How to profit on Qantas

Qantas has limped across the profit line with a reduced cost base and a new global partner.

If it is a consistent return you are after from an airline investment, then stick to buying tickets.

As the Bledisloe Cup of airline battles graphically illustrated this morning, the airline business is a case study of instability. The Qantas (QAN) Wallabies again limped from the field bloodied and bruised – although after a much improved performance – as All Blacks domination remained intact.

A decade ago it was an entirely different story; the Flying Kangaroo ruled the skies while Air New Zealand was busted, requiring a taxpayer bail-out.

Air New Zealand this morning delivered a 156% lift in net earnings to $182 million, making it one of the world’s most profitable international operations. Qantas emerged from last year’s massive losses to scrape over the line with a $5 million profit.

As is the trend these days, Qantas boss Alan Joyce pointed to the underlying earnings which at $192 million, a result that walloped analyst expectations of just $76 million and was greeted with wild applause by investors who pushed Qantas shares 9% higher in early trade.

But the figures are hazy, boosted by a damages settlement from Boeing, a change in accounting treatment on ticket revenues and asset sales.

Perhaps the most optimistic observation from the result was the turnaround underway in the international division following Qantas’s decision to unwind its partnership with British Airways and hook up with Emirates.

The international division’s losses have almost halved to $291 million although the domestic market remains hugely competitive, with earnings down 21% on last year, while the Jetstar expansion into Asia continues to crimp earnings.

The decline in the Australian dollar longer term should aid the recovery by boosting offshore income and lifting inbound tourism, but is expected to create pain in the immediate term by pushing fuel prices higher.

Qantas has reduced costs by 19% since 2009 and gearing has been reduced. But no-one ever cut their way to profitability.

And as Alan Joyce this morning warned, the expansion and investment in its Asian routes was a long term strategy that would not deliver an overnight payoff.

Factor in gyrating fuel prices, the potential for global political instability, currency shifts and an industry dominated by government owned competitors that operate without commercial imperatives, and Qantas faces a tough future.

Source: Bloomberg

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