Low fares hit Qantas profits.

AUSTRALIA’S Qantas is the latest airline to feel the impact of a competitive international airfare market and subdued economic growth as evidence mounts that the  aviation economic cycle has peaked.

 Lower fares on international routes and subdued domestic demand shaved 3 per cent off Qantas revenues in the quarter ending September 30 but it is still expecting a first-half underlying pre-tax profit of between $A800m and $A850m.

This is below the underlying pre-tax profit of $A921m in the first half of last financial year but the airline noted it would still represent the third best first-half result in its history. It said the result would be helped by cost improvements from its transformation program and lower fuel prices offsetting the slowdown in revenue.

The Australian carrier also expects slower growth in the first half and cut its capacity increase forecast to between 1.5 and 2 per cent, from the previous guidance of 2 to 3 per cent.

Group domestic capacity is tipped to grow by 1 per cent while international growth is forecast to be around 3.5 per cent.

But there are some tail winds from fuel costs, which are forecast to fall from $A1.7 billion in the first half of fiscal 2016 to $A1.5 billion in the latest quarter. Full-year costs are tipped to be no $A3.15 billion and no worse than $A3.2 billion.

Qantas Group chief executive Alan Joyce said the result would be another strong first half for the airline and the group’s reduced cost base, disciplined financial framework would help it to keep performing well in the more challenging international environment.

Mr Joyce said he airline would continue to manage capacity carefully to match demand while investing to build on the group’s competitive advantages,.

“Like most carrier’s globally, we are seeing international fares below where they were 12 months ago, but the impact has been tempered by the competitive advantages we’ve been working hard to fortify, including our strong domestic position and diversified loyalty business,’’ he said.

Overall revenue for the group fell from $A4.11 billion a year ago to $A3.98 billion in the latest quarter despite a 2.5 per cent rise in group passenger numbers to 13.2 million.

First-Quarter unit revenue  from the group’s Jetstar and Qantas domestic operations fell by 2.9 per cent compared to a year ago as the airline was hit by a $28m reduction in resources market earnings, primarily from routes within the resource- rich states of  Western Australia and Queensland.

However, Qantas said domestic conditions beyond the resources sector reverted to a more stable environment seen prior to the run-up to this year’s federal election.

Group international unit revenue was down 6.9 per cent as lower fuel prices, higher capacity growth and increased competition led to lower fares.

“New Qantas international routes continue to meet expectations though have lowered average international unit revenue during their ramp-up phase,’’ it said. “Qantas International increased capacity by 5.8 per cent, with all growth funded by increased utilisation of existing group fleet.’’

Qantas has redeployed aircraft from its domestic operations to international services, primarily to meet growing inbound demand from Asia.

It expects its Jetstar International arm to grow capacity by 4.3 per cent and noted its loyalty program had hit 11.5 million members at September 30 as it signed new partners, including Airbnb.

The flying kangaroo's results came as the  International Air Transport Association said in its October business confidence survey that industry heads expected little change in profits over the next 12 months, consistent with signs that the industry profitability cycle may have peaked.

Most respondents expected growth in cargo and passenger businesses and reported a fall in operating costs for the quarter, it said.

“But given that oil and jet fuel prices have trended slowly higher since bottoming-out in early-2016, most respondents expect input costs to increase over the next 12 months,’’ IATA said. “The outlook for input costs contrasts with expectations for yields and points to a more challenging profitability environment.

“In a reflection of strong competition and the subdued economic backdrop, over 90 per cent of respondents expect passenger yields to remain unchanged or to fall further in the year ahead.’’