Qantas resumes capacity recovery trajectory after Omicron setback

Summary:

• Qantas Group domestic capacity projected to be 90-100% of pre-pandemic levels by 30-Jun-2022.
• International capacity will be slower to return, but should hit 70% by the end of Sep-2022.
• China, Hong Kong restrictions mean uncertainty for these key Qantas markets.
• Project Sunrise is likely to be back on the agenda for 2025, after a two-year delay.

Please see also:
Australia reopens to international flights - Part 1: SIA expands, US airlines hold back
Australia reopens to international flights - Part 2: Qantas returns

Qantas expects to return to pre-COVID domestic capacity by mid-2022

Forward bookings over the past few months have been "encouraging and trending upward," Qantas CEO Alan Joyce said during a first-half earnings briefing on 24-Feb-2022.

Over the last half of Feb-2022 Qantas achieved its largest international sales volumes since before the COVID-19 pandemic began. And in the week of 14-Feb-2022 the airline had its highest domestic bookings since before the Delta variant outbreak in Jun-2021.

This will no doubt be a relief following the demand slump caused by Omicron.

The airline had previously been planning to operate 100% of its pre-pandemic group domestic capacity in the three months through 31-March-2022, which is its fiscal third quarter. However, with the onset of Omicron it cut the capacity plan for this period to 70% of pre-pandemic levels. Soon after, it reduced this estimate again to 60% due to the continued Western Australia border closure, previously due to reopen in early Feb-2022.

Now, as the Omicron outbreak recedes, Qantas is lifting the group's capacity plans. Domestic capacity is predicted to be in the 90-100% range in the fiscal fourth quarter (through 30-Jun-2022), rising above 100% of pre-COVID levels in the first quarter of the next fiscal year (three months through 30-Sept-2022).

Leisure travel is rebounding more strongly than business demand. This means the Jetstar LCC subsidiary will see higher gains than the overall group estimate. Jetstar is expected to operate 120% of pre-pandemic capacity in the fiscal first quarter.

The chart below illustrates the rollercoaster ride that Qantas group capacity has been on during the pandemic. Domestic capacity - as measured in ASKs - reached 92% in Jun-2021, before the Delta outbreak caused it to sink to the 30-40% range.

Then another recovery began in late 2021, but momentum was halted early in 2022 due to the Omicron variant. Now the airline expects its capacity to soar past 90% again by Jun-2022.

Qantas Group domestic monthly capacity profile as percentage of FY19, Mar-2020 to Jun-2022 (projected)

Source: Qantas results presentation.

International capacity is also rising steadily, but full recovery will take longer

International capacity is recovering from a much lower base. The group began resuming more flights in Nov-2021 as border restrictions eased, with more added in Dec-2021 and in the early months of 2022.

However, as with the domestic operation, the arrival of the Omicron variant caused international plans to be trimmed. The airline had been planning to operate 30% of its pre-pandemic international capacity in the fiscal third quarter through 31-Mar-2022, but it cut this back to 20% due to Omicron.

Now, Qantas forecasts international capacity will reach 40% of pre-COVID levels in the fiscal fourth quarter through 30-Jun-2022, and then 70% in the next quarter through 30-Sep-2022.

Qantas Group international monthly capacity profile as percentage of FY19, Mar-2020 to Jun-2022 (projected)

Source: Qantas results presentation.

China remains a major question mark in international capacity outlook

While more borders are opening in key markets overseas, the mainland China and Hong Kong markets remain heavily restricted.

Before the pandemic Hong Kong and Shanghai routes accounted for about 12% of Qantas' international capacity, as measured in ASKs, according to Mr. Joyce. Now only approximately a third of that capacity is operating, and is mainly carrying freight.

Qantas is hoping that the Chinese mainland market will reopen in Jul-2022, but if it does not, Qantas has plenty of other options for deploying the capacity formerly allocated there, said Mr. Joyce.

The Qantas Group is also looking beyond its near term recovery and considering options for longer-term growth. The airline is moving closer to confirming Project Sunrise, which will involve record-breaking nonstop flights from Sydney and Melbourne to destinations such as London and New York.

Qantas is aiming to finalise the business case for Project Sunrise by the middle of this year, Mr. Joyce said. If it does so, it could begin such flights by 2025, which is about two years later than it had planned before COVID-19 forced it to shelve the project. The airline intends to order Airbus A350-1000s for these routes.

Capacity growth plans have more likelihood of coming to fruition this time

Qantas' system capacity level has bounced around a lot during the COVID-19 pandemic, with the volatility driven primarily by the domestic operation, while international remained moribund. Schedule plans have been disrupted at short notice due to the vagaries of the pandemic and restrictions imposed by state and federal governments.

This has meant that optimistic recovery projections have been dashed on more than one occasion over the past two years. However, Qantas can be forgiven for having greater confidence in its latest recovery predictions.

The federal government and most states have signalled a change in philosophy, as they switch focus to treating COVID-19 as an endemic illness that must be lived with. High vaccination rates and the lesser severity of the prevailing Omicron variant support this approach. It also means that spikes in case numbers should not mean new travel restrictions.

Qantas is raising its capacity quickly, perhaps faster than demand warrants. However, this fits with the airline's oft-stated belief that it would rather have aircraft in the air than on the ground - even if returns on such flights are marginal.

Coincidentally it also makes life harder for the new domestic competition from Rex and Virgin Australia, with planned new entrant Bonza also due to start service in coming weeks.

Watching traffic figures is important, but in many ways capacity shifts and predictions are more revelatory.

Qantas and other airlines have limited influence over traffic and demand in the current environment but they can control capacity settings, and these give important clues to their strategies.