MARKETS SPECTATOR: Qantas disquiet

Deutsche Bank says seasonality issues, alliance costs and continuing domestic pressures will likely restrict Qantas profits in the second half to zero.

European giant Deutsche Bank has downgraded Qantas (QAN) to hold from buy as it foresees a weaker second half of 2013 despite their first half result coming in line with guidance.

First half profit before tax was $223 million, versus guidance of $180 to $230 million and Deutsche Bank forecasts of $212 million.

"Whilst operational performance was slightly weaker than expected, profit before tax was aided by lower interest costs. The domestic yield pressures seen in the 2013 first half will in our view continue into the second half and with the company likely to incur a $40 to $50 million downside impact due to the implementation of the Emirates alliance, we expect it will deliver a close to break-even result in second half of 2013," Deutsche Bank said.

The broker notes that no guidance was given for the second half and that the company said the operating environment would remain challenging and volatile. These ties in with seasonality that tends to favour the first half, the broker is of the view that Qantas will only just be able to break even in the coming half. On that basis, they have reduced their full year 2013 profit before tax forecast to $232 million, down from $290 million.

Nonetheless, Deutsche does recognise the fact that the Emirates alliance will likely be the next catalyst for the airline, although it has not included it in its forecasts as Qantas is yet to publicly quantify the benefits from the partnership. Deutsche believes they are unlikely to accrue until full year 2014 anyway.


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Looking at the long term chart above, it looks constructive as the stock continues to grind its way out of the long-term cyclical downturn.

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