https://www.linkedin.com/posts/drton...579724288-flAn
Jetstar (JQ) is facing significant issues at the moment, with a part of its labour force requesting a pay rise. JQ management argues this will increase costs and thus fares, to the detriment of the public. Let's analyse this.
Firstly, in competitive markets, nominal wage rates increase with Product Inflation + Productivity. Qantas Group labour productivity has increased at a CAGR of 3.8% since 2005. This is group productivity - the airline doesn't split out JQ productivity. Product Inflation is not the CPI. It is the yield (RASK) growth of JQ. Over the past 5 years, this has increased by 2.4%.
On the basis of these numbers, one could argue for wage growth materially higher than 4%. If you look at the transport workers and pilots, their cost bases are 10% to 15% of total cost - this is an educated guess. If their weighted average wage growth demands are, say, 7%, this represents a JQ cost increase of around 1%. If JQ costs go up by 1% how much will fares go up? A model of JQ RASK indicates on average that 46% of JQ cost increases are passed through to yields. This means we would expect JQ fares to increase by 0.5%.
This means that on SYD-MEL we would expect JQ fares to go up by less than $1.