David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

In many industries, shareholders like to see executives boldly expanding into new markets. In aviation, not so much.

Qantas Airways Ltd.'s announcement Thursday that it plans to lift capacity on international routes by about 5 percent in the six months through December relative to the same period last year sent its shares down as much as 7.2 percent in early trading, the worst such performance since annual results were released in August.

Liftoff
Qantas shares have finally overtaken their 2007 peak
Source: Bloomberg

It's not hard to see why. Domestic aviation -- particularly for Qantas, which has a local market share north of 60 percent -- is a nice orderly business that the big incumbents can generally carve up among themselves. Venture out on the open skies, and you quickly find there are tougher conditions and a host of more aggressive competitors.

In terms of revenue per available seat kilometer -- a measure of the productivity of a single airplane seat -- the lie-flat beds and branded pajamas bestowed on full-service passengers on Qantas's international routes don't bring in much more than the cheap-and-cheerful sandwich cart seats on budget arm Jetstar.

Foreign Affairs
Qantas's full-service international flights are barely more productive in revenue terms than its budget carrier Jetstar
Source: Bloomberg, Gadfly calculations

With Australia's economy showing signs of improvement after a period of stagnation, that pattern played out clearly in the three months through September. Revenue on domestic routes rose 8 percent from a year earlier, Qantas said Thursday, while on international routes it edged up a mere 0.2 percent.

It would be nice if airlines could always tailor their supply to demand. But unfortunately they can't add and subtract seats one at a time, only in the 150-to-450 seat blocks that constitute a plane-full.

With Virgin Australia Holdings Ltd. and Cathay Pacific Airways Ltd. adding seats on flights between Australia and Hong Kong, and Qantas starting to receive the first Boeing Co. 787 Dreamliners to operate its ultra-long-haul route from Perth to London, it's inevitable that sometimes capacity grows in advance of demand.

Leave Them Wanting More
Qantas's valuation tends to rise when it cuts back on capacity growth, and vice versa
Source: Bloomberg, company reports
Note: ASK = available seat kilometers, a measure of the number of seats available multiplied by kilometers flown.

As Gadfly has argued previously, the temptations and risks of the wider world remain an enduring dilemma for Qantas. Fear of missing out on the outbound Chinese tourism boom risks dragging the carrier away from its more profitable core business.

In recent years, Qantas has showed admirable discipline in limiting its China-bound aircraft to Hong Kong and the Shanghai hub of its partner China Eastern Airlines Corp. With daily flights now being added to Beijing and the addition of cavernous A380 cabins on the Hong Kong route, that restraint looks to be slipping.

Qantas has seen one of the airline industry's great turnarounds since its nadir between 2011 and 2014, and its shares on Monday touched their highest level since the company's 1995 listing. But most of the benefits of this recovery have already been realized, with non-fuel costs moving sideways in recent years.

Cruising Altitude
Qantas has worked to cut costs over the years -- but the low-hanging fruit has already been picked
Source: Bloomberg
Note: ASK = available seat kilometers, a measure of seats on aircraft multiplied by distance flown.

At 4.5 times blended forward 12-month Ebitda estimates, the flying kangaroo's enterprise value is close to the top of its historic valuation range. That seems a risky place from which to embark on an expensive new foreign adventure.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. To be sure, Jetstar is arguably an international airline itself: About 60 percent of reported capacity is on its international routes and the Singapore-based Jetstar Asia brand.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net