Qantas has again come out on top over its key competitor, Virgin Australia, despite a reasonably strong year from Virgin. According to IBISWorld, the full-year profit before tax result for Qantas totalling $1.39 billion has come off the back of continuing capacity optimisation in domestic and international flights, and a strong dual-brand strategy that targets both corporate and budget travel. Virgin is expected to take a step in the right direction, but is still struggling to keep up with Qantas’ strong branding and strategies.
Strong business demand in major markets, such as Melbourne and Sydney, and continued growth in the mining sector have boosted Qantas’ domestic revenue. The company has reported an impressive 7% growth rate from group domestic operations, which includes results from budget airline, Jetstar. Under the company’s flagship brand, Qantas reported an impressive 19.1% underlying profit growth in from domestic operations. IBISWorld Senior Industry Analyst Tom Youl expects that stringent capacity strategies and clear brand positioning have driven growth for the company and its shareholders.
“The International Airlines industry has proved more challenging for Qantas, as budget airlines have significantly intensified price competition. However, Qantas still posted revenue growth of 7.5% in its international segment. This growth was derived from booming passenger volumes from key markets. Passengers to and from China went up nearly 50% from 2016-17, while key routes to and from Japan and New Zealand also reported growth of over 20%,” said Mr Youl.
In comparison, Virgin Australia is on track to record its strongest NPAT since 2011-12. Like rival Qantas, Virgin has optimised capacity to boost margins per flight and streamlined its fleets to reduce maintenance costs.
“Yield improvements and fleet simplification saw profits boom and revenue grow solidly. Virgin reduced the number of older aircraft, including their ATR72-500/600 and Embraer 190 fleet, to lower its operating costs. Growth in the resources sector and improved demand from business further boosted the company’s domestic performance,” said Mr. Youl.
Virgin is anticipated to report profit growth in its international segment in 2017-18. While this growth is likely modest, this could be considered a success for Virgin given that its expansion into new markets, such as Hong Kong, limited this profit growth. Furthermore, Tigerair, Virgin’s budget brand, exited the international market in February 2017. This left many aircraft temporarily unutilised and forced further strategy changes, limiting the company’s profit growth.
“Despite a strong result in 2017-18, Virgin still trails its domestic competitor, Qantas, in almost every measurable. Virgin is currently restructuring to directly compete with Qantas. The company aims to replicate Qantas’ dual-brand strategy, competing for business and premium travel expenditure with its flagship brands and competing against Jetstar in the budget travel market with Tigerair,” said Mr. Youl.
“This ongoing restructure has limited Virgins’ profitability, while Qantas is reaping the benefits of a transformation which begun in 2015. Unhedged fuel contracts, investment in fuel-efficient Dreamliner aircraft and a clear duel-brand strategy has kept Qantas on top and driven its record profits in 2017-18,” said Mr Youl.
While Virgin is not yet competing toe-to-toe with Qantas, according to IBISWorld, its 2017-18 results are a step in the right direction.
“Tigerair’s performance may be indicative of how well Virgin is competing in the coming years. The budget airline’s fleet upgrades and continuing route optimisations are planned to loosen Jetstar’s stranglehold on the low-cost travel market,” said Mr. Youl. However, Qantas’ growth, market position and brand power will continue give it an edge over the little cousin of the Australian airways.
The Domestic Airlines industry revenue is expected to total $13.5 billion in 2017-18, up 4.8% from the previous year. Qantas remains the dominant player in the industry accounting for approximately 63% of industry revenue. Virgin Australia, the only other major player in the domestic market, is expected to hold about 28% market share in 2017-18. The International Airlines industry grew by 0.2% over the same year.
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