Qantas delivers strong first half results, despite soaring fuel costs

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Qantas has posted a strong first half year result in the 2019 financial year despite soaring fuel costs with underlying profit before tax coming in at A$780 million (US$559 million) – still a fall of $179 million on the same period in 2018.

The airline said that fuel shot up 27 per cent by $416 million in the period to $2 billion, but reducing the gap between the increased fuel bill and fall in earnings shows the Group succeeded in substantially recovering much of the higher fuel cost through a 5.7 per cent increase in unit revenue.

Qantas said the strong revenue performance also helped the Group deal with a rise in non-fuel costs, including the impact of a weaker Australian Dollar and higher commission costs, to post record profits in its domestic flying business and Qantas Loyalty.

The domestic division achieved another record profit, up one per cent to $659 million, made up of record earnings from both Qantas and Jetstar.

Qantas International’s revenue increased by almost seven per cent to $3.7 billion but earnings declined by 60 per cent to $90 million compared to $134 million in the same half last year, largely due to a rapid rise in fuel costs (up by $219 million for the half) that couldn’t be fully recovered.

The airline said benefits from the introduction of the Dreamliner into Qantas International continued to flow, as did the upside from hub and network changes. Load factor grew by 1 percentage point to 85.5 per cent and capacity growth rate moderated to 1.3 per cent in a market that grew by 3.8 per cent.

A strong unit revenue performance by Jetstar International helped substantially offset its higher fuel costs, with healthy levels of demand on key leisure routes. Earnings of Jetstar airlines in Asia were reduced by higher fuel costs and airport charges, while Jetstar Japan remained profitable in the half.

Qantas Group chief executive officer, Alan Joyce said: “We’re really pleased with how the business responded to the challenges and opportunities we saw in the half.

“Our dual brand strategy with Qantas and Jetstar in the domestic market meant these segments delivered another set of record earnings. Across our network, capacity is broadly meeting demand, including shifts to capitalise on the continued strength of the resources sector.

“Higher oil prices were a significant headwind and we moved quickly to recover as much of the cost as we could. That’s easier to achieve in the domestic market than on longer international routes, where fuel is a much bigger factor, and that’s reflected in the segment results we’re reporting today.

“We also saw an increase in selling costs, simply due to the commissions associated with the 6 per cent rise in revenue, as well as costs linked to a weaker Australian dollar.

“Importantly, we made good progress against our longer-term strategy. More 787s arrived and more 747s are being retired; Loyalty continued to diversify with new revenue streams to deliver another record result; and we started or completed several lounge upgrades to help maintain the revenue premium Qantas achieves.

“Looking ahead, we’re seeing strong forward bookings. Competitor capacity growth has slowed internationally and is relatively flat domestically. And oil prices have declined from the peaks we saw late last year.

“These factors point to a strong second half and we expect to completely recover our increased fuel costs by the end of this financial year.

“We are mindful of potential signs of weakness in the broader economy and we’re always adjusting capacity to meet demand in individual markets – but overall revenue and yield indicators remain positive.

“Above all, the resilience we’ve built into the business gives us plenty of confidence about our performance going forward.”

Qantas International took delivery of three 787-9s in the half with a further six arriving from the first half of FY20 to take the total fleet to 14. This is facilitating accelerated retirement of the 747 in the next two years; a further three 747s will have been removed by the end of FY19, leaving seven.

As recently announced, Qantas has formalised with Airbus its decision not to take eight additional A380s that it ordered in 2006 but it said it remains committed to a major upgrade of its existing A380s, which begins in mid-calendar 2019.

Several streams of work on Project Sunrise – which aims to deliver non-stop flights from the east coast of Australia to New York and London by 2022 – continued and it remains on-track.

The Qantas Group also announced an ambitious plan to become the world’s first airline to reuse, recycle and compost at least three-quarters of its waste to landfill by the end of 2021. More than 100 million single use plastic items per annum will be removed from lounges and cabins by the end of 2020.

In the process of carrying 50 million people each year, Qantas, Jetstar and QantasLink generate more than 30,000 tonnes of waste – the equivalent weight of about eighty 747 aircraft.

Examples of reduction measures include switching to alternative packaging, donating or composting food and increasing digitisation of paper-based products ranging from manuals to boarding passes.

As for the future, Qantas said with strong forward revenue projections, reduced fuel headwinds and continued transformation, it expects to generate strong net free cash flow during 2H19. Group capacity growth is expected to be flat across domestic and international and fuel cost is expected to increase by 21 per cent in FY19 to $3.9 billion.