Qantas' cost challenge
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Qantas' cost challenge
Wed "Australian Financial Review"
Qantas' cost challenge
Jul 23
Jane Boyle
Qantas's warnings about its vulnerability to international and domestic competition may be met with scepticism in some quarters.
But analysis by Merrill Lynch, which has a neutral stance on the stock, highlights the risk of substantial yield pressure as Qantas seeks to win back corporate market share from Virgin Blue and matches heavy discounting by international rivals.
The stockbroker concludes there is an urgent need for the airline's program to slash costs by $1 billion over two years. It says Qantas must act now to cut operating costs by 10 to 15 per cent and that cost compression is "a necessity for commercial survival rather than being value accretive per se" given cost differences with competitors.
This raises the risk of industrial disruption and that more capital expenditure will be required to rationalise the fleet in the near term.
The analysis shows Virgin Blue may have already grown beyond Qantas's comfort zone in the corporate market, and that if the low-cost carrier's expansion is not checked, it may pose a bigger threat and potentially become a more attractive partner for a foreign carrier like Singapore Airlines.
Merrill Lynch concludes that Qantas's new domestic fare structure, aimed at winning back corporate share from Virgin, may cut the cost of travel for the average Qantas corporate account by 5 to 10 per cent. The airline expects the yield impact to be neutral at worst because it will improve revenue mix.
But the analysis suggests that if Qantas is successful, Virgin Blue could lose $120 million to $200 million in revenue unless if lifts fares.
Merrill Lynch notes Virgin is unlikely to give up corporate share without a fight, and is likely to lift service levels with the addition of lounges and a loyalty program.
At the same time, a recovery in international yields is likely to be delayed by the need to match discounting by foreign rivals such as Singapore Airlines, Cathay Pacific, United Airlines and Emirates as they move to boost volumes. Another concern is that Qantas's international profitability appears skewed towards a small proportion of routes, especially the US where it has a duopoly with the weakened United Airlines.
===========================================
Qantas' cost challenge
Jul 23
Jane Boyle
Qantas's warnings about its vulnerability to international and domestic competition may be met with scepticism in some quarters.
But analysis by Merrill Lynch, which has a neutral stance on the stock, highlights the risk of substantial yield pressure as Qantas seeks to win back corporate market share from Virgin Blue and matches heavy discounting by international rivals.
The stockbroker concludes there is an urgent need for the airline's program to slash costs by $1 billion over two years. It says Qantas must act now to cut operating costs by 10 to 15 per cent and that cost compression is "a necessity for commercial survival rather than being value accretive per se" given cost differences with competitors.
This raises the risk of industrial disruption and that more capital expenditure will be required to rationalise the fleet in the near term.
The analysis shows Virgin Blue may have already grown beyond Qantas's comfort zone in the corporate market, and that if the low-cost carrier's expansion is not checked, it may pose a bigger threat and potentially become a more attractive partner for a foreign carrier like Singapore Airlines.
Merrill Lynch concludes that Qantas's new domestic fare structure, aimed at winning back corporate share from Virgin, may cut the cost of travel for the average Qantas corporate account by 5 to 10 per cent. The airline expects the yield impact to be neutral at worst because it will improve revenue mix.
But the analysis suggests that if Qantas is successful, Virgin Blue could lose $120 million to $200 million in revenue unless if lifts fares.
Merrill Lynch notes Virgin is unlikely to give up corporate share without a fight, and is likely to lift service levels with the addition of lounges and a loyalty program.
At the same time, a recovery in international yields is likely to be delayed by the need to match discounting by foreign rivals such as Singapore Airlines, Cathay Pacific, United Airlines and Emirates as they move to boost volumes. Another concern is that Qantas's international profitability appears skewed towards a small proportion of routes, especially the US where it has a duopoly with the weakened United Airlines.
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