QANTAS is under pressure to offer more clarity about its expansion in Asia as it faces the double whammy of high fuel prices and economic upheaval in Europe weakening demand for travel in other markets.
Although it has been leaning towards Malaysia as a base for a new premium airline as part of a joint venture with Malaysia Airlines, Qantas is not expected to be in a position to offer investors more details about its Asian expansion plans until next month at the earliest.
In the midst of volatile economic conditions, high fuel prices and uncertainty over travel demand, Macquarie Equities said a lack of clarity over Qantas's plans to set up a hub for a new premium carrier in south-east Asia "only serve to complicate the investment thesis".
The broker's preference for investing in airline stocks has reverted to Virgin Australia because it had a "better articulated strategy than Qantas" and was likely to benefit from a restructure aimed at snaring a bigger slice of the corporate travel market from its bigger Australian rival.
The uncertainty has led Macquarie Equities to downgrade Qantas from "outperform" to "neutral", and lower its share-price target from $1.96 to $1.57. Goldman Sachs lowered Qantas from "buy" to "hold" on Friday.
Shares in Qantas have been trading in a narrow band for the past five months between an all-time low of $1.375 - struck in October at the height of a damaging industrial dispute - and $1.705. They closed down 1.5? at $1.49 on Friday. Virgin Australia rose 0.5? to 31.5?. Last month the International Air Transport Association warned that weakness in air freight markets was beginning to be replicated in passenger traffic.
The peak body for airlines reduced its forecasts for combined airline profits this year from $US4.9 billion ($4.75 billion) to $US3.5 billion.
But in a worst-case scenario in which Europe enters a full-blown banking and economic crisis, the association has said that airlines could suffer a combined loss of more than $US8 billion.
Last week AirAsia X, an offshoot of the region's largest budget airline AirAsia, blamed high jet fuel prices and weakening demand for air travel for its decision to abandon flights to Europe and India.
Macquarie Equities analysts said Australian airlines were "somewhat protected" from a fall in demand for premium traffic worldwide due to the strength of the resources and oil and gas industries.
The domestic corporate travel market had been "holding up well", they said.
"[But] we see the potential for Qantas reducing its European exposure further through the suspension of the Sydney-Frankfurt route should European conditions continue to deteriorate."
Frequently Asked Questions about this Article…
What is causing uncertainty around Qantas' plans to expand in Asia?
Qantas is under pressure to clarify its Asian expansion after signalling it may base a new premium carrier in Malaysia as part of a joint venture with Malaysia Airlines, but the airline isn’t expected to give investors more detail until next month at the earliest. The uncertainty is compounded by high jet fuel prices and economic upheaval in Europe, which are weakening travel demand in other markets.
How have brokers reacted to the uncertainty around Qantas' strategy?
Macquarie Equities downgraded Qantas from "outperform" to "neutral" and cut its share-price target from $1.96 to $1.57, citing the lack of clarity over the Asian hub plan. Goldman Sachs also lowered Qantas from "buy" to "hold".
Why is Macquarie preferring Virgin Australia over Qantas for airline stock exposure?
Macquarie says Virgin Australia currently has a "better articulated strategy" than Qantas and is likely to benefit from a restructure aimed at winning a bigger slice of the domestic corporate travel market, so the broker has reverted its preference to Virgin.
How are high fuel prices and weakening demand affecting airline profitability forecasts?
The International Air Transport Association (IATA) trimmed its combined airline profit forecast for the year from US$4.9 billion to US$3.5 billion, and warned that a severe European banking or economic crisis could push airlines to a combined loss of more than US$8 billion. High jet fuel prices and weakening travel demand have already led carriers such as AirAsia X to abandon some long-haul routes to Europe and India.
What has been happening to Qantas' share price recently?
Qantas shares have traded in a narrow range over the past five months between an all-time low of $1.375 (hit in October during an industrial dispute) and $1.705, and they closed down around 1.5% at $1.49 on Friday, according to the article.
Are Australian airlines protected from a global drop in premium travel demand?
Macquarie analysts say Australian airlines are "somewhat protected" because the strength of the resources and oil & gas industries helps support premium travel demand domestically, and the domestic corporate travel market has been holding up relatively well.
Could Qantas reduce its European exposure in response to worsening conditions?
Yes — the article notes Macquarie sees the potential for Qantas to further reduce European exposure, for example by suspending its Sydney–Frankfurt route if European conditions continue to deteriorate.
How have other regional carriers responded to high fuel costs and softer demand?
AirAsia X — the long-haul offshoot of AirAsia — recently blamed high jet fuel prices and weakening demand for its decision to abandon flights to Europe and India, illustrating how fuel and demand pressures are prompting route cuts.
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