Jetstar's first 787-8 at Gold Coast airport: Commons photo

Commentary  Among the very poor traffic and yield figures in the latest Qantas guidance to the ASX in monthly traffic stats, Jetstar International continues to fly enough empty seats to kill itself, or if nothing gets done, the parent company.

In May it flew with 31.2 per cent of its seats unoccupied. For the low cost model, which is predicated on high occupancy figures, this is lethal if not corrected.  It has shown no signs of being effectively corrected in recent times, even though Jetstar has abandoned various routes and sharply reduced frequency on others.

Yet this is the part of Qantas that is putting into service what will be a fleet of 14 Boeing 787-8s while returning a smaller number of what are largely borrowed Qantas A330-200s.

The Qantas occupancy by-fare-paying-passenger stats in other parts of its operation also reported falling numbers, apart from Qantas long haul, which showed a monthly improvement.  Qantas domestic, once supposed to be the cash cow of the group, flew with 29.6 per cent of its seats empty in May including those flown by its Qantaslink brand.

Qantas domestic does however have the benefit of premium traffic carriage through a significant business class component, and the finance sector has been led to believe, probably correctly, that passengers flying Qantas domestic generally pay better margins to the airline, although they seldom contribute to it through ancillary fees, which are another important component of the low cost model everywhere.

It is important not to consider the Qantas traffic stats in isolation. They reflect tougher times in general, and a lower Australian dollar is expected to impact fuel costs, even though fuel has been shifting in cycles that have seen it fall for periods as expressed in USD.

The figures have also caused some reports to focus on widespread concerns that the Qantas Group might lose more than a $1 billion in the full financial year that ended yesterday, and a loss of such magnitude would make the sort of blissful prospects airlines in general conjure up on an ‘underlying basis’ look as silly as they sometimes can be.

A legitimate cause for concern is the Qantas infatuation with Jetstar. Whatever the text book merits of low cost business models, which include the enormously successful operations of Ryanair, Southwest (with the odd setback) , easyJet, JetBlue and right in the Jetstar backyard, Air Asia and AirAsiaX, there are constraints on them, and they seem more constrained than anywhere else in the Asia-Pacific hemisphere.

The problems are essentially regulatory hurdles (as in Jetstar Hong Kong and Jetstar Japan and Jetstar Pacific in Vietnam) and excess capacity.

The challenge for managements is to be nimble enough to avoid prolonged losses or the pursuit of growth in markets where the full service carriers, including those like Qantas and Singapore Airlines that own low cost brands, can cut the heart out of low cost operations.

Does Qantas slash fares to compete with a full service competitor and harm its own Jetstar value proposition in the process, or does it let the full service rival cut its throat for it unopposed? It’s that brutal.

These are times that test the mettle, the vision, and the agility of managements. Qantas is among those being so sorely tested, and the question is, whether its management is up to it, especially in a sixth year without dividends, and a junked share price.

Qantas appears to be trying to make itself a smaller target in these hostilities. The risk however is that it also makes valuations of the worth of its business, in full and in part, worth less.

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