 31 may rise almost fivefold to A$281 million, analysts at Macquarie Group Ltd. said in a Feb. 4 report. Qantas reports first-half earnings Feb. 17.

The company has 65 percent of the Australian domestic airline market, including more than 90 percent of corporate and business travel.

Joyce said he wants to use more of that market power to draw customers to international routes. Virgin Blue, whose CEO John Borghetti is a former Qantas executive, is aiming to expand its market share inside Australia and on international routes through its alliance with Etihad.

“Qantas is a portfolio business and the best part is the frequent flyer program, which is so lucrative,” said Harbison. “They can’t afford to see frequent flyers going onto Emirates.”



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