Qantas sets sights lower for 2014

Qantas (ASX: QAN) is expecting some turbulence in its future flight plans. The company announced Friday that it expects its group yields to fall between 2% and 3% for the first half of fiscal 2014. “The domestic market is still absorbing capacity growth that has been double the long-run average,” Qantas Chairman Leigh Clifford told analysts at its annual meeting, “and this growth has come at the same time as weak underlying demand across the market, from the leisure to corporate segments.’’

Citing volatile economic conditions, the company remained mum on earnings guidance for this year, but the forecast announcement alone proved enough to push share prices down 3.4% on Friday, erasing Thursday’s 3.1% gains.

Fasten your seatbelt

Investors need to keep their eyes on two main indicators: overall flight use and competition. The first is a direct result of the global financial crisis, and comes from corporations cutting back on overall business travel. As communication technology improves, corporate travel (airlines’ biggest margin money maker) could be on an overall decline that may never pick up. Clifford himself noted that there is already a “lag effect” from a rise in business confidence translating to travel, but that lag effect could prove lasting.

But even if flight volumes fluctuate, air travel isn’t going anywhere. The second and more important area for investors to watch is competition. Qantas and Virgin Australia Holdings (ASX: VAH) continue to battle for high-end customers, but they’ve also taken their fight to the street with budget carriers Jetstar and Tigerair. Qantas was first to the game with Jetstar, but Virgin’s controlling stake purchase in Tigerair this year shows that the airline’s not turning a blind eye to this mass market niche yet.

Sydney Airport’s (ASX: SYN) September numbers provide further fodder that air travel is on the rise, with domestic flights up 2.3% and international flights up 4.1% year-to-date. With positive growth from Australia’s largest airport, Qantas may be pointing its finger a bit too pointedly at the macroeconomic environment.

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Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.

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