Key Points: 

  • Input costs for airlines are elevated due to high labour and fuel costs, but strong demand is driving profits.
  • These strong conditions aren't expected to persist. Competition and pricing competition is coming back both for Qantas and Air New Zealand, both internationally and domestically.
  • In the Australian domestic market, Virgin Australia is preparing for an IPO, Rex has been expanding into more profitable domestic routes, and private-equity-backed Bonza has just received approval to fly in Australia.

Transcript: 

Angus Hewitt: Input costs are elevated for airlines at the moment. Their two highest cost items, their two biggest cost items, fuel, expensive; labor expensive. But that doesn't mean profitability for airlines is being constrained at the moment.

Capacity is really limited, whether that's due to recommissioning mothballed aircraft or mostly that's just due to getting enough labor on board to fly the things. Because capacity is constrained, but demand is still strong, we're seeing full planes. We're seeing expensive tickets and we're seeing exceptional profitability for Qantas (QAN) and for Air New Zealand (AIZ).

But we don't expect these really good conditions to persist. Capacity is coming back. Competition is coming back and pricing competition is coming back both for Qantas and Air New Zealand, both internationally and domestically.

In the really lucrative Australian domestic market, you've got Virgin risen from the ashes of administration, you've got Rex, which has expanded into more profitable domestic route since the pandemic, and you've got a private equity backed upstart called Bonza budget airline, which has just received its approval to fly in Australia. So I think we're really going to see a lot more competition coming back in the medium term.