Qantas: Result 2016

A record profit for this airline isn't enough to tempt us.

Working for an airline certainly has its perks: Qantas Airways staff are to receive a $3,000 ‘record results bonus’ thanks to a bumper net profit of $1.0bn. Underlying pre-tax profit rose 57% to $1.5bn, which was driven by lower fuel costs and $400m of cost-cutting initiatives.

This was particularly noteworthy because overall revenue fell 2% to $5.7bn due to a 1% reduction in carry capacity. Jetstar fared better with revenue increasing 5% and underlying earnings before interest and tax doubling to $452m. Jetstar’s new Australia-Japan leg turned a profit for the first time and the business is adding eight new aircraft.

The company returned $505m, or 23 cents per share, to shareholders during the year and completed a $500m share buyback. The cash return is to continue this year with the board declaring a final dividend of 7 cents – Qantas's first dividend since the financial crisis in 2009 – and a second buyback of $366m, which should reduce the share count by around 5%.

Still, we would prefer that the company scrap the buyback and pay out the cash as dividends. Qantas is extremely capital intensive and produces low returns on capital ‘through the cycle’, despite the occasional year of decent returns. Over the past decade, Qantas has produced an average net profit of just $61m, yet required more than $3bn of shareholder equity to do so. We think the cash is better off in the hands of shareholders than being used to buy stock in a below average business, especially with the share price now twice what it was a couple of years ago.

Management expects a 2–3% increase in capacity during 2017 but did not provide profit guidance. We commend management for the successful cost cutting, but this is still a company whose financial fortunes are tied to factors outside management’s control, such as volatile fuel prices, currency movements and intense competition. The risks are many and we’re sticking with AVOID.

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