Wirraway
4th Aug 2004, 16:27
Thurs "Sydney Morning Herald"
Too much blood on the runway
By Elizabeth Knight
August 5, 2004
It's official. Our two domestic airlines are at war and yesterday we learned from Virgin's chairman, Chris Corrigan, that his airline's earnings were down 22 per cent in the four months to July 2004, and its share price off 14 per cent, making it the first casualty of a vicious capacity and fare battle.
In a couple of weeks Qantas will report its July 2004 result, which will give the market a far better feel of the extent of the damage that Qantas has sustained.
Needless to say, Qantas boss Geoff Dixon is not giving anything away on what he will be reporting. But he was a little surprised about the severity of the impact on Virgin's earnings and mighty shocked about the impact on his own share price, which yesterday dropped by 9c to $3.37.
The issue is that none of this was meant to happen. These two airlines have been operating as a comfortable duopoply since Virgin entered the market and the third player, Ansett, fell over.
Both have said quietly on many occasions that this is a sensible market. Sure, there have been plenty of publicity grabbing one-off super-low fares, but nothing really designed to take the industry into a fare war.
But somewhere along the line one or both lost sight of commercial reality and pushed too hard to gain or retain market share.
As a result there has been phenomenal growth in capacity, particularly on the leisure routes.
Dixon said that he had always warned he would draw a line in the sand marking how much market share Qantas was prepared to cede to Virgin.
He reckons no one in the equities market or the aviation market believed him. This is sort of understandable because the line was moved a couple of times before it was planted above the high water mark. They do now.
Enter Jetstar. It has only been operating a couple of months but the extra capacity was a catch-up to the additional seatsVirgin had provided.
The strange thing is that everyone appeared to believe the aviation industry spin that all this new capacity could be introduced with minimal effect on yields and load factors.
This was certainly the spin being put out by Virgin until yesterday when it had to eat humble pie. Sure everyone was aware that the excess capacity would take its toll on load factors - more new seats than bottoms to fill them.
In the four-month period to July Virgin increased capacity by a huge 60 per cent on the previous corresponding period. On top of this Qantas's budget offshoot, Jetstar, had come in and added a whole lot more capacity on the routes that were Virgin's home territory.
When Virgin announced that its May loads were down to 70.2 per cent the market was spooked but it found a degree of calm when loads moved back up to 76 per cent the following month.
So why didn't the market believe the commercial logic? Because Virgin was too busy telling investors that it was manageable. It said that the cost was adjusted downwards to overcome the yield pressure.
Seems not.
And the trouble for Virgin - and to a lesser extent Qantas - is that the business pitch is still all about adding even more capacity to the Australian domestic market and particularly the leisure end of that market.
Any more planes landing at Cairns or the Gold Coast and they will be half empty or they will be almost giving the seats away.
There will be intense investor pressure to pare back further capacity expansion.
So who will be the first in what is becoming a stand-off between the two airlines.
Answer. Not Dixon. He will back off on extra capacity but he won't give away any more market share. And the line has been drawn at 66 per cent of the market. If Virgin's Brett Godfrey goes first, then Dixon is happy enough to follow.
Dixon is not crowing. He is pretty upfront that his domestic yields have suffered but he is confident that there are a few additional levers that Qantas can pull to manage this capacity problem a bit more effectively.
The mainline airline can still work on its cost base and he can use his higher-yielding domestic passenger from the international feeder network to buffer the overall declines. But not indefinitely.
One thing is for sure - if this capacity battle continues there will be plenty more carnage in the domestic market.
There is no excuse for either network not to act rationally. And with the ultimate corporate pragmatist, Chris Corrigan, as a major shareholder in Virgin, it's hard to believe that sanity won't ultimately prevail.
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Too much blood on the runway
By Elizabeth Knight
August 5, 2004
It's official. Our two domestic airlines are at war and yesterday we learned from Virgin's chairman, Chris Corrigan, that his airline's earnings were down 22 per cent in the four months to July 2004, and its share price off 14 per cent, making it the first casualty of a vicious capacity and fare battle.
In a couple of weeks Qantas will report its July 2004 result, which will give the market a far better feel of the extent of the damage that Qantas has sustained.
Needless to say, Qantas boss Geoff Dixon is not giving anything away on what he will be reporting. But he was a little surprised about the severity of the impact on Virgin's earnings and mighty shocked about the impact on his own share price, which yesterday dropped by 9c to $3.37.
The issue is that none of this was meant to happen. These two airlines have been operating as a comfortable duopoply since Virgin entered the market and the third player, Ansett, fell over.
Both have said quietly on many occasions that this is a sensible market. Sure, there have been plenty of publicity grabbing one-off super-low fares, but nothing really designed to take the industry into a fare war.
But somewhere along the line one or both lost sight of commercial reality and pushed too hard to gain or retain market share.
As a result there has been phenomenal growth in capacity, particularly on the leisure routes.
Dixon said that he had always warned he would draw a line in the sand marking how much market share Qantas was prepared to cede to Virgin.
He reckons no one in the equities market or the aviation market believed him. This is sort of understandable because the line was moved a couple of times before it was planted above the high water mark. They do now.
Enter Jetstar. It has only been operating a couple of months but the extra capacity was a catch-up to the additional seatsVirgin had provided.
The strange thing is that everyone appeared to believe the aviation industry spin that all this new capacity could be introduced with minimal effect on yields and load factors.
This was certainly the spin being put out by Virgin until yesterday when it had to eat humble pie. Sure everyone was aware that the excess capacity would take its toll on load factors - more new seats than bottoms to fill them.
In the four-month period to July Virgin increased capacity by a huge 60 per cent on the previous corresponding period. On top of this Qantas's budget offshoot, Jetstar, had come in and added a whole lot more capacity on the routes that were Virgin's home territory.
When Virgin announced that its May loads were down to 70.2 per cent the market was spooked but it found a degree of calm when loads moved back up to 76 per cent the following month.
So why didn't the market believe the commercial logic? Because Virgin was too busy telling investors that it was manageable. It said that the cost was adjusted downwards to overcome the yield pressure.
Seems not.
And the trouble for Virgin - and to a lesser extent Qantas - is that the business pitch is still all about adding even more capacity to the Australian domestic market and particularly the leisure end of that market.
Any more planes landing at Cairns or the Gold Coast and they will be half empty or they will be almost giving the seats away.
There will be intense investor pressure to pare back further capacity expansion.
So who will be the first in what is becoming a stand-off between the two airlines.
Answer. Not Dixon. He will back off on extra capacity but he won't give away any more market share. And the line has been drawn at 66 per cent of the market. If Virgin's Brett Godfrey goes first, then Dixon is happy enough to follow.
Dixon is not crowing. He is pretty upfront that his domestic yields have suffered but he is confident that there are a few additional levers that Qantas can pull to manage this capacity problem a bit more effectively.
The mainline airline can still work on its cost base and he can use his higher-yielding domestic passenger from the international feeder network to buffer the overall declines. But not indefinitely.
One thing is for sure - if this capacity battle continues there will be plenty more carnage in the domestic market.
There is no excuse for either network not to act rationally. And with the ultimate corporate pragmatist, Chris Corrigan, as a major shareholder in Virgin, it's hard to believe that sanity won't ultimately prevail.
==========================================