Why the Qantas share price has crashed today

The Qantas Airways Limited (ASX: QAN) share price is coming back to earth today, losing 11.6% to $3.59 in mid-morning trading, after the airline said it was expecting weak demand for domestic services.

Qantas says that it has revised its planned capacity additions due to “some softness in demand, related to the upcoming federal election and recent drop in consumer confidence in Australia.

The company says weakness emerged over the peak Easter and school holidays period in late March and has continued in forward bookings in April and May. As a result, domestic capacity growth in the final quarter of the 2016 financial year (FY16) will now be negative compared to the previous year.

Qantas has also revised down its previous forecast of domestic capacity growth of around 2% in the second half of FY16 to growth of between 0.5% and 1%.

International demand has also weakened, with the airline removing 3 Sydney-Los Angeles services and redirecting capacity to Singapore and Hong Kong. Competitive pricing on US and UK routes meant revenue per available seat kilometre (RASK) for the international operations has dropped compared to the prior year.

Overall Group capacity is expected to increase by 5% to 6% in the second half of FY16, mostly driven by cost-efficient growth from Boeing 787 Dreamliner aircraft at Jetstar International and increased fleet utilisation at Qantas International.

External risks

The announcement reflects one of the main issues of investing in an airline and that is external shocks over which the company has no control. When airlines can offer airfares to the US for around $1,000 Australian dollars or less, consumers can pick the cheapest, or even the airline of their choice for not much more. Qantas is even offering return flights from Brisbane to Los Angeles for $1,062, making it extremely difficult to make a profit.

To make sure their planes are mostly full, airlines don’t have much choice but to match or lower their prices to keep their customers, or cancel flights like Qantas has been forced to do.

As yet, we don’t know what the financial impact will be on the company’s financials, but it appears to be immaterial – so far.

Foolish takeaway

The risk of unexpected and external shocks is one major reason why most Foolish (capital ‘F’) investors avoid airline shares. The Qantas share price has certainly done very well over the past 18 months, but it’s very easy for the share price to decline rapidly – as we are seeing today.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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