Ian Mcmahon’s perspective

QF ‘line in the sand’ to go

AT a travel industry function late last month a highly successful suburban travel retailer told me he had lost a lucrative booking because a rival agent undercut the best fare he could offer to New York by $600. It was the same week that the agent hawking the drastically discounted fare (Flight Centre) announced a record “underlying profit” of more than $375 million and the airline concerned (Qantas) posted a staggering loss of $2.8 billion. There are all sorts of sweeping generalisations that could be made about the conjunction of these three events. The one that I choose to make is this – In times of airline overcapacity, agents, particularly big and powerful agents prepared to ruthlessly extract the best deals they can, do well. And they do so at the expense of carriers desperate to unload that most perishable of commodities: empty airline seats. As with every sweeping generalisation, there are holes to be picked. Agents doing well? What about the $60 million or so lost by Helloworld last financial year? (Fair point, but Helloworld does seem to be the only agency group contriving to lose money in the present climate.) At the expense of airlines? Qantas’ huge losses are a sad footnote to the fact that the world’s carriers are collectively on track to record total profits of $US18 billion. Nevertheless I adhere to the thesis that the amount of capacity in the market is the key determinant of the prices airlines can charge, the deals agents can do and, ultimately, what consumers pay. On the international front, demand now seems to have caught up with the flood of airline seats that Middle East carriers brought to our market in recent years with Travel Daily reporting their aircraft are now flying out “chokkers”. But who knows what capacity increases lie ahead? However, domestic capacity is controlled by Qantas which saw domestic earnings fall by $335 million to $30 millon; and Virgin Australia which reported domestic losses of nearly $87 million. That’s what happens when passenger numbers increase by 5% and seats grow by 8% in what Virgin boss John Borghetti called “the war that had to happen when you have a dominant player that wants to maintain its position”. But it seems financial realities will now see Qantas walking away from that foolhardy “line in the sand” of 65% market share. Put another way, domestic fares are about to go up. THE Ebola outbreak in West Africa, weakness in the Eurozone, hostilities in Eastern Ukraine and instability in the Middle East loom as threats to a buoyant international air travel market, IATA has warned. The world airline body’s alert came amid an upbeat assessment of global passenger traffic, with results for July showing international passenger demand rose by 5.5% compared to the same month in 2013. Airlines piled on more seats at an even faster rate, outstripping demand growth with a capacity expansion of 6.2%. This produced a slight weakening of the load factor to 81.9% (down 0.5 percentage points from a year ago), but still at “a very high level”, said IATA. IATA director general Tony Tyler called the result “a positive story”. In this region, Asia Pacific carriers achieved passenger growth slightly above the global average at 5.6%, prompting carriers to add more flights and ultimately increase capacity by 6.8%. As a result, average load factors fell 0.9 percentage points to 78.9%. The biggest factor affecting demand developments in this part of the world is the response of the Chinese economy to stimulus measures which saw year-on-year GDP growth reach 7.5% in July, IATA reported. The top performing region was the Middle East where solid growth in business-related premium travel helped drive traffic growth of 9.2%. Also doing well was Latin America where airlines took a conservative approach to capacity – increasing seats by 6.6% to meet