Qantas Airways LTD (QAN-AU)

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Alexander Groeneveled

Geoffrey Jordan

Qantas Airways Limited (ASX: QAN), the world's second oldest airline and the largest airline company in Australia with domestic market share of 65 percent,^[1] provides Australian domestic, New Zealand domestic and international flight services operating from Australia.

Qantas operates a low-cost subsidiary airline called Jetstar, which has enabled Qantas Airways to serve those customers who are more price sensitive as well as those who fall within the mid-high price range.

As with all companies in the airline industry, oil prices are a significant factor in the company's performance.

With the onset of the global financial crisis and prolonged economic downturn, a major contraction has occurred in global aviation demand, yields and capacity. The International Air Transport Association forecast $US9 billion in industry net losses for 2009. Qantas remains one of the few airlines that is still profitable, despite the economic downturn.

Company Overview

Qantas operates more than 4,700 flights each week to 72 destinations in Australia and around the world. The Jetstar brands operate around 1,900 flights each week to 50 destinations in Australia, New Zealand, Asia and the United States. Dedicated freighter services offer wide-body cargo capacity to key ports in Asia, the Pacific and North America.^[2]

Business and Financial Metrics

Fiscal 2009 Results^[3]

Qantas announced a profit before tax of $181 million for the full-year ended 30 June 2009, down 87 per cent on the prior year. Qantas reported net profit after tax of $123 million and revenue of $14.6 billion. Results were driven by weaker domestic and international demand, which led to a 4.3 per cent yield decline and a 1.1 percent decrease in seat factor (load) to 79.6 percent. Capacity cuts of 1.9 percent led to the removal of some variable operating costs as well as reduced revenue. Jetstar, however, increased capacity during the year through network growth.

Qantas Airways uses its three brands of airlines to target the majority of Australia's leisure and business travel market. Qantas targets primarily mid-high priced international travelers, QantasLink targets mid-high priced domestic travelers and Jetstar targets cost-sensitive travelers in the domestic and Asia-Pacific market.

Qantas Destinations^[4][5][6]

Qantas Annual Report 2009^[2]

Qantas Annual Report 2009^[2]

Jetstar

Jetstar is the Qantas Group’s low fares brand and has become the world’s largest low fares, long haul carrier. In May 2009, Jetstar became the second largest carrier of passangers to and from Australia after Qantas. It has achieved outstanding growth over five years and cemented its lowest fare market position. During the year, Jetstar grew strongly, by picking up capacity as Qantas withdrew from underperforming routes, and growing its Asian and intra-Asian operations. The Group increased its ownership in Jetstar Asia and, with a simplified ownership structure providing greater strategic alignment, this will provide a platform for future growth in the world’s highest potential aviation market.

Alliances^[2]

Qantas is a founding member of oneworld. oneworld provides Qantas customers with access to 675 destinations and 550 airport lounges, and the opportunity to earn and redeem Frequent Flyer points across its global network. A key milestone for 2009 is the October co-location of oneworld carriers in Terminal 3 at London Heathrow. While British Airways’ (BA) core operation is in Terminal 5, all BA flights to Australia covered by the Joint Services Agreement with Qantas are operated from Terminal 3. Qantas is also party to 26 bilateral codeshare agreements.

In November 2008, daily China Eastern codeshare flights became available between Shanghai and Chengdu and Xi’an; and a daily return codeshare service commenced between Shanghai and Beijing. Qantas commenced a codeshare with Etihad in March 2009, adding 21 return services per week between Australia and Abu Dhabi, with onward codeshare services to Amman, Beirut and Bahrain. Qantas extended its longstanding codeshare arrangement with oneworld member Japan Airlines (JAL) in June 2009 to include JAL services from Singapore to Osaka and Tokyo.

Also in June 2009, Qantas introduced new codeshares with oneworld partner airlines American Airlines and Iberia. Codesharing commenced on selected American Airlines flights to Atlanta, Cincinnati, Detroit, Indianapolis, Memphis, Minneapolis, New Orleans, and Tampa from American Airlines’ Dallas and Chicago hubs, while Qantas launched codeshare services on Iberia flights to Madrid from Frankfurt and London.

Trends and Forces

The global financial crisis severely reduced airline demand

With the onset of the global financial crisis and prolonged economic downturn, a major contraction has occurred in global aviation demand, yields and capacity. The International Air Transport Association forecast $US9 billion in industry net losses for 2009. Multiple airlines have collapsed since 2008. Previously profitable airlines are now reporting substantial profit declines and even losses.

In-flight incidents have harmed Qantas's reputation

In 2008 Qantas encountered events that affected its reputation negatively. Two in-flight incidents, QF30 in July 2008 and QF72 in October 2008, attracted widespread attention. Preliminary findings from independent authorities found no suggestion that Qantas safety was a cause.^[7]

QF30 Incident

A Qantas Boeing 747-400 made an emergency landing at Manila on July 25, 2008, after experiencing a sudden decompression in flight. Qantas Flight QF30 had been en route from Hong Kong to Melbourne. A Qantas press release about the incident said that "all 346 passengers and 19 crew disembarked normally and there were no reports of any injuries to passengers or crew."

QF72 Incident

A Qantas airliner incident that seriously injured dozens of people might have been caused by either Bluetooth laptop computers or electronic game devices. The Qantas airline QF72 suddenly lost control over the Indian Ocean because of a computer glitch in the autopilot controls. The plane was able land safely, though dozens of travelers were seriously injured. About 20 of the passengers suffered spinal injuries, broken bones or lacerations when they were flung from their seats on to the ceiling and walls. Investigators speculate that electromagnetic waves from a computer or a wireless mouse or even an electronic game might have interfered with autopilot controls and may have caused it to plunge.

The Australian aircraft engineers union dispute has created delays

Protracted industrial action undertaken by the Australian Licensed Aircraft Engineers Association between May and July 2008 harmed Qantas punctuality, productivity, costs and reputation, and full recovery took many months. Qantas customers experienced punctuality issues deriving from a long-running engineering industrial dispute and subsequent maintenance backlog, and this led to a shift in perception that Qantas had reduced its commitment to safety.

Open Skies with the EU

An agreement signed by Australia and the European Union on 30 April 2008 has enabled European carries to operate flights to Australia from any of the 16 EU states.^[8] This has been a major step towards signing an open skies agreement with Europe that could produce more flights between the two continents.^[9] At present there are separate bilateral air services agreements with 16 EU states.^[10] These agreements place restrictions on Qantas' services between the two continents. Previously French restrictions limited Qantas to three flights a week which prompted the airliner to discontinue its services to Paris. If these restrictions were lifted Qantas would be able to rapidly expand its services between the two continents. This would increase competition in the short run for the EU-Aus air-travel market as Qantas expands its services in the EU. It would not only lead to increased passenger revenue for Qantas but also increased revenue from air freight. Jetstar is pursuing an expansion into the EU market of cost-sensitive travelers and would considerably benefit from such an agreement.

Asia-Pacific Development

A strategic part of Qantas Airways growth plan is to set up a strong Asian network through its low-cost carrier Jetstar. Jetstar partnered with Vietnams second largest carrier, Pacific Airlines, to create the first ever low-cost Vietnamese carrier, which will take to the skies on 23 May 2008.^[11] Jetstar also owns a 18 per cent stake in Pacific which will increase to 30 per cent by 2010.^[12] Also owned by Qantas Airways is a 45 per cent stake of Orangestar Pte Limited, which owns and operates the value-based intra-Asia airlines Jetstar Asia and Valuair, based in Singapore.^[13] If the Asia-Pacific air travel market continues to expand then Qantas Airways will have begun to position itself to follow this expansion.

New Fleet

As with any airline, a key to expansion is investing in aircrafts that can hold higher capacities whilst being more fuel efficient. In December 2005, Qantas Airways made a firm order for 65 new Boeing Dreamliners with the option and purchase rights to buying 50 more, a possible expansion of 115 new aircraft.^[14] The first delivery of these orders had been scheduled for May 2008 however Boeing has announced a 15 month delay to this first installment and as long as 22 months for the full fleet to be delivered.^[15] As a result Jetstar might have to delay the start of the new international services it was looking to operate using the larger and more efficient Dreamliner. Jetstar had been keen to deploy the fuel-efficient jets to undercut competitors and service routes presently deemed uneconomical with its existing fleet of six A330's. Although the effects of this delay and any further delays will have the greatest impact on Jetstar, Qantas will too be jolted to a halt in its plans for continued global expansion.

Competition

Qantas Airways' competition is split up in 2 two markets, domestic flights and international flights to and from Australia. Domestically, Qantas Airways' has a 65 per cent market share, while its main competitor Virgin Blue claims 31.7 per cent.^[16] Qantas Airways' has had increased competition for the domestic market from Virgin Blue as Virgin has been taking delivery of 20 new Embraer jets from July 2007 to Janurary 2009 in an effort to increase their domestic capacity.^[17] The domestic competition has also increased due to the arrival of Singapore-based low cost carrier Tiger Airways.^[18]

Qantas Airways is the largest competitor in the international market of flights to and from Australia. However, unlike the domestic market, Qantas Airways is in competition with a large array of international airlines. On most routes serviced by Qantas Airways there is at least one airline that benefits from government ownership, control or support. ^[21] O

Market Share

Qantas Airways claims 65 per cent of the domestic market share in terms of revenue passenger kilometers. Its largest and only significant competitor is Virgin Blue who claims a market share of 31.7 per cent, leaving only 3.3 per cent to other airlines.

Qantas Airways has a 31.9 per cent share of the international market in terms of passengers carried to and from the country. Its closet rival Singapore Airlines has an 11 per cent market share, while local competitor Air New Zealand is the next in line with a 9 per cent share. As Qantas Airways takes delivery of its new fleet of 65 jets, it intends to expand its shares in both the international and domestic markets.

1. ↑ Qantas Annual Report 2007, pg. 14
2. ↑ ^{2.0 2.1 2.2 2.3} Qantas Annual Report 2009, pg. 49
3. ↑ Qantas Full Year 2009 Results
4. ↑ Qantas Route Maps, International
5. ↑ Qantas Route Maps, Domestic
6. ↑ Jetstar Travel Info, Destinations
7. ↑ Qantas 2009 Annual Report
8. ↑ HolidayLetting.co.uk, EU and Australia sign aviation agreement, 3 May 2008
9. ↑ The Australian, Open-sky pact with the EU, 1 May 2008
10. ↑ The Australian, Open-sky pact with the EU, 1 May 2008
11. ↑ News.com.au, Jetstar Pacific ready for takeoff, 14 April 2008
12. ↑ Qantas Annual Report 2007, pg. 21
13. ↑ Qantas at a Glance, pg. 1
14. ↑ Forbes.com, "Qantas takes up purchase options on 20 Boeing Dreamliners", July 8 2007
15. ↑ Forbes.com, "Australia's Qantas to claim compensation for B787 Dreamliner delivery delays", April 9 2008
16. ↑ Virgin Blue Annual Report 2007, pg. 3
17. ↑ Virgin Blue Annual Report 2007, pg. 5
18. ↑ Qantas Annual Report 2007, pg. 9
19. ↑ Qantas Annual Report 2007, pg. 50
20. ↑ Virgin Blue Annual Report 2007, pg. 5
21. ↑ Qantas Annual Report 2007, pg. 9
22. ↑ Qantas Annual Report 2007, pg. 50
23. ↑ Singapore Airlines Annual Report 2007, pg. 3
24. ↑ Air New Zealand Annual Report 2007, pg. 29
25. ↑ Australian Transport Safety Bureau, Domestic Airline Activity
26. ↑ Australian Transport Safety Bureau, International Airline Activity