Despite hopes that the Federal government will come to the aid of embattled airline Qantas Airways Limited (ASX: QAN), shareholders are unlikely to be any better off.
Yes, I'm afraid so.
The share price may spike up a bit once the government and Qantas announce a deal, but over the long term, nothing can save the airline from itself.
It's the economics of the industry, rather than what management or the government will do, that will see Qantas, and fierce rival Virgin Australia (ASX: VAH) destined to underperform the market for years to come.
In Australia's domestic aviation market, there is an oversupply of seats. That comes from two factors.
Virgin's determination to steal market share from Qantas, and Qantas with its line-in-the-sand refusal to see its market share drop below 65%. As Virgin adds more flights and seats, or drops ticket prices, Qantas is forced to follow – not doing so would see it lose market share.
As more flights and seats become available, it doesn't necessarily mean they will be all sold either. Demand for air travel is fairly stable, so the only way to convince more consumers to fly is to offer tickets at very attractive (read ridiculously cheap) rates.
So we have loads more flights and thousands more tickets available, many at prices that are so low, neither airline can make any profit, and as we've seen recently, at a loss.
Virgin is expected to report a $49 million loss this year, while Qantas is forecasting a loss of between $250 million and $300 million.
So while Qantas has reformed its international division thanks to its partnership with Emirates, it is still competing on a larger scale with sovereign backed airlines, like Singapore Airlines and Air New Zealand (ASX: AIZ). Making a profit for shareholders is less an imperative for them than it is for Qantas, so they can afford to make a loss. Unfortunately Qantas doesn't have that option.
Singapore and Air New Zealand also happen to be large shareholders in Virgin, hence Qantas' fears about its competitor's pricing and strategy to take domestic market share.
No matter what the federal government does, whether it guarantees Qantas' debt, reforms the Qantas Sale Act to relax foreign ownership restrictions, or even inject cash into the airline – the underlying issue remains. The sale of assets such as the Qantas Frequent Flyer program or the freight division and drastically cutting costs would only ever be a temporary band aid solution.
The bottom line is that Australia's domestic air travel market, given our low population level, can only realistically support about one and a half airlines (one reason why a third airline has always failed to compete effectively).
Foolish takeaway
To ensure profitability, Qantas would need to relax its stance over market share, and both airlines would need to reduce capacity and raise prices. Think that's going to happen? Neither do I.
