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Alexander Groeneveled

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

In May 2004, Qantas began operating 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.

Jetstar the company's low cost airline subsidiary began operating in May 2004 and from 2006/07 has increased domestic passenger revenue by 42.9 per cent.^[2] Qantas has been focusing on growing its international reach by adding capacity on already existing routes whist also establishing new routes.^[3] In March 2006, Jetstar started their international services in the Asia-Pacific region with an initial forecast to turn its international services profitable after 3 years. The airline achieved its goal in only 2 years, owing mainly to the rapid growth of the Asia Pacific market - a 20 per cent rise in revenue from its international routes in the Asia Pacific 2007/08.^[4]

As with all companies in the airline industry, oil prices are a significant factor in the company's performance. From 2005/06 Qantas Airways fuel prices totaled $2.8 billion - a 45.1% increase on the previous year and in 2006/07 they increased again by 19%, more than $500 million, in spite of hedging programs.^[5]

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.^[6] This has been a major step towards signing an open skies agreement with Europe that could produce more flights between the two continents and boost Qantas Airways' plans for international expansion.^[7]

Business Financials

Qantas Airways net profit for 2006/07 was $719.6 million, an increase from the previous year of 49.9 per cent.^[8] This increase is attributed to a 3.4 per cent increase in capacity in both the domestic and international markets.^[9] This boost in capacity and an improvement in passenger yield of 6.9 per cent contributed to a net passenger revenue of $11.9 billion, an increase by 13.4 per cent.^[10] The table below shows the results of Qantas Airways' continual and successful expansion throughout the domestic and international markets.

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. Below is the geographic breakdown of the destinations serviced by the airline. This breakdown does not include services operated as codeshare flights.

Qantas Destinations^[13][14][15]

Net passenger revenue counts for 78.5 per cent of Qantas Airways' total revenue with the rest being made up from its airline related companies.^[16] In 2006/07, Qantas Freight accounted for 6 per cent of revenue or $902.5 million carrying over 330,000 tonnes of air freight.^[17] On April 24th Qantas Airways announced its acquisition of Melbourne based air freight trucking company Jets which has 40 trucks specialized to handle air freight.^[18] This acquisition will increase the breadth of Qantas' air freight capability and improve the service for its air freight and cargo handling customers. Qantas Holidays contributed to 5.1 per cent of revenue in 2006/07, an increase of 6.7 per cent from 2005/06. This is due in part to Qantas' continual expansion of global destinations. Contact Work Revenue, which is contributed to by Qantas' Catering companies, saw a decrease in revenue by 7.4 per cent in 2006/07 resulting in an overall contribution of 2.9 per cent of revenue. Below is a graph analyzing the breakdown of revenue attributed to by Qantas Airways' non-airline companies.

Qantas Annual Report^[19]

Qantas Airways Limited also owns 45.04 per cent of Orangestar Pte Limited, which owns and operates the value-based intra-Asia airlines Jetstar Asia and Valuair, based in Singapore. The Group purchased an 18 per cent stake in Vietnam’s Pacific Airlines in July 2007.^[22] Qantas also holds a 46.3 per cent shareholding in Air Pacific and is a partner with Australia Post in two jointly controlled entities – the domestic air freight operator Australian air Express and the national road freight business, Star Track Express.^[23]

Key Trends and Forces

Hedging and Diversification Protects only so much Against Rising Fuel Costs

^[24] Qantas Airways fuel expenditure for 2007 is 2.5 times the size of its fuel expenditure in 2004 - an increase from $1.3 billion (13.2% of total expenditure) to $3.3 billion (23.7% of total expenditure).^[25] Although Qantas Airways has been able to manage soaring oil prices to date through hedging strategies and industry diversification, a continual increase will pressure Qantas Airways profitability. This pressure is being especially felt by subsidiary airline Jetstar as it continues to enter into, and compete in, the ever growing airline industry for cost-sensitive customers.

A fuel price increase of 70 per cent in 2007/08 caused Qantas and QantasLink to announce an increase in domestic and international fares sold in Australia from May 9 2008 by 3.5 per cent and 3 per cent respectively.^[26] Jetstar is still reviewing its fare levels and fares sold outside of Australia are also under consideration.^[27] As a precaution to rising oil prices Qantas Airways had already hedged 34 per cent of its oil needs for 2008/09 at US$90 per barrel.^[28]

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.^[29] This has been a major step towards signing an open skies agreement with Europe that could produce more flights between the two continents.^[30] At present there are separate bilateral air services agreements with 16 EU states.^[31] 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.^[32] Jetstar also owns a 18 per cent stake in Pacific which will increase to 30 per cent by 2010.^[33] 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.^[34] 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.^[35] 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.^[36] 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 into 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.^[37] 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.^[38] The domestic competition has also increased due to the arrival of Singapore-based low cost carrier Tiger Airways.^[39]

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. ^[42] On 27 March 2007 in an effort to boost Australian tourism the Australian government signed an air service agreement enabling Emirates and Etihad airlines to fly an extra 35 and 21 services respectively to and from Australia by 2011.^[43] Although boosting Australia's tourism market, this agreement, and others like it, results in an increase in competition for Qantas Airways.

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. ↑ Qantas Annual Report 2007, pg. 50
3. ↑ Qantas Annual Report 2007, pg. 12
4. ↑ "Jetstar's international routes turn profitable" e-Travel Blackboard, 18 April 2007
5. ↑ Qantas Annual Report 2007, pg. 9
6. ↑ HolidayLetting.co.uk, EU and Australia sign aviation agreement, 3 May 2008
7. ↑ The Australian, Open-sky pact with the EU, 1 May 2008
8. ↑ Qantas Annual Report 2007, pg. 49
9. ↑ Qantas Annual Report 2007, pg. 50
10. ↑ Qantas Annual Report 2007, pg. 50
11. ↑ Qantas Annual Report 2007, pg. 50
12. ↑ Qantas Annual Report 2005, pg. 41
13. ↑ Qantas Route Maps, International
14. ↑ Qantas Route Maps, Domestic
15. ↑ Jetstar Travel Info, Destinations
16. ↑ Qantas Annual Report 2007, pg. 49
17. ↑ Qantas Annual Report 2007, pg. 49
18. ↑ Thomson Financial News, Australia's Qantas Airways buys national trucking business, 28 April 2008
19. ↑ Qantas Annual Report 2007, pg. 49
20. ↑ Qantas Annual Report 2007, pg. 49
21. ↑ Qantas Annual Report 2005, pg. 41
22. ↑ Qantas at a Glance, pg. 1
23. ↑ Qantas at a Glance, pg. 1
24. ↑ Qantas Annual Report 2007, pg. 49
25. ↑ Qantas Annual Report 2007, pg. 49
26. ↑ Qantas Statement - Fuel Prices, Sydney, 28 April 2008
27. ↑ Qantas Statement - Fuel Prices, Sydney, 28 April 2008
28. ↑ Qantas Statement - Fuel Prices, Sydney, 28 April 2008
29. ↑ HolidayLetting.co.uk, EU and Australia sign aviation agreement, 3 May 2008
30. ↑ The Australian, Open-sky pact with the EU, 1 May 2008
31. ↑ The Australian, Open-sky pact with the EU, 1 May 2008
32. ↑ News.com.au, Jetstar Pacific ready for takeoff, 14 April 2008
33. ↑ Qantas Annual Report 2007, pg. 21
34. ↑ Qantas at a Glance, pg. 1
35. ↑ Forbes.com, "Qantas takes up purchase options on 20 Boeing Dreamliners", July 8 2007
36. ↑ Forbes.com, "Australia's Qantas to claim compensation for B787 Dreamliner delivery delays", April 9 2008
37. ↑ Virgin Blue Annual Report 2007, pg. 3
38. ↑ Virgin Blue Annual Report 2007, pg. 5
39. ↑ Qantas Annual Report 2007, pg. 9
40. ↑ Qantas Annual Report 2007, pg. 50
41. ↑ Virgin Blue Annual Report 2007, pg. 5
42. ↑ Qantas Annual Report 2007, pg. 9
43. ↑ Australian Visa Bureau, Airline deal to bring more tourists to Australia, 27 March 2007
44. ↑ Qantas Annual Report 2007, pg. 50
45. ↑ Singapore Airlines Annual Report 2007, pg. 3
46. ↑ Air New Zealand Annual Report 2007, pg. 29
47. ↑ Australian Transport Safety Bureau, Domestic Airline Activity
48. ↑ Australian Transport Safety Bureau, International Airline Activity