New estimates released by Qantas this week underline how much airlines are at the mercy of events over which they have no control. Qantas has had to deal with an unusual convergence of “one-off” natural disasters and other external forces recently, and the scale of the economic impact has offset much of the hard-fought gains the airline has made over the past year.
According to Qantas group estimates, major external events will have a negative effect of AU$165 million for the half-year ending June 30. The “economic impact” figure combines cost and lost revenue (all amounts listed in Australian dollars).
This figure comprises $25 million from the Trent 900 engine problems and subsequent A380 groundings, $60 million from the Queensland floods, $20 million from cyclones Yasi and Carlos, $15 million from the Christchurch earthquake, and $45 million from the Japanese earthquake and tsunami. I included the A380 groundings because these were caused by external forces (Rolls-Royce’s manufacturing issues and decisions by regulators). Rolls-Royce will probably end up reimbursing a lot of that, but nothing has been resolved yet.
Just to put the $165 million into perspective, I took a look back Qantas’ financial report from the six months through Dec.31. The Qantas group’s net profit for that period was $241 million, which was up from $58 million a year earlier. So the external events were large enough to wipe out the improvement in profit Qantas achieved.
It also equaled or eclipsed the underlying profit before interest and tax (EBIT) for all the group’s major operating units in last six-month period – $165 million for the Qantas airline, $143 million for Jetstar, and $41 million for Qantas Freight.
But the comparison I find most compelling is with the carrier’s long-term business improvement plan, which it calls QFuture. This “transformational” program includes a range of revenue enhancement and cost initiatives that are collectively aimed at putting the carrier on a more solid financial footing.
In the six months through Dec. 31, QFuture achieved $173 million in net benefits. So the combined effect of the external disruptions effectively negated the gains Qantas made through its long-term plan.
Some might argue that the airlines are always complaining about external shocks, such as oil price spikes. The difference is that airlines can prepare for oil price volatility through fuel hedging, and they can also pass on higher fuel prices through surcharges.
The Qantas case stresses an unavoidable truth about the airline industry – it is particularly sensitive to unpredictable events. Travel demand is always fickle and can take a long time to recover, and because airlines are reliant on a global market, they are exposed to shocks in a broader range of countries than other industries.