Michael Pascoe has a much clearer insight of aviation than SC
Qantas isn't really tightening its seat belt April 7, 2011
There's been an amazing amount of bluff and bluster from Qantas CEO Alan Joyce over the past week. If you only read the headlines, you'd almost think Qantas was tightening its seat belt. It's not.
Putting 21 tired old 737s and a couple of near-ancient 767s up for sale makes for a good headline, but the real surprise is buried in the fine print: despite the well-publicised impact of natural and nuclear disasters, the oil price, fragile domestic tourism, currency damage to inbound travel and the annoying John Travolta flight safety video, Qantas is expanding its domestic and international capacity in the second half of this year by 8 and 7 per cent respectively.
That is not belt tightening. Alan Joyce might be fiddling with the buckle, but the belt is sitting loosely over a pair of comfort-fit pants with the hidden waist expander as the airline goes for a second helping of roast turkey. And if Boeing can ever get its 787 to stay airborne for longer than the Spruce Goose, Qantas is looking at dessert with a shovel.
In an industry more rational than aviation, you'd expect the current litany of woes to mean no capacity expansion, if not a contraction.
What's more, the 737 and 767s of pensionable age won't really be missed. They're only in the air thanks to being written down to nearly zero, meaning the return-on-capital-employed figure made up for the more expensive maintenance, higher fuel costs and the brand damage caused by reduced reliability, tired cabins and worse seats.
(Not untypical was the cushion on my Thursday evening Sydney-Brisbane run being pretty much gone, leaving an uncomfortable metal bar under the thighs – and that was business class. I would not have wanted to be paying for it. Ditto “business class” in the old 737s that are basically economy seats with the middle chair blocked off. These planes have become incompatible with the Qantas makeover.)
So what's really happening with the Flying Roo when the walk isn't matching the talk? Those given to conspiracy theories might have an eye on the growing industrial relations tensions, but I suspect a bigger bet is being made on prosperity being just around the corner. That's always quite a bet in the risky aviation business.
There are some interesting factors caught up in that gamble. The current oil price jump is not like the last demand-driven tightening. Those with a better understanding of these things reckon there's about a $15 “risk premium” in today's price – it's the speculation about potential supply disruption, rather than a fundamental change.
The thing about a risk premium price spike is that it happens quicker and isn't accompanied by the natural hedge Australia tends to get from a stronger dollar. Yes, the Aussie is around post-float highs, but as a major energy and commodities exporter, our currency's recent rise has not kept pace with the oil price. If it had, our dollar would be buying something more like $US1.10.
The flip side is that the risk premium can disappear as quickly as it arose. A sudden resolution of the Libyan war could send the oil speculators running for the doors, wiping most of that premium out. Want to bet an airline's profitability on Libyan battlefields? I guess that's why it's called a risk premium.
In the meantime, the speed of the oil price hike is hitting inelastic demand – meaning higher petrol prices are immediately felt in consumers' hip pockets. Leisure travel is one of the more discretionary items in the household budget and quickly cut when the consumer perceives their domestic budget has to be tightened.
Well, their domestic tourism budget is being tightened anyway. The latest Roy Morgan Research holiday-tracking survey recorded the lowest January quarter score (57 per cent) since 2006 for Australians intending to holiday in Australia for their next trip in the next 12 months, but the highest score (10 per cent) in five years for Australians intending to travel overseas for their next trip in the next 12 months.
If the oil price was demand rather than risk premium driven, it would be symptomatic of a healthier, stronger economy. Before the GFC smashed the party, oil prices were a great deal higher, but everyone was having such a good time dancing, they barely noticed. Right now, people are noticing.
In this climate then, it's very strange for the two Australian airline groups to be increasing capacity. Maybe running an airline is like being an average farmer: if you weren't given to some form of optimism, you couldn't undertake the daily triumph of hope over experience. Yet there are reasons for some optimism - or excuses, depending on your disposition.
Qantas' international problems and profitability or lack thereof are very well publicised by the management. What you don't hear so much about is how very nicely profitable QantasLink is – the domestic regional business is doing very well indeed, so let's not draw attention to it. Include Qantas's ambition to grab more of the resources charter business and regional Australia is serving the Roo well. As the resources boom picks up pace, it should serve it even better.
The big promise of the capex boom being spread around, as preached by the Reserve Bank and Treasury, plus the billions being pushed into our economy by the terms of trade still means continued growth in employment and wages. Eventually, more jobs for more people with more money means more spending. The consumer might be suffering some sticker shock about electricity and petrol today, but that tends to wear off in time and the discretionary spending returns. Remember that the RBA doesn't see a consumer strike, but a healthy abating of “the run-up in household leverage”. Healthier households become stronger ones – the unknown is how long it will be before they feel healthy enough to handle more indulgence.
And business is waiting for its share of the capex and resources billions. The smarter operators are already working on getting theirs, both in services growth and services to the services growth. And winning and servicing business still requires plenty of travel.
It's much harder to find a sunny side of the international inbound street given the acknowledged current problems. Volume hope is still a few years away when China is richer again and we experience the next new wave of tourism, if we're smart enough to win it and if our carriers are competitive. In the meantime, there are plenty of us going shopping overseas and needing to come home again. Qantas's challenge is to be the carrier of choice on the routes we want.
Right now though, there are bums on seats, but the bums aren't yielding much profit. It's a brave CEO then who keeps adding capacity, providing more seats – or all is not quite so gloomy in the Qantas crystal ball.
It'd be nice to think that the real test of how serious Qantas is about its belt tightening will be revealed in the annual report when we see what's happened to the pay packets of the CEO and CFO – but somehow such things seem immune to turbulence.
PS. And they've flicked Glenn A Baker's Reelin' in the Years nostalgia audio channel to the international entertainment menu. If they touch the ABC's Angela Catterns, there really will be trouble.
Michael Pascoe is a BusinessDay contributing editor (courtesy of SMH)
Last edited by Going Boeing; 7th Apr 2011 at 12:20.