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Qantas flies high, Virgin Blue falls

21-Aug-2008
Qantas CEO, Geoff Dixon
Qantas CEO, Geoff Dixon
  • Risk management separates Virgin Blue and Qantas in 2007/08;
  • Both carriers face the blow torch of higher fuel prices and a softening economy in 2008/09;
  • Qantas faces a period of introspection under a new management team.

The number one and two Australian airlines, Qantas and Virgin Blue, were on very different flight paths in the financial year ended 30-Jun-08. The Qantas Group unveiled a 46% increase in net profit to a record AUD1.4 billion, while Virgin Blue suffered a 54% reduction in profit to AUD98 million.

The major factor separating them was their success in managing risk - specifically fuel prices, but also competitive challenges.

Qantas, well hedged, aggressively expanded its profitable budget Jetstar unit, while cutting costs and capacity at its mainline operation. Virgin Blue invested heavily in initiatives designed to capture higher yields over the long term and expanded its mainline operation - particularly in the latter part of the financial year.

In a heightened cost environment, Qantas' strategy won hands down, but the flight paths of both carriers could converge in the year ahead. Both carriers are expecting earnings to fall - Virgin Blue admitting it will be hard pressed to stay in the black this financial year.

For 2008/09, risk management will again define success in a market where both carriers face heightened fuel pressures and a softening local and global economy.

Looking to the future, Qantas is, if not well placed to handle fuel price changes, at least in a position of relative certainty for the next twelve months. On Qantas' hedging position, CEO, Geoff Dixon noted, "we have hedged 81% of our crude oil price exposure at a worst case all-in cost of USD118 a barrel. This cover is all in options, which will allow Qantas to benefit if prices fall." That would leave a worst-case scenario where, "at current prices our fuel expense will be over USD1.6 billion higher in 2008/09".

Qantas will be making the adjustment to a new executive team, while Virgin Blue will soon no longer have a majority shareholder, as Toll Holdings completes its in specie dividend of almost all of its holding in Virgin Blue to its shareholders by the end of Aug-08.

Shareholders of both carriers could be excused for feeling nervous - and considerable volatility in both stocks is likely in the months ahead.

Virgin Blue's shares had more than doubled in a month (on optimism about its new found freedom - and as the oil price fell), before thudding back to earth with this week's profit announcement and forecast of a very challenging outlook for 2008/09. Perhaps investors are also concerned about Virgin Blue's huge ongoing investment programme, without the comfort of a strong majority shareholder on the share register. Virgin Group has certainly made no noises about increasing its 24% stake.

Sir Richard is presently engaged in fighting the British Airways-American Airlines-Iberia alliance, and selling his stake in Virgin Nigeria. The ownership question for Virgin Blue continues to loom large. A strong and supportive (airline industry or otherwise) investor could trigger significant changes to the Australian and South Pacific competitive environment, as Qantas and Jetstar faces a period of introspection under a new management team.

Qantas investors will meanwhile be looking for signs of a smooth transition from Jackson/Dixon/Gregg (Chairman/CEO/CFO) to Clifford/Joyce/Storrie and recovery from the string of operational glitches and perceptions of the handling of the CEO appointment.

For the new managers at Qantas and newly "independent" Virgin Blue, 2008/09 will be one of the most challenging on record


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