QANTAS boss Alan Joyce is blurring the boundary between Jetstar and the Qantas brand as he attempts to collect every dollar he can while running the airline for a loss for only the second time in its history.
While he sold the reported profit before tax of $181 million as evidence that the dual-brand strategy was working, the reality is his old brand Jetstar is catching up fast, and for the first time reported a higher profit than Qantas.
And there was another first in the 14-year history of the company: it was the first time a full-year dividend was not paid.
The impact of the downturn and swine flu, which cost the airline $45m, was dramatically illustrated by the fact that without $226m in profit from its frequent flyer division and the $86m profit booked in the first half on the sale of Qantas Holidays, it would be much further in the red today.
In the last year, Qantas earnings stood at just $4m, compared with $1.4 billion last year, while Jetstar hit another record, increasing earnings from $102m to $107m.
The reason was that international traffic dropped sharply, and domestic routes also fell with the slowdown in the economy.
Qantas's domestic passenger numbers fell 4.2 per cent in the year against an 11 per cent fall in international passengers. Jetstar recorded 6.8 per cent and 34.6 per cent increases, respectively.
The budget carrier is still tiny by comparison, carrying just over 10 million passengers last year against more than 23 million for Qantas mainline.
The decision to run five Jetstar flights a day between Melbourne and Sydney has raised eyebrows even more, given the route has the highest margins for Qantas.
Joyce has a good explanation: with Tiger running planes on the route, Qantas needs to offer an alternative.
The five flights will be at so-called leisure timeslots, against the 32 flights a day on the mainline brand.
The dividend decision is partly because the first-half payout was 100 per cent franked, meaning the company has no more franking credits to spare, and -- of course -- it is running a loss for the foreseeable future.
For obvious reasons, Joyce was reluctant to make a forecast in a year in which the international industry is tipped to report a loss of $US9bn ($11bn).
JPMorgan's Matt Crowe yesterday said the second half of this year would be stronger, which should put Qantas in positive territory.
The management of the Jetstar and Qantas brands has been an extraordinary success so far, but the lines are increasingly being blurred, and this magnifies the risks.
Joyce is pulling all the triggers he can to cut costs in the hope of a rapid recovery when the economy picks up.
At least the stockmarket thinks he is making all the right moves, given Qantas's stock price has doubled from its March lows to close yesterday at $2.69 a share, up 3.5 per cent on the day -- based on blue sky ahead as opposed to the red ink around Qantas today.
Qantas has changed the way it presents its figures, but suffice to say in the first half Qantas reported earnings of close to $200m -- which means it must be swimming in red ink now, to be reporting earnings before interest and tax of $4m.
The brand is the key to the success of the star performer -- the frequent flyer program, which under changed accounting treatment reported $226m in earnings against $128m last year.
Without the Qantas brand, there is no frequent flyer program. And without the frequent flyer program, Qantas the company would be awash in red ink now.
The good news is the recent Woolworths deal has been a stunner for Qantas and the retailer, with a million people signing up for the program.
Each time someone spends money and earns points, Woolies sends a payment to Qantas.
The program is fast heading towards 7 million members, which is roughly half the households in Australia. The benefits for Woolies include giving consumers another reason to shop at its store rather than Coles, and better customer knowledge, which should cut marketing spend.
As an aside, when Wesfarmers reports its numbers today, expect a big jump in Coles sales, showing it is closing the gap on Woolies.
[bold, my emphasis]
Source:
MARTIN COLLINS: John Durie | August 20, 2009, The Australian