Qantas is flying towards its best annual profit result in seven years as it targets greater benefits from cost-cutting, significant fuel savings and subdued competition on domestic and international routes.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
A year after one of the tumultuous periods in its 95-year history, Qantas delivered better-than-expected earnings for the first half as its international operations soared into the black, and it benefited from its cost-reduction strategy and an end to a capacity war with Virgin Australia in the domestic market.
Qantas posted a first-half net profit of $204 million, a significant turnaround from a $235 million loss in the prior period. It was its strongest half-year result in four years, and boosted Qantas shares by as much as 7 per cent on Thursday before they closed up 4¢ at $2.84.
Chief executive Alan Joyce said its transformation plan was the key driver of the strong first-half result, delivering $374 million in benefits during the period.
"We wouldn't be making any money without the transformation," he said.
Unveiling the turnaround result, Qantas has made clear its focus will be on completing its three-year cost-cutting program, and paying down $1 billion in debt by the end of the year, before it considers resuming dividend payments to shareholders. It has not paid a dividend since 2009.
The airline has forecast further improvement in the second half, helped by a lower fuel bill, but is cautious about demand in the domestic market, noting the impact of a slowdown in the resources industry. Nevertheless, the likelihood of Qantas posting a $1 billion pretax profit this financial year has increased significantly with analysts expected to upgrade their full-year forecasts.
Using its preferred metric, Qantas's underlying pretax profit of $367 million, which compared with a $252 million loss previously, was significantly better than expected by investors. It also topped the airline's own forecast three months ago of a profit of up to $350 million. Revenue rose 2 per cent to $8 billion.
Long tagged a troubled part of the company, Qantas's international business delivered the standout performance, swinging to a $59 million pretax profit from a $262 million loss.
Importantly, Qantas said an improvement in yields – or return on fares – had continued in the first weeks of the second half. The return to profitability was significant given losses from Virgin's international business which, although much smaller than its rival's, widened during the half.
Qantas plans to boost capacity by up to 2 per cent in the second half, most of which will be due to more flying by the international operations. There will be more flights to Los Angeles, Santiago and Honolulu.
The results for the group were helped by a $208 million depreciation benefit following a write-down of the international fleet last year. The benefit was split between the international and domestic businesses.
Qantas did not give profit guidance for the second half but said overall demand was stable. However, it noted that demand was mixed in the domestic market, a point Virgin also made last week.
Nevertheless, Qantas said capacity in both domestic and international markets was moderating, and yields had stabilised and were in the early stages of recovery.
The airline has raised its targeted benefits from its cost-cutting program to $675 million this financial year, from $600 million previously.
"They have done a great job on their transformation targets," Deutsche Bank analyst Cameron Mcdonald said.
The airline expects its fuel bill to be no more than $4 billion this year, which equates to a saving of more than $450 million in the second half. It was just $30 million in the first half.
Qantas's domestic business delivered a $227 million pretax profit for the half, up from $57 million previously.
"We still see a very mixed market so we will need to be responsible with the capacity we are putting in there," the departing boss of Qantas domestic, Lyell Strambi, said.
The airline is yet to make a decision on whether it will exercise options to buy new Boeing 787-9 Dreamliner aircraft for its international business. Mr Joyce said new aircraft would have to be "brought in when the balance sheet of Qantas is strong enough to take it".