Qantas and Air NZ domestic yields under considerable pressure

Rising competition is starting to bite into earnings at the leading Australasian airlines. Qantas reported domestic yields excluding exchange (covering Qantas, QantasLink and Jetstar) for the seven months to 31-Jan-08 rose 1.2% year-on-year. The previous time Qantas released traffic data, for the five months to 30-Nov-07, domestic yields had increased 3.5%, indicating 4.5 average reductions in yield in the intervening two months.

The situation in New Zealand is similar. Air New Zealand reports short-haul yields (dominated by the domestic and Tasman markets) had risen 1.8% in the seven months to 31-Jan-08. But Feb-08 data showed year-to-date short-haul yields had risen 1.3%, translating into a full 4% reduction in the month of Feb-08.

In the domestic market, passenger numbers grew 4.7% in Feb-08, around half the level of the 9.2% capacity increase, as Air New Zealand retaliates against Pacific Blue’s entry into the domestic market. Short-haul passenger load factors decreased 1.2 percentage points to 76.5%, including a 2.0 percentage points fall in domestic load factor to 76.3%. In combination with falling yields, this is an ominous sign for future earnings.

Air New Zealand’s long-haul yields fell by around 2% in Feb-08, which is also of concern to the carrier, although long-haul load factors remained strong.

Qantas’ international yield held up well in Dec-07/Jan-08, rising approximately 8.5% in both months, to take the year-to date (seven months to 31-Jan-08) yield increase to 6.5%. Feb-08 data will be watched closely to see whether Qantas feels the headwinds being experienced by Air New Zealand.

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