Qantas chief executive Alan Joyce has not made an auspicious start to his tenure at the helm of Australia’s national airline, Qantas.

Joyce, the former chief executive of Qantas’ low-cost arm Jetstar, took the reins in November, but was last week forced to admit he and his team had got it wrong, badly wrong.

Net profit for the year to June 30 would be between A$100 million and A$200 million, sharply lower than the A$500 million the airline had forecast at the start of February.

It is almost corporate credo that shareholders be fully informed on profit expectations and furthermore once those expectations are enunciated to the market, a company then delivers at the very least within “cooee” of that target.

Qantas failed on this score. However, what makes this latest profit warning all the more bitter is the earlier forecast was made as the airline raised A$500 million with an share placement to investors.

In retrospect it now looks like those who subscribed to the new capital at A$1.85 a share may not have got the bargain it appeared at the time. Qantas shares are now trading close to their issue price at A$1.93.

The Qantas explanation for the sharp downturn is, as one would expect: “a rapid and significant deterioration in trading conditions.”

This was particularly felt in the international operations. Pricing on the trans-pacific route (Australia to the US) is down nearly 60 per cent since September of last year. While international freight volumes are also significantly lower.

Airlines – despite their glamorous image in the media – are a miserable business. They are a volatile mix of enormous fixed costs and highly variable revenue that leaves operators highly vulnerable to shocks.

It is an industry prone to the whims of a new or existing rival launching onto the turf they have not traditionally occupied. More severe is their leverage into the fortunes of the macro-economy.

and domestic market If the market turns down, airlines are often slow to make necessary cuts to capacity. Instead they decide to tough it out by offering cheaper and cheaper fairs in a bid to keep their airplanes full. And even if one airline acts prudently, they often find themselves suffering from the imprudence of their rivals.

These dynamics are being exaggerated by the, not only, (significant) magnitude of the current downturn, but also by the fact that the slowdown is global rather than regional. Traditionally, weaknesses on routes to growing regions have offset economic difficulties in other markets.

Meanwhile, Qantas’ greater reliance on the corporate market, which is less sensitive to price, has left it relatively more exposed to the economic cycle. In a downturn businesses just stop spending on travel and will not revive travel plans, even in the face of lower fares. This is even more the case in the current downturn.

For all of these reasons one can have sympathy with some slippage in earnings especially as rivals, such as Cathay Pacific, Singapore Airlines and British Airways as well as the airlines body, the International Air Transport Association, have grown increasingly dour about the outlook. IATA numbers for instance show global passenger numbers and freight volumes are sharply down from a year ago and continue to fall at an accelerating rate.

Nevertheless, investors will still struggle with the magnitude of the Qantas' downgrade and the fact the original forecast was struck at a time when the outlook for the world economy was almost universally poor.

Looking forward:

The question now facing investors is whether this massive profit downgrade is just a one off? The flip-side of an industry highly geared to the economic cycle is that its shares will respond quickly once the global economy starts to improve. As a result, an investment in a share such as an airline, if well-timed, can be very rewarding.

Qantas has a strong balance sheet and thus an ability to weather the downturn. Net cash stands at A$2.7 billion, earnings before interest and tax covers its interest bill more than 3 times, while net debt to equity stands at round 30%. It retains an investment grade BBB credit rating from Standard & Poor’s.

Its dominance of the Australian domestic market means it is the ultimate arbiter of capacity on these routes and thus price. Its strategy of offering two brands – Jetstar for the budget traveller, and Qantas for the business traveller – gives it a much greater capacity than its international rivals to configure its fleet for the times.

Joyce, not withstanding the profit warning, also appears to be taking steps to configure the business for the times. Quite apart from his plans to defer expenditure on four new A380 super jumbos, and 12 new Boeing 737, he also appears to be bring his keen appreciation for the economics of low cost carriers to bear.

This was most evident in the recent round of job cuts, which included 500 management positions, addressing perhaps one of the greatest criticisms of Qantas, that it was top heavy.

A seat aboard Qantas may well be one of the best places to luxuriate in a broad economic upturn.