Qantas’ aggressive Asian push

Qantas' aggressive Asian push

Flying kangaroo looks to grow its Asian business

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published December 12, 2012 11:13 am AEDT

Qantas Airways (ASX: QAN) is expected to ramp up its strategy to woo back customers, by flying more of its aircraft to key business hubs, re-time flights to Asia and increase capacity to cities such as Singapore and Hong Kong.

According to the Australian Financial Review, the updated strategy comes on the back of the airlines deal with Emirates, which should free up Qantas planes to fly into Asia, and the collapse of earlier plans to establish a premium airline based in Singapore or Kuala Lumpur.

Under the first phase of the plan, Hong Kong and Singapore will become point-to-point destinations, rather than the first leg of flights to Europe. Qantas will also start selling tickets on Emirates' four flights daily to Asia, as long as the deal with Emirates is approved.

As part of the plan, Qantas will be able to retire its aging, fuel-guzzling 747 jumbos and replace them with more fuel-efficient Airbus A330 aircraft. The company also plans to improve its business class offerings to allow it to compete more effectively with rivals Singapore Airlines, Cathay and rapidly growing Chinese carriers.

This is all part of a strategy by Qantas to turnaround its loss-making international division, which has been bleeding money for years. The company's profitable domestic division holds about a 65% market share in Australia, but is facing increasing competition from Virgin Australia Holdings (ASX: VAH). Virgin is ramping up its attack on Qantas domestically, by buying a stake in budget airline Tiger Airways and making a takeover offer for regional operator, Skywest Airlines (ASX: SXR).

Whether Qantas' Asian strategy works or not is yet to be seen, but I wouldn't be putting money on it. Airlines are notoriously competitive businesses with many state-owned or backed, and therefore normal business practice gets thrown out the window.

Foolish takeaway

As my colleague Scott Phillips outlined, the airline business is an endless circle. To grow profits, airlines need to take advantage of economies of scale, by increasing the number of seats, which in an industry characterised by excess capacity, means lower margins. The alternative is less capacity, higher costs and less profit. That's why we here at the Motley Fool are unlikely to ever recommend an airline.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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