2016 is thus far a year of both consolidation and expansion across the aviation market at an incredibly rapid pace. New airlines are appearing across the globe while large, established names merge in the airline, MRO and leasing sectors. Another Middle Eastern low cost airline has been launched today from Saudiai in the form of Flyadeal, while easyJet's move for Monarch has us wondering who will provide Greybull with the best offer – easyJet or HNA? The latter will provide Monarch independence and keep the brand alive but the former will offer tantalising growth options for the future. But maybe, just maybe, the most interesting news today is coming out of Australasia.
Air New Zealand’s announcement last month that it is selling all or part of its 25.9% holding in Virgin Australia looked at the time to be good timing, ANZ’s Christopher Luxon resigned from the Virgin Austalia board after losing his battle to wrestle control of the airline from chief executive John Borghetti, something that was bound to fail as Singapore Airlines, Etihad Airways and Virgin Group would not want ANZ calling the shots. But, since Borghetti's appointment in May 2010, Virgin Australia shares have fallen by 27.6% while Qantas shares have rebounded by over 60.5%. Singapore Airlines is the logical choice to take control of the airline to stop the likes of HNA Group from taking a holding in the airline, but now Qantas has dealt ANZ a real blow with its announcement today that the Australian domestic market is contracting rapidly.
Qantas shares fell almost 10% in trading today to A$3.68 as the airline announced plans to drastically cut the number of domestic flights both for Qantas and Jetstar to rapidly cut capacity to match weakening passenger demand. This announcement quashes the previously planned 2% fleet expansion supposed to take place in April through June 2016. In a release to the stock market today Qantas confirmed: "Some softness in demand, related to the upcoming federal election and a recent drop in consumer confidence in Australia, began to emerge over the peak Easter and school holiday period in late March and continued to be seen in forward bookings...To mitigate the negative impact on domestic RASK (revenue-per-available-seat kilometre) in the fourth quarter of the financial year, Qantas Group domestic capacity in the final quarter will now be negative compared to the prior corresponding period.... As a result of these changes, previous guidance for domestic capacity growth of around 2 per cent in the second half of the financial year has been revised."
The statement, although pointing out that RASK was well down on 2015, also made clear that RSKs were up on 2015 thus far by 0.8%. It remains to be seen if this is the result of capacity cuts already enacted over recent months. Ironically in a complete turnaround from three years ago, it is the international market performance that at this time remains strong with capacity up 5% and actually failing to keep pace with demand, which is up 6.1%.
So as Qantas laid bare domestic market weakness, Virgin Australia shares took a beating, saved somewhat by the closing bell to end down 1.41% but likely to remain weak for some sessions to come. Against the backdrop of uncertainty, will the SIA board pay ANZ the desired premium for its stake in Virgin Australia? It might be that the contracting domestic market in Australia could see a Chinese suitor pip SIA to the post for Virgin Australia.