After a disastrous 2014, this year is shaping up to be much better for Qantas and Virgin Australia with lower fuel prices and a pull-back from a bruising battle for market share set to lift profits.
According to ratings agency Moody's, the recent slide in oil prices will benefit airlines much more than their passengers as they use lower fuel costs to boost profit margins, rather than reduce fares.
Moody's latest report on the global aviation industry suggests airline's profit margins - the percentage of revenue a company gets to keep as profit - will rise from between 8.5 and 9.5 per cent on average last year to between 12 and 14 per cent this year.
The lower fuel price should help both Virgin and Qantas, which impose substantial fuel surcharges on customers.
Qantas has an annual fuel bill of $4.5 billion, though its hedging program will reduce the benefit it receives from the halving of oil prices since mid 2014.
The report said Qantas and Virgin had some of the weakest profit margins in the industry as a result of a fight for market share that saw both companies continue to lift capacity - by adding more planes and services - and lowering fares.
But it said a decision from both airlines in late 2014 to keep capacity steady should lift their profits.
"The recent experience of Qantas Airways and Virgin Australia in the domestic Australian market demonstrates that there are no winners in market share battles," Moody's said.
"The recent pull back of capacity growth by each should help improve the financial results of these two players in 2015, all else equal."
Qantas posted a net loss of $2.8 billion for 2013/14, while Virgin's loss was $356 million.
Qantas has forecast an underlying profit of between $300 million and $350 million for the first half of the 2014/15 financial year.
Virgin expects its full year result will be a significant improvement on last financial year.
Share
