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(Bloomberg Opinion) -- You might not have thought it three months ago, when the spread of Covid-19 forced Qantas Airways Ltd. to halt international flights and drove its shares to their biggest percentage drop in eight years. But a global pandemic could wind up being good news for the company.
Australia’s dominant airline is now something close to a monopoly player. Virgin Australia Holdings Ltd., its erstwhile local rival, went into administration in April. While limited flights are still operating, it’s unlikely to offer aggressive competition until a rescuer comes along, and possibly some time after that.
That’s a fortunate position to be in. For carriers around the world, domestic operations tend to do better than international ones, since competition is usually weaker while shorter distances offer productivity benefits. This advantage is accentuated by the coronavirus, which has more or less shut down cross-border aviation on a global basis.
Few carriers have as impressive a redoubt as Qantas can boast in Australia. Just a handful of domestic markets are larger in terms of passenger traffic. Of those, only India and Japan have an airline on a par with Qantas in terms of dominance, and most have suffered far worse from the virus.
The company’s position is likely to be further solidified by a A$1.9 billion ($1.3 billion) capital raising announced Thursday. If you think this is some sort of desperate rescue move, have a look at the slim discount — just 3.3% or so to the previous day’s share price, once you account for dilution from issuing new stock.
The advantage for airlines in the current crisis is that while the industry’s fixed costs are famously high, a lot of them aren’t nearly as fixed as the term would suggest. About 60% goes toward fuel, route and landing fees, as well as maintenance and depreciation, which is only incurred to the extent that flights are actually operating. The A$8.2 billion that Qantas expects to save over the coming 12 months amounts to about half of typical annual costs. Only A$600 million of the total will come from the difficult business of restructuring, with most of the savings resulting from simple expedients like burning less fuel.
The international business that will be most severely hit accounts for less than 20% of profit in a good year, despite making up nearly half of Qantas’s seat capacity. Resisting the temptation of unprofitable overseas expansion is a strategy we’ve long urged on Chief Executive Officer Alan Joyce.
Idling its gas-guzzling, hard-to-fill A380s — another measure announced Thursday — is also long overdue. Qantas shareholders have a habit of welcoming fleet writedowns, like the charge of up to A$1.4 billion that will result from that decision. In both areas, the coronavirus is providing the perfect opportunity to do what Qantas should have been doing anyway.