The ‘Golden Triangle’, which captures aviation services between Australia’s three largest cities – Sydney, Melbourne and Brisbane – is Australia’s key domestic market. It represents about 22% of total domestic available seat kilometres for Qantas Airways (QAN, Sell) and a similar amount for Virgin Australia (VAH, Lighten). More importantly, we estimate it could contribute up to 35–40% of the airlines’ domestic earnings.
- Market share – Qantas remains the dominant player in this segment, but seems to have lost share to Virgin Australia. Based on published flight schedules supplied by air travel intelligence company OAG, over the past year Qantas – comprising its full-service carrier, Qantas Domestic, and its low-cost carrier, Jetstar – has lost up to 3% of its share of the key routes that make up the Golden Triangle to Virgin Australia – comprising its full-service carrier, Virgin Domestic, and it slow-cost carrier, Tigerair Australia. For example, Qantas’s share of the key route for business and premium leisure travellers – Sydney to Melbourne – has slipped from an estimated 62% in December-quarter 2016 to 59% in December-quarter 2017.
- Qantas Domestic versus Jetstar – Qantas Domestic appears to be faring the worst. For example, on the Sydney to Melbourne route, Qantas Domestic’s share is estimated to have fallen from 46% in December-quarter 2016 to 44% in December-quarter 2017, while Jetstar’s fell from 16% to 15%. This is significant because according to our calculations, Qantas Domestic generates the highest return on invested capital (ROIC) among Qantas's livery – we estimate its FY17 ROIC was 21%.
- Capacity – Based on published flight schedules supplied by OAG, Virgin Australia increased capacity in the Golden Triangle by 3% in October 2017 on the same period in 2016, and plans to add 7% in March-quarter 2018 and 12% in June-quarter 2018. How will Qantas respond? In October 2017 Qantas didn’t match Virgin Australia’s additions, with Virgin Australia adding 3% of capacity versus Qantas’s 1%. The current flight schedules suggest Qantas's share could slip further – for example, its share of the Sydney to Brisbane route could fall from 57% in March-quarter 2017 to 53% in March-quarter 2018.
We estimate a 1% change in share of the Sydney-Melbourne-Brisbane market could impact earnings by about $20m for Qantas and $12m for Virgin Australia, all else being equal. We believe both airlines continue to face headwinds in what remains a challenging operating environment with increasing competition, weak demand, excess capacity and higher fuel costs. We maintain our Sell rating on Qantas and our Lighten rating on Virgin Australia.