Australia's Qantas reports dip in domestic demand; shares slide

(Reuters) - Australia's Qantas Airways Ltd QAN.AX said on Thursday it would increase domestic capacity to maintain market share against rival Virgin Australia Holdings Ltd VAH.AX even as it reported lower revenue from those routes, sending shares tumbling almost 6%.

FILE PHOTO: Qantas planes taxi at Kingsford Smith International Airport in Sydney, Australia, February 22, 2018. REUTERS/Daniel Munoz/File Photo

Although revenue for the national carrier’s total business, which includes domestic and international operations, edged up 1.8% to a first-quarter record A$4.56 billion ($3.12 billion) in the three months that ended Sept. 30, unit revenue in its domestic business, which typically dominates profits, fell nearly 1%.

“I think what’s really concerned investors is that fall in domestic revenue, largely driven by a drop-away in Jetstar,” Michael McCarthy, chief market strategist at CMC Markets, said in reference to the airline’s budget brand, adding that rising fuel costs were also a concern.

“Those two factors combined, along with the fact that Qantas was recently trading at an all-time high, appear to have hit the stock hard this morning,” he said.

Margins at Australian airlines have been squeezed by fuel costs and weakness in consumer spending, as well as falling business confidence as economic growth in Australia falters. But the strategy of limiting capacity has benefited carriers.

Qantas’ total capacity fell 0.2% during the quarter, with its international business clocking a 0.6% decline. Domestic capacity increased by 0.5%.

The airline said it planned to further raise domestic capacity by up to 1% in the second half to match scheduling data that showed its rival would do the same despite market weakness.

“The Qantas Group will maintain its strategic position in all parts of the market,” the airline said.

Qantas has reported record profits since it abandoned a strategy of maintaining a 65% share of the domestic market, regardless of cost, in May 2014.

Credit Suisse analysts last week told clients that forward schedules were showing a 2% increase in domestic capacity in the second half ending June 30, but noted that flights could be cut with six weeks’ notice.

Financially strapped Virgin Australia is expected to complete a review of its route network and fleet by the end of December.

In the international market, Qantas reported unit revenue up 4.4% in the first quarter as a weak Australian dollar made the market less attractive and competitors cut capacity more than anticipated.

Qantas also flagged impact from unrest in the region, saying its interim profit would take a A$25 million hit from anti-government protests in Hong Kong, while weaker freight demand would hurt its annual profit by A$25-30 million.

The carrier said its total fuel bill for fiscal 2020 could be as much as A$4.05 billion, compared with A$3.85 billion a year earlier.

The company’s shares were 5.8% lower at A$6.140 by 0028 GMT, their lowest level since Sept. 25.

($1 = 1.4592 Australian dollars)

($1 = 1.4626 Australian dollars)

Reporting by Rushil Dutta, Ambar Warrick and Nikhil Kurian Nainan in Bengaluru and Jamie Freed in Singapore; Editing by Shailesh Kuber, Christopher Cushing and Gerry Doyle