Markets: Qantas faces a slippery outlook as oil spikes

On the day oil hit a two-year high, Qantas results returned to net profit, albeit a modest one of $6 million. That’s better than the $244 million loss in 2012, Qantas chief executive Alan Joyce will argue. He is right. But it will take more to fully reassure investors.

Again no dividend will be paid. In fact Australia's flag carrier has not paid a dividend since 2009. Qantas’ shares are down 17 per cent this year and 35 per cent since its 2013 high of $1.90 on April 30. Yesterday the stock closed at $1.23.

Qantas’ problem is that domestic and international competition has driven down the company’s yield - that is passenger revenue, excluding foreign exchange, divided by total number of passengers carried, multiplied by the number of kilometers flown.

“A decline in yield was driven by excessive domestic market capacity, a mixed economic environment and aggressive competitive responses,” says Qantas. 

The company’s revenue seat factor or load, which represents the proportion of airline output that is actually consumed, is also sliding.

All this is happening as Qantas’ operating expenses are rising even as it boasts the most modern fleet since privatization. Operating expenses excluding fuel were $9.27 billion in 2013. While fuel costs fell, that may not be in the case in coming months.

Any military action in Syria by western powers has the potential to keep oil, and in turn jet fuel prices, elevated for some time.

Since its low on April 17, the Bloomberg New York Harbor 54-grade jet fuel spot price has climbed 19 per cent. West Texas Intermediate crude rose to US$110.10 a barrel, its highest level since May 2011. Brent crude, which hit a six month high of US$116.61 a barrel, could rise to US$150 a barrel, Societe Generale says.

Compounding this, passenger spend may decline further as the drop in the local dollar makes Australians think twice about overseas travel. The Australian currency is down 15 per cent against the US dollar since April 10 having fallen to US cents 89.48 as of 0953 AEST, from $1.0543.

Competition for foreign travelers and business passengers into the Australian market is likely to be intense as Qantas acknowledges, noting that "foreign carriers are looking to improve yield and leverage cost advantages."

The year ahead for the flying kangaroo could be very tough.