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Qantas sees blue skies ahead despite hike in fuel costs

Glenn Freeman  |  21 Feb 2019Text size  Decrease  Increase  |  
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A 10 per cent hike in Qantas's fuel bill has hit the national carrier's bottom line, but overall revenue has risen 5.8 per cent to $9.2 billion and Qantas Domestic, Jetstar Domestic and Qantas Loyalty have all reported record results.

International flights led Qantas's (ASX: QAN) earnings decline, as the segment's underlying earnings before interest and tax plunged 60 per cent, reflecting the higher fuel usage on long-haul versus domestic flights.

By contrast, Qantas's domestic business saw an uptick in EBIT as the company was able to recover most of the higher fuel costs, says Morningstar equity analyst Daniel Ragonese.

Detailed view of a plane wing in flight

Qantas expects fuel-cost growth to moderate in the second half

Underlying earnings from Qantas Domestic operations rose 0.9 per cent to a record $453 million, with a 5.7 per cent increase in revenue.

At the group level, which includes international flights, unit revenue rose by almost 6 per cent.

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However, this only partially offset the 10 per cent growth in fuel costs over the half.

"The international business is more challenging, and much more exposed to the higher fuel cost," Ragonese says.

"But management has indicated the competitive environment has stabilised, and fuel prices have fallen from the recent peak."

Underlying earnings from international operations slipped from a restated $224 million in the prior corresponding period to $90 million.

Qantas expects fuel-cost growth to moderate in the second half, anticipating an annual average of 21 per cent, down from 27 per cent in the six months to 31 December.

Qantas CEO Alan Joyce said strong forward bookings, slowing capacity growth for international competitors and declining oil prices pointed to a strong second half.

But he also flagged a potential softening in Australia's economy, including declining levels of consumer discretionary spending linked to falling house prices and weak wages growth.

While these factors are hitting retailers, Qantas is somewhat insulated, according to Joyce.

"Maybe that's because the new generation of flyers are spending more on experience, less on retail and less on alcohol," he said.

As well as reduced fuel costs in the second half, the carrier predicts an improvement from the prior corresponding period with Easter falling within the school holidays this year.

Qantas raised its interim dividend from seven to 12 cents and launched a $305 million buyback that, once completed, will mean it will have handed back $3.6 billion to shareholders since October 2015.

Qantas shares were trading at $5.76 at 3pm, up almost 2 per cent since the market open and slightly above Morningstar's most recent $5 fair value estimate, as set in August 2018.

is senior editor for Morningstar Australia

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