Mining downturn to hit airlines

Qantas and Virgin could see their regional and charter operations under pricing pressure

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Fly-in,fly-out (FIFO) airlines could be under pressure as the downturn in the mining and resources industry continues.

Those airlines include Qantas Airways (ASX:QAN) and its subsidiary QantasLink, and Virgin Australia (ASX:VAH), which purchased regional airline SkyWest Airlines earlier this year. Qantas holds the lion’s share of Western Australia’s FIFO market, and is targeting 40% of the market. The airline’s share has been helped thanks to its new contract with Hancock Prospecting for its Roy Hill project, and winning the Fortescue Metals Group (ASX:FMG) charter contract from SkyWest.

The Fortescue contract is estimated to be worth up to $35 million annually to Qantas’ Network Aviation unit in Perth, which it acquired in 2010 for $30 million. In March 2012, Qantas was targeting an extra $150 million in annual revenues from flying mine workers to remote sites.

Like all mining services companies, Qantas and Virgin will be under pricing pressure as miners cut costs and cancel or shelve projects. But the industry is still a high priority for Qantas, with CEO Alan Joyce stating last month that it had a clear advantage in the key resources states of Western Australia and Queensland. An estimated 100,000 resources workers travel by FIFO, but small operators have been snapped up by the major airlines.

Brisbane-based Alliance Aviation (ASX:AQZ) is showing no fear though, with plans to add an additional two aircraft to its fleet of 29 planes in the 2014 financial year. “Whilst market conditions have resulted in a minor contraction of flying on existing contracted routes, Alliance has maintained an increasing diversification of revenue sources,” chief executive Scott McMillan said. Alliance has contracts with BHP Billiton (ASX:BHP), Santos (ASX:STO), Xstrata and Newmont across Queensland and the Northern Territory.

Offsetting the downturn in the mining industry could be the growth of Australia’s oil and gas industries. Several companies are exploring in remote regions of Western Australia, Queensland and South Australia, which could see demand for FIFO services increase.

Foolish takeaway

Alliance Aviation could be in the sights of both Virgin and Qantas, as they look to build scale in the FIFO aviation market, and gain access to other FIFO regions around Northern Australia.

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