High hopes for Qantas hikes

Airline stocks are an investment for the brave or foolhardy.

Since their 52-week high of $1.90 on April 30, Qantas Airways shares have plunged 34% to $1.26. Virgin Australia shares have been far more choppy. Over the last 12 months Virgin's stock has reached a high of 51 cents on November 7 last year and a low of 38 cents on May 16 this year. The stock yesterday closed at 45.5 cents, nears its 12-month average of 43.77 cents, according to Bloomberg data.

Qantas has blamed currency fluctuations for its higher fuel costs. US oil prices are up 14% this year, and hedge funds are betting for further increases. Airlines usually pay their fuel bills in US dollars, and the Australian dollar has dropped 15% since April 11, when it was trading at $1.0545 against the US currency. Late on Wednesday night, the Australian dollar fell as low as 89.35 US cents – its weakest level since September 2010.

In an effort to counteract higher fuel costs, Qantas this week announced an increase in surcharges on domestic and international flights. It is also increasing its domestic fares by an average of 2-3%. Some analysts, such as Citigroup’s Anthony Moulder, expect Virgin to follow suit.

Moulder thinks the increases in base fares are actually a good sign, because they indicate “…that non-leisure travel is holding up well enough for these increases to positively contribute to [Qantas'] revenue.” He forecasts the carrier's shares will rise to $2.30 in the next 12 months.

That’s an 83% increase – perhaps a tad optimistic, given the dire state of Australia's consumer confidence (see Adam Carr's Can Australia avoid a confidence death spiral?).