Thunder Down Under: Qantas and Virgin Australia are mired in losses while Air New Zealand prospers

It was supposed to be the low point before a turnaround. On Aug. 23, 2012, Qantas announced a heavy net loss for its fiscal year that ended in June, no surprise given labor unrest that led to a temporary grounding of the airline. Qantas also blamed the strong Australian dollar, which it said was making Australia an expensive destination to visit while attracting a flood of new foreign competitors chasing outbound Australian tourists. Less than a month later, Qantas responded by announcing a groundbreaking joint venture with Emirates.

But the turnaround never happened, at least not yet. On Aug. 28, 2014, the Australian dollar was no longer strong. There were no instances of labor strife in the past year. The Emirates JV was in full swing. But instead of adding up to the revival Qantas expected, its fiscal year to June 2014 was worse than ever, highlighted by a $595m pre-tax loss excluding special items. A year earlier, it had managed a modest profit. And even in that rough year of labor unrest two years earlier, Qantas made money if you exclude the impact of that unrest. Something, it seems, has gone horribly wrong.

Actually, a lot has gone wrong, creating trouble not just for Qantas but for its main competitor Virgin Australia too. Virgin likewise had a rough fiscal year to June, headlined by $195m in pre-tax losses ex items. For the latter half of the fiscal year—in other words, the first six months of 2014—Qantas recorded a negative 4% operating margin and a $361m pre-tax loss ex items (the official net result was a huge $2.4b loss, but that included lots of un-meaningful accounting write-offs). Virgin’s pre-tax loss from January to June was $140m, and its operating margin negative 5%

Why such lousy results for both of Australia’s major airlines? For starters, the Australian dollar’s past strength, constantly cited as a source of dismay by Qantas chief CEO Alan Joyce, was in retrospect a good thing—as strong home currencies typically are for airlines—because a weak dollar is now driving up the cost of fuel. In the first half of 2014, Qantas and Virgin both grew their ASK capacity by less than 2% y/y. But their fuel outlays increased 9%. A weaker local currency, of course, is also hurting outbound demand.

This is only the start of the story. The Australian economy, booming for so…

Click Here or the button below to sign up for a Free Trial.

This issue is not currently online. To inquire about purchasing a copy, please email subscription@skift.com.