SINGAPORE/SYDNEY Headwinds from Australia's slowing economy and intense competition in the domestic airline market have resulted in an uncertain near-term outlook for Qantas Airways Ltd (QAN.AX) and Virgin Australia (VAH.AX), which report their full-year results this week.
Yields are under pressure for both airlines as investment in the once-booming resources sector slows and the government forecasts limp economic growth into 2014.
"Virgin has been trying to take market share in that domestic space, so Qantas has sort of retaliated and tried to hold their ground," said Nathan Zaia, an analyst at Morningstar in Sydney, adding capacity is currently well above demand.
Both airlines had also done well out of "fly-in fly-out" contracts from mining companies, and from scheduled services to regional destinations and smaller towns within Australia. That is slowing down in tandem with the mining sector, added Akshay Chopra, an analyst at Karara Capital in Melbourne.
"A lot of those customers have been very profitable because they've been paying big prices on tickets to fly these regional and sub-regional areas. As some of those slow, that's clearly going to have an impact," Chopra said.
That is the case at Virgin Australia, which counts Singapore Airlines (SIAL.SI), Etihad, and Air New Zealand (AIR.NZ) among its investors. It is projected to post pre-tax losses of A$38 million and after-tax losses of A$31.4 million for the year to 30 June on Friday, according to ThomsonReuters data.
It has been discounting fares to win corporate accounts from Qantas. It has also made a push into the regional market by buying a smaller regional airline, Skywest, and buying a 60 percent stake in low-cost carrier Tigerair Australia from Singapore-based Tiger Airways Holdings TAHL.SI this year.
Earlier this month the airline issued a profit warning and projected a full year net loss in the range of A$95-110 million. Virgin Australia blamed the loss on a difficult business environment, higher costs including a new ticketing system and new carbon tax, and losses from the Skywest acquisition.
QANTAS FARES BETTER
Qantas, which reports on Thursday, is forecast to report a full year pre-tax profit of A$92.7 million and after-tax profit of A66.4 million on Thursday, according to ThomsonReuters data.
It appears to be faring better by virtue of having the lion's share of the domestic market, while its subsidiary Jetstar dominates the low-cost segment.
Qantas has also reduced losses in its international business by retiring older aircraft, and by forming a partnership with Emirates EMIRA.UL on services to Europe.
Qantas chief executive Alan Joyce told Reuters in August that his airline was still winning some mining contracts despite the slowdown. He forecast that there would be some reduction in domestic capacity, helping to increase profitability. Australia, he added, had gone through "these cycles before".
Zaia agreed, saying: "I am expecting ... capacity growth to be slow or just flat. As we get population growth and business confidence and consumer confidence increases, that demand will pick up."
The falling Australian dollar, which is likely to increase fuel costs, is also a concern. And while the weak dollar could bolster international tourism numbers, Qantas and Virgin Australia face intense competition from the likes of Asian low-cost carriers AirAsia X (AIRX.KL) and SIA subsidiary Scoot.
"They've all been attacking the more profitable international segment, and that just means the profit held international business has also been reduced," said Karara of Capital's Chopra.
(Editing by Jeremy Laurence)