Qantas. Domestic. Sydney. Too much of a good thing? Qantas photo

As a recipient of a number of regular proprietary financial institution bulletins they historically tend to be very weak at picking downtrends in consumer demand, and this could mean bad news for Qantas and Virgin Australia and their low cost brands.

In an informative review of some of those bulletins Jamie Freed at Fairfax media captures the cautious assessments of analysts prepared to be quoted at length for the benefit of non subscriber base customers.

Caution is a good thing to exercise in studying them. It’s not just a case of managing capacity, as acknowledged last week by the respective CEOs of the Qantas group, and Virgin in Alan Joyce and John Borghetti respectively.

It’s the far more difficult issue of demand sentiment, something both airlines seem to have skated around because of the toxic prospect of large business travel accounts deepening their cut backs on government and corporate flying, and discretionary leisure flyers deciding to stay at home.

Pay attention to what CLSA analyst Scott Ryall says in the Fairfax story about the inadequate response Qantas has made to its capacity management.

Surely those comments would be true in large measure of Virgin Australia too.

But Virgin Australia has not returned the signaling from Qantas about a capacity freeze.  That must be of concern in Qantas, because if Virgin’s rich and powerful major shareholders decide to bleed the Qantas group, there will be no convincing return to profitability in the current first half of FY15 as Alan Joyce rather optimistically mentioned in his outlook guidance last Thursday.

Similarly the weakness in leisure demand already indicates that Jetstar and Tigerair are very seriously out of kilter in the market, with seat inventories that are incompatible with the medium term well being of Qantas and Virgin.

The last knife in the drawer that the two full service airlines can use is to try and lift their budget brand fares, since the gap between usable cheap Jetstar and Tigerair fares and the best deals on Qantas and Virgin Australia is too narrow already.

A $40 or $50 headline saving on a low fare airline means sod all after the extras plus the general inconvenience are taken into account today.

This is a situation where the full service carriers might reverse the original concerns expressed when Qantas launched Jetstar, and become a real threat to their low cost brands rather than the other way around.

It’s a painful reminder that having a low cost subsidiary can cut both ways if as seems to be the case, business travel activity is declining more slowly than discretionary travel demand.

This is a bigger problem for Qantas than Virgin Australia for the obvious reason that Jetstar is not just the largest of the two low fare brands, but fully owned by it, as against Virgin holding only 60 percent of the tiny Tigerair operation in this country.

Joyce’s optimism about H1FY15 may be built upon the sand, and not upon the rock.

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