ARCHIVE (Q2 2015): QANTAS REVENUE ANALYSIS

ARCHIVE (Q2 2015): QANTAS FARE ANALYSIS

Qantas Group is a corporate group with the parent company of Qantas Airways Ltd; Australia’s flag carrying airline. QF is part of Qantas-Group, with strong diversified liberal customer-focused interlinked brands to deliver a strategic objective of sustainable returns to shareholders, safety, strong domestic business, transforming Qantas International  and growing Jetstar (Qantas Annual Report QFAP 2013, p77 2014). Qantas strategizes on resuming full-legacy operations while altering fare families and restrictions to catalyse a strong revenue-driven and consolidated domestic business (and hence strong returns to shareholders).

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DOMESTIC FARE PACKAGE STRUCTURE

Qantas, in 2011, has introduced streamlined fare baskets across the network for simplicity, flexibility and enhancements entitlements to frequent-flyer customers (Qantas.com.au, 2015). This includes:

  • Red e-Deals: lowest fares
  • Flexi-Saver: flexibilities within fares in context of timings, availabilities and restrictions/terms/conditions.
  • Fully-Flexible: flexibilities with full refundable capability.
  • Business: premium baggage, more points, access to lounges, new menus
  • Award structures of upgrade on all economy fares to business, along with status credits, and any-seat awards (with upgradability)

 

Early this year, Qantas released re-shuffled and streamlined its fare-family structure, and altered restrictions/conditions within fare classes within the domestic GDS-supply market. This includes:

  • relaxed conditions/restrictions to QF-domestic flexible fares
  • greater frequent-flyer points allowances on Red e-Deals and Flexible fares
  • multi-class bookings on same ticket
  • Altered restrictions and conditions on individual fare classes (Australian Business Traveller, 2015) (Qantas.com.au (AMADEUS), 2015).

 

FARE STRUCTURE: CONTEXT

A microeconomic business-analysis of booking-profiles within the new marketing strategy for Qantas-Domestic, involves the optimization of valued features/benefits and product-enticement within the slowed growth in the sunk functional-product (ASKs), to facilitate value-compliment productions (award-structures, upgradability, fare-mix flexibility), simplified/divisible product (simplified fare-families and conditions/restrictions/terms/conditions), and communicability (distinctive product-offering to customer/pax-mix) (Qantas.com.au, 2015). This move allows distinct configuration-mixture, price-discrimination, market-segmentation and yield power of the legacy carrier, while also differentiating itself from its mostly wingtip-operating subsidiary Jetstar to allow a parallel response to Virgin Holding’s VA/TT strategy of product differentiation, associated revenue-management and game-theory driven capacity-growth policies. (VAH annual report 2013, 2015) (QF-14 Investor-Annual-Report, 2015).

 

 

PRODUCT

Qantas, over the years, have maintained its operating stance as a full-service carrier. With demand being driven by high income/price, strong frequencies and network, business demand-driven timing, weak seasonality, strong safety/goodwill, and high amenities, service and customer-loyalty (Tretheway and Oum, 1992), QF has strengthened in re-defining its product stance, both in the international and (most importantly) the domestic arena (mostly through many incremental developments (TheAustralian, 2015)). Significant news include (Drum et al., 2015 @ worldairlinenews.com)

  • A330 cabin refurbishment/upgrades (lie-flat business, new-economy, new-IFE). VA transcon-A332 product also optimized.
  • 737-800 cabin re-fit (IFE) (Smith@BT, 2015). Law few batch deliveries (including RetroRoo)
  • 717 cabin upgrade (Qantasnewsroom.com.au, 2015)
  • Introduction of Jetstar 787 services, A330-200 conversion to QF
  • Lounge improvements (SYD, MEL, OOL, TMW)
  • New meals, headsets, amenities (Australian Business Traveller, 2015)

Qantas-141021-2151-1024x616.jpg

Product demand is inherently driven by appropriated value points for both leisure and business passengers, such as  price/income-ratio (and high CPV), frequency/capacity management, right timings for target markets, airport accessibility and appropriated infrastructure, strong punctuality, connection availability (interline/codeshare/partnership value input, transit-pax facilitation, regional-aviation facilitation), seasonality management (YVR capacity and connecting traffic management), safety/goodwill, distance (understanding inter-modal competition segment-based), in-flight amenities (cost benefit of product improvements and complementary offerings such as food or amenity packs) and customer loyalty (Qantas Loyalty). This require marketing by functionality, features, benefits, compliment-productions, complexity/divisibility,  product-enticement and communicability in order to ensure increased customer perceived value (I.Douglas, 2015). (S.Bukovac, 2014).

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CHANGES IN DOMESTIC MARKET (2012-15)

With the context of shaken-up operations of QF the growth of Jetstar,  the ongoing transformation by VA (VAH annual report 2013, 2014) and stagnant-growth of Tigerair Australia, it is clear that the impacts of the new airfare structures and refined business strategies of the domestic-business, will impact the trajectory of ongoing low-profitability of VAH (with 60% stake in TT) and Qantas-Group. This can be observed through analysis of fare indexes, domestic aviation activity and segment/revenue-streams analysis (from 2012 to current. Focus on recent and outlook). The domestic market consists of a heavy duopoly, with high brand valuation/equity-index, high contribution margin and cost-per-sales dollar, low customer-perceived values, and expense-driven customer-lifetime-values. (BITRE.gov, 2015)

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FARE INDEX

Through understanding products dedicated as capacity by individual carriers within the domestic market, a thorough segmental analysis of revenue streams through airfare charges on different classes can demonstrate the effectiveness of the business-strategy, the product and associated market segmentation/targeting,  and the marketing.

It is clear that best-discount airfares (including most JQ  and some Red e-Deals itineraries) have fluctuated turbulently with the variable-operating environment and associated costs, high standard-deviation in capacity/supply, and inferior-product low-cost no-frills  demand. This suggesting little margins and low yielding and  for no-frills products/services. Meanwhile, restricted economy (including Red e-Deals, flexible JQ fares and flexi-saver fares) and Business airfares have suffered revenue power in 2011 over intense competition, new fare-structure for QF-Group, and over-capacity between VAH and QF-Group (Tsang@aspireaviation.com, 2013). This is resuming to recover through slowed capacity-growth, low price-of-fuel and high margin/yield-power being practised throughout the entire competitive sphere. Meanwhile, in full economy for domestic airfares (including premium JQ fares, some Flexisaver and Fully-Flexible Fares), it was clear that Qantas and Virgin Australia intended on raising the price and perceived value of flexibility and ease of restrictions to recover lost revenues from lower yields proven in restricted economy (hence paving way for high ancillary revenues from cancellations/no-shows and booking-amendments). The full-economy airfares are set to stay strong and reduce gap to restricted-economy.

 

DOMESTIC AVIATION ACTIVITY

Extrapolating information from fare data explains the implications of fare inputs within the competitive environment to depict impacts of new fare-assignments and baskets in context of total RPK’s, average load factors and total seat output (industry-wide mostly). This is seen in:

  • RPK trends annually have retained similar scale through between early-2013 to current, while 2012 demonstrates RPK-purge during low-season through fare-cutting, competitive capacity purge and low-yielding/unprofitable passengers (Tsang@aspireaviation.com, 2013). Trend of RPKs should resume, given low margin and low cost-absorption from LCCs. This also suggests that growth-centralization would shift more to capacity in low-cost operations, hence given expansion of JQ at expense of consolidation of QF (while TT holds off growth until greater profitability assured) (Tigerair, 2014).
  • New fare families and easing of restrictions to bid higher prices facilities lower seat-factors and reduced excitement of the market, especially with passengers being fare-family downgraded in order to meet reservation costs along the volume/elasticity/low-yield-driven market with low CPV. Strategic planning of market segmentation, penetration and differentiation is required to excite higher reservation prices and product value, and hence recover load-factors. Low Seat-factor doesn’t equate to lower profitability, given the market-inputs impacting variable costs and revenue power, and where (break-even seat factor) = (yield/(cost/ASK)). Qantas aims on recovering the Qantas mainline, utilizing LCC-ops of JQ as a buffer.
  • Domestic seats are set to respond to lower seat factors and retained RPKs and load factors through capacity consolidations on segments. This is done through re-structure of aircraft-rostering/operations, especially on transcendental and Eastern-trunk huh-hub services/ops (and further consolidation measures are set to resume).

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MARKET INPUT POST-TT-TAKEOVER (VAH) (2012-14)

 

On 30 October 2012, Virgin Australia acquired 60% of Tigerair Australia (TT) for $35m (SMH, 2012), and the struggling carrier was bought out completely on 17 October 2014 (TheAustralian.com, 2015). Since then, the market has been as follows, concluding to major changes and shake-ups in the domestic industry post-takeover. This is seen below (in context of marketing solely), as well as costs and network/operations (of which little has changed since takeover). follows (Qantas Annual Report QFAP 2013, 2014)&(VAH annual report 2013, 2014).

 

FARE STRUCTURE & DOMESTIC MARKET: (2012-14)

 

Information as follows (Qantas Annual Report QFAP 2013, 2014)&(VAH annual report 2013, 2014)& )&(Tigerair Annual Report 2013, 2014), describes a calculated/quantitative analysis of  revenue streams that Qantas-Group (with newly applied fare structure in 2011) and VA-Holdings operated (with turnaround plans and 60% acquisition of TT) in 2012/13 comparative analysis (2014 data impacted by new revenue regimes and short-term impacts on revenues, loads and costs(QFG 2014 loss, 2015)):

  • Yield (Total-Revenue/RPK): Average earnings per revenue-pax-kilometre. Qantas-Group lowered yield significantly in need to fill aircraft, along with game-theory elimination of VAH’s capacity. VAH still held steady on yields despite 60% stake in Tigerair LCC. Yield suffered industry wide with intense competition and capacity injection into the domestic market. Consolidated fare classes and flexibilities are set to excite the market with steady yields (fuel cost drop and competitive discounting currently), and facilitate higher yields (corresponding to operating costs) to retain strong margins and simplified yield calculation/control.
  • Passenger-revenue/ASK: Successful marketing through management of surplus capacity of QF and JQ. VAH dropped in its earnings/ASK sharply, suggesting inability to fill surplus capacity with new or acquired customer-equity. With amendments, this is expected to hold or drop during the short term (reduced RPKs with spillage onto LCC), but steadily increase as increased CPV shifts demand curve and elasticity to strengthen RASK.
  • Marketing/RPK: Dependency of marketing on obtaining revenue-passengers. Virgin Australia has been highly dependent on post-transformation of Virgin-Australia from budget carrier to full-service carrier. Marketing investment and requirement subsequently dropped from both carriers. This suggests successful forecasting by both carriers in collecting and analysing data inputs quantitatively/qualitatively, ability mining data and business/competitive intelligence and present transparent feedback that the profit bubble the domestic cyclical industry was be impacted through capacity purge (and subsequent cost and revenue improvements were required over time).  Suggests strong Return-on-marketing-investment and held contribution-per-added unit by both companies, while also suggesting Qantas operates a high brand-equity-index and high brand-valuation. Future requirement for QF to retain to retain strong brand presence, high CPV and diversification-capability with JQ.
  • Expenditure/Revenue: Ability of cost recovery and profitability. Qantas has reduced its expenditure (through cost management/restructures) and increased revenue volume with low-yield pax. Virgin-Australia has significantly lower costs and higher revenue-power, hence stronger in cost-recovery and profitability through 2012/13. QF expected to increase margins and cost-recovery capability with drop in variable costs and retained/increased yields. Set to improve/stabilize in future (assuming maintained ASK consolidation and strong fleet turnover).
  • Other-revenue/Total-revenue: Dependency of Group on non-aviation services in inducing revenue. Qantas-Group is largely and growingly dependant on its diversified and wide product-line non-aviation services such as frequent-flyers in inducing revenue, as oppose to Virgin-Australia, which consolidated its revenues more exclusively to aviation services. Loyalty-revenue was 13% of other revenues, and grew to 19%, suggesting  Qantas-Group’s dependency on loyalty business. Other revenues sources will require expansion/investment for growth in order to facilitate the simplification/relaxation of fares, and retain hold on other-revenue/total-revenue ration.
  • LCC-revenue/Total-revenue: Group’s dependency on LCC. Revenues from LCC offshoot Jetstar, jumped to more than 20% or total cash flow, suggesting growth and greater demand for LCCs, and consolidated/facilitative cutback on the mainline. LCC revenues are set to increase and grow through low-end customer spillage through brand-diversification capability practiced by QF.

 

FARE STRUCTURE & DOMESTIC MARKET: (2014-beyond)

 

With Qantas-Domestic’s FY15 first half EBIT of $227m-AUD  (compared to $57m during 1st half FY14)  (Qantasnewsroom.com.au, 2015), along with climbing shares (Google.com.au, 2015), it is clear Qantas is undertaking economically-reasonable strategic decisions, being a first taste of new revenue policies (of which, the new fare family structures and strategy are part of). This came with:

  • 5% improvement in R/ASK
  • unit cost down 4.1%
  • Capacity reduction down 2.4%
  • 113 business-driven accounts, 42 new, 12 won.

With strong cost-base management and consolidation undertakings, Qantas shifts its focus to revenue management and value-inducement within its product-line through moderation of capacity (and slowed fleet growth), reduction in RPKs (with low yielding passengers spilled onto JQ), and higher fares (and condition-leniency) and managed resource allocation. Given analysis in fare structures, domestic activity and product, while contextualizing it with recent and historic results, it is clear that Qantas resume to focus on improving revenue streams, with new fare-family allocation, classes and condition structures being few of many policies.

 

 

 

References

Qantas Annual Report 2013, (2015). Qantas Annual Report 2013. [online] Available at: http://www.qantas.com.au/infodetail/about/investors/2013AnnualReport.pdf [Accessed 18 Mar. 2015].

Qantas.com.au, (2015). Frequent Flyer – Program – Domestic Fare Changes and Frequent Flyer Enhancements. [online] Available at: https://www.qantas.com.au/fflyer/dyn/program/domestic-fare-changes [Accessed 31 Mar. 2015].

Qantas.com.au, (2015). QF AMADEUS SUMMARY. [online] Available at: http://www.qantas.com.au/regions/amadeus/minirules/AUAURED1JQ_SUMMARY/ [Accessed 2 Apr. 2015].

2013 Annual General Meeting, (2015). Virgin Australia Holdings. [online] Available at: http://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/agm_presentation_2013.pdf.

QF-14 Investor-Annual-Report, (2015). QANTAS ANNUAL REPORT 2014. [online] Available at: http://www.qantas.com.au/infodetail/about/investors/2014AnnualReport.pdf [Accessed 2 Apr. 2015].

Tretheway, M. and Oum, T. (1992). Airline economics. 1st ed. Vancouver: Centre for Transportation Studies, University of British Columbia.

Drum, B. (2015). QANTAS Airways | World Airline News. [online] Worldairlinenews.com. Available at: http://worldairlinenews.com/category/qantas-airways/ [Accessed 4 Apr. 2015].

Smith, G. (2015). Qantas to refit B737 fleet – Business Traveller. [online] Businesstraveller.com. Available at: http://www.businesstraveller.com/news/100734/qantas-to-refit-b737-fleet [Accessed 4 Apr. 2015].

Qantasnewsroom.com.au, (2015). Qantas Previews New A330 and B717 interiors. [online] Available at: http://www.qantasnewsroom.com.au/media-releases/qantas-previews-new-a330-and-b717-interiors [Accessed 4 Apr. 2015].

Tsang, D. (2013). Qantas, Virgin Australia face new industry normal – Aspire Aviation. [online] Aspire Aviation. Available at: http://www.aspireaviation.com/2013/03/06/qantas-virgin-australia-face-new-industry-normal/ [Accessed 5 Apr. 2015].

Bitre.gov.au, (2015). Australian Domestic Airline Activity—time series. [online] Available at: http://www.bitre.gov.au/publications/ongoing/domestic_airline_activity-time_series.aspx [Accessed 6 Apr. 2015].

Bitre.gov.au, (2015). Domestic Air Fare Indexes. [online] Available at: https://www.bitre.gov.au/statistics/aviation/air_fares.aspx [Accessed 6 Apr. 2015].

Domestic Aviation Activity 2014, (2015). DEPARTMENT OF INFRASTRUCTURE AND REGIONAL DEVELOPMENT. [online] Available at: http://www.bitre.gov.au/publications/ongoing/files/Domestic_aviation_%20Dec_2014.pdf [Accessed 6 Apr. 2015].

Tigerair, V. (2014). Virgin Australia chief tempers expectations for expansion of Tigerair. [online] The Sydney Morning Herald. Available at: http://www.smh.com.au/business/virgin-australia-chief-tempers-expectations-for-expansion-of-tigerair-20140928-10n6v0.html [Accessed 6 Apr. 2015].

Virgin does deals with Singapore, S. (2012). Virgin does deals with Singapore, Tiger, Skywest. [online] The Sydney Morning Herald. Available at: http://www.smh.com.au/business/virgin-does-deals-with-singapore-tiger–skywest-20121029-28gdx.html [Accessed 6 Apr. 2015].

TheAustralian, (2015). Virgin Australia takeover of Tiger Airways approved by ACCC. [online] Available at: http://www.theaustralian.com.au/business/aviation/virgin-australia-takeover-of-tiger-airways-approved-by-accc/story-e6frg95x-1226626853253 [Accessed 6 Apr. 2015].

Google.com.au, (2015). Google- QF shares. [online] Available at: https://www.google.com.au/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=qantas%20shares [Accessed 6 Apr. 2015].

Qantasnewsroom.com.au, (2015). QANTAS HALF YEAR 2015 FINANCIAL RESULTS. [online] Available at: http://www.qantasnewsroom.com.au/media-releases/qantas-half-year-2015-financial-results [Accessed 6 Apr. 2015].

QFG 2014 loss, (2015). QANTAS GROUP FINANCIAL RESULTS. [online] Available at: http://www.qantas.com.au/infodetail/about/investors/mediaReleaseResults14.pdf [Accessed 7 Apr. 2015].

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