The battle for the air-budget dollar that has been good for flyers could be coming to an end.
Having recently turned 10 years old, Qantas Airway's low-cost carrier Jetstar reported its first annual loss on Thursday. The underlying loss was $116 million, down from a profit of $138 million the previous year.
Qantas said the drop in earnings was driven by competition. "There is an unprecedented level of capacity that has come into the market, both within south-east Asia and between south-east Asia and Australia," Jetstar chief executive Jayne Hrdlicka✓said.
"We expect we are at the bottom of the cycle of what has happened in south-east Asia. It is not going to turn around quickly. It takes time to absorb the capacity in the market, but we have seen significant rationalisation from all players." She was adamant investors would start to see improvements from here on.
When Virgin Australia's results come out on Friday, Goldman Sachs analyst Andrew Gibson✓ expects its Tigerair Australia subsidiary to post a loss of $44 million on domestic routes. "Recent traffic statistics reveal that domestic system capacity growth has been concentrated in the budget end of the market," he said.
Overall, Mr Gibson forecasts a domestic loss for Virgin, outside of Tigerair, of $5 million, highlighting the airline group's use of the budget airline in its war with Jetstar. The capacity battle may be coming to an end as Qantas and Virgin try to become profitable again.
"[We] don't see large capacity injections for the remainder of 2014 as we have seen in the past 12 months, which should positively impact industry yields and earnings," CIMB analyst Mark Williams said.
Qantas chief executive Alan Joyce said he was confident there would not be a war between Jetstar and Tigerair. "They are actually pulling back on capacity at the moment," he said. "A few weeks ago, the Virgin group was going to add 6 per cent. That has now come down to 2.5 per cent and I think it seems to be reducing over time."
