Post by Banjo on Aug 30, 2014 7:51:06 GMT 7
Airline capacity war over as clock ticks on cheap tickets
The end is in sight for the days of falling airfares and empty planes with both major Australian domestic airlines saying the battle for customers is too bruising.
The fierce war for customers between Qantas Airways and Virgin Australia has seen the average price of the lowest-cost domestic economy class tickets fall by 32 per cent since September 2011, according to government data.
The constant discounting has taken its toll on both airlines and turned the domestic market from one which churned out $1 billion in profits a year to one where losses totalled $100 million.
Virgin confirmed the extent of its bruising on Friday, revealing a shock $356 million loss for the last financial year just 24 hours after Qantas posted a record $2.8 billion loss, which the airline's chief executive Alan Joyce described as "confronting".
"Obviously the last 12 months have been the most challenging in the history of Australian aviation," Virgin boss John Borghetti said on Friday.
"It was the war that had to happen, I suppose, when you have a dominant player [Qantas] that wants to ensure that he maintains his position."
Analysts predict tickets will likely rise eventually as the airlines try to figure out what to do next, but so much capacity has been added to the system it could take well into next year before fares jump.
"In some market segments they probably will," Mr Borghetti said on Friday, before holding out the hope that fares for bargain hunters could survive as other prices rose.
"I don't think you should definitely assume the lowest fares for consumers are definitely going to move."
Mr Borghetti said cautious consumers combined with the excess capacity could temper a desire from the airlines to lift prices targeting leisure travellers.
That echoed earlier comments from Mr Joyce, where he indicated cheap tickets may survive but not as many will be offer on each flight.
"I think the more difficult question is at the leisure end, and particularly in the budget end where there is a lot of capacity. If you look at the capacity growth last year from Jetstar and from Tiger, it was significant," Mr Borghetti said.
"Certainly from what we are seeing now [supply and demand] appear to be getting closer – but there is a hell of a gap.
"That is the more critical path, because the consumer sentiment, if it is not positive, people won't part with their dollar. That is the most discretionary part of the market. But I've been called a glass half full guy so I believe things will get better."
Mr Borghetti also pointed to solid figures in the corporate market.
Qantas Domestic head Lyell Strambi agreed the holiday market was soft and that would temper the pace of price increases.
"We just need to be a little bit conscious here of overinflating expectations because we are on the back of two years capacity increase in excess of demand," he said.
"In the leisure market more broadly there is underlying weakness. People are keeping dollars in their pockets at the moment and not spending as much. That is a little soft there."
Morgan Stanley analyst Nicholas Markiewicz said for now airfares were stagnant and had in fact fallen slightly despite Qantas signalling months ago it would stop trying to outpace Virgin simply by flying more planes.
"Should capacity moderate we would expect an uplift in pricing, though we expect the degree of any improvement to be capped by Virgin's increasingly competitive position," he said.
This is consistent with a warning from Mr Joyce for Qantas investors that it would take time for yields, or the returns the airline makes on fares, to rebound.
Qantas has frozen capacity in the first half of the financial year. Virgin has not given any guidance for the first half, but it will have one fewer A330 widebody in its fleet and Mr Borghetti has indicated he believes there is too much capacity in the market.
Read more: www.smh.com.au/business/aviation/airline-capacity-war-over-as-clock-ticks-on-cheap-tickets-20140829-10a4jx.html#ixzz3BpeZcC4t
The end is in sight for the days of falling airfares and empty planes with both major Australian domestic airlines saying the battle for customers is too bruising.
The fierce war for customers between Qantas Airways and Virgin Australia has seen the average price of the lowest-cost domestic economy class tickets fall by 32 per cent since September 2011, according to government data.
The constant discounting has taken its toll on both airlines and turned the domestic market from one which churned out $1 billion in profits a year to one where losses totalled $100 million.
Virgin confirmed the extent of its bruising on Friday, revealing a shock $356 million loss for the last financial year just 24 hours after Qantas posted a record $2.8 billion loss, which the airline's chief executive Alan Joyce described as "confronting".
"Obviously the last 12 months have been the most challenging in the history of Australian aviation," Virgin boss John Borghetti said on Friday.
"It was the war that had to happen, I suppose, when you have a dominant player [Qantas] that wants to ensure that he maintains his position."
Analysts predict tickets will likely rise eventually as the airlines try to figure out what to do next, but so much capacity has been added to the system it could take well into next year before fares jump.
"In some market segments they probably will," Mr Borghetti said on Friday, before holding out the hope that fares for bargain hunters could survive as other prices rose.
"I don't think you should definitely assume the lowest fares for consumers are definitely going to move."
Mr Borghetti said cautious consumers combined with the excess capacity could temper a desire from the airlines to lift prices targeting leisure travellers.
That echoed earlier comments from Mr Joyce, where he indicated cheap tickets may survive but not as many will be offer on each flight.
"I think the more difficult question is at the leisure end, and particularly in the budget end where there is a lot of capacity. If you look at the capacity growth last year from Jetstar and from Tiger, it was significant," Mr Borghetti said.
"Certainly from what we are seeing now [supply and demand] appear to be getting closer – but there is a hell of a gap.
"That is the more critical path, because the consumer sentiment, if it is not positive, people won't part with their dollar. That is the most discretionary part of the market. But I've been called a glass half full guy so I believe things will get better."
Mr Borghetti also pointed to solid figures in the corporate market.
Qantas Domestic head Lyell Strambi agreed the holiday market was soft and that would temper the pace of price increases.
"We just need to be a little bit conscious here of overinflating expectations because we are on the back of two years capacity increase in excess of demand," he said.
"In the leisure market more broadly there is underlying weakness. People are keeping dollars in their pockets at the moment and not spending as much. That is a little soft there."
Morgan Stanley analyst Nicholas Markiewicz said for now airfares were stagnant and had in fact fallen slightly despite Qantas signalling months ago it would stop trying to outpace Virgin simply by flying more planes.
"Should capacity moderate we would expect an uplift in pricing, though we expect the degree of any improvement to be capped by Virgin's increasingly competitive position," he said.
This is consistent with a warning from Mr Joyce for Qantas investors that it would take time for yields, or the returns the airline makes on fares, to rebound.
Qantas has frozen capacity in the first half of the financial year. Virgin has not given any guidance for the first half, but it will have one fewer A330 widebody in its fleet and Mr Borghetti has indicated he believes there is too much capacity in the market.
Read more: www.smh.com.au/business/aviation/airline-capacity-war-over-as-clock-ticks-on-cheap-tickets-20140829-10a4jx.html#ixzz3BpeZcC4t
