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Qantas May Actually Benefit From the Coronavirus

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(Bloomberg Opinion) -- You might not have thought it three months ago, when the spread of Covid-19 forced Qantas Airways Ltd. to halt international flights and drove its shares to their biggest percentage drop in eight years. But a global pandemic could wind up being good news for the company.

Australia’s dominant airline is now something close to a monopoly player. Virgin Australia Holdings Ltd., its erstwhile local rival, went into administration in April. While limited flights are still operating, it’s unlikely to offer aggressive competition until a rescuer comes along, and possibly some time after that.

That’s a fortunate position to be in. For carriers around the world, domestic operations tend to do better than international ones, since competition is usually weaker while shorter distances offer productivity benefits. This advantage is accentuated by the coronavirus, which has more or less shut down cross-border aviation on a global basis.

Few carriers have as impressive a redoubt as Qantas can boast in Australia. Just a handful of domestic markets are larger in terms of passenger traffic. Of those, only India and Japan have an airline on a par with Qantas in terms of dominance, and most have suffered far worse from the virus.

The company’s position is likely to be further solidified by a A$1.9 billion ($1.3 billion) capital raising announced Thursday. If you think this is some sort of desperate rescue move, have a look at the slim discount — just 3.3% or so to the previous day’s share price, once you account for dilution from issuing new stock.

The advantage for airlines in the current crisis is that while the industry’s fixed costs are famously high, a lot of them aren’t nearly as fixed as the term would suggest. About 60% goes toward fuel, route and landing fees, as well as maintenance and depreciation, which is only incurred to the extent that flights are actually operating. The A$8.2 billion that Qantas expects to save over the coming 12 months amounts to about half of typical annual costs. Only A$600 million of the total will come from the difficult business of restructuring, with most of the savings resulting from simple expedients like burning less fuel.

The international business that will be most severely hit accounts for less than 20% of profit in a good year, despite making up nearly half of Qantas’s seat capacity. Resisting the temptation of unprofitable overseas expansion is a strategy we’ve long urged on Chief Executive Officer Alan Joyce.

Idling its gas-guzzling, hard-to-fill A380s — another measure announced Thursday — is also long overdue. Qantas shareholders have a habit of welcoming fleet writedowns, like the charge of up to A$1.4 billion that will result from that decision. In both areas, the coronavirus is providing the perfect opportunity to do what Qantas should have been doing anyway.

Getting through the coming years isn’t going to be a cakewalk. Australia still needs international flights, but capacity on that front is expected to be half of typical levels in the year through June 2022. Even so, the country stands a good chance of returning to something resembling normal domestic aviation traffic sooner than any other major airline market, with the possible exceptions of China and Japan.

Unlike Asian rivals that have been raising cash to make it through the pandemic, such as Cathay Pacific Airways Ltd., Korea Air Lines Co., and Singapore Airlines Ltd., Qantas has a substantial domestic market to fall back on while cross-border aviation is in hibernation. And unlike its U.S. rivals, such as American Airlines Group Inc., Southwest Airlines Co., and United Airlines Holdings Inc., it faces neither fierce competition nor a profound disease burden at home.

No airline would wish the coronavirus crisis on itself, but Qantas is better placed than most to ride out this epidemic. “Qantas never crashed,” as Dustin Hoffman’s character once said in “Rain Man.” That looks to be as true now as it was then.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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