Emirates partner Qantas posts record profit on back of lower fuel prices

Two people watch from a beach as a Qantas plane taxies on the runway at Sydney Airport. AP Photo

Qantas Airways posted a record first-half profit and announced its second capital return in less than six months as chief executive Alan Joyce’s cost-cutting programme and lower fuel prices boost Australia’s largest airline.

Underlying pretax profit in the six months ended December 31 more than doubled to A$921 million ($666m) from A$367m a year earlier, Qantas said in a statement on Tuesday. Analysts expected an underlying profit of A$908.7m, according to the average estimate compiled by Bloomberg.

Mr Joyce said he has no plans to step down from the role that he’s held since 2008 as a A$2 billion turnaround programme announced two years ago continues to bear fruit. The Sydney-based airline on Tuesday announced a stock buyback of as much as A$500m, taking the capital return to more than A$1bn since August.

Investor confidence in Mr Joyce’s ability to bring back on track an airline that only two years ago had widening losses, a stock near a record low and junk-rated debt helped the shares surge 31 per cent in the past 12 months, outperforming a drop in the Australian benchmark index. Shares fell 3.3 per cent to A$3.86 at 12.18pm after a gain in oil prices raised concerns that future profits may be dented. The S&P/ASX 200 Index fell 0.3 per cent.

“Qantas shares have surged in the past two years and for it to continue on the same path, earnings will have to be staggering,” Evan Lucas, a Melbourne-based market strategist at IG, said. “Also the fact the cost-cutting programme is reliant on cheaper fuel is playing into investor minds after the increase in oil prices overnight.”

Underlying fuel costs in 2016 are expected to be no more than A$3.4bn, the airline said. Qantas said it expects to reap A$450m in benefits from Mr Joyce’s turnaround in 2016.

Qantas boasted free cash flow of A$770m in the six months ended December 31, allowing it to buy back shares. As the airline continues to reduce debt and benefit from the turnaround measures, it will have more “opportunities” to return capital to shareholders, Mr Joyce said on a media call. The airline will assess its capital levels ahead of its full-year earnings and determine ways to distribute capital then, he said.

The airline hasn’t paid a regular dividend since 2009 and as its earnings are rising, investors are looking for regular payouts. Reinstating the dividend would say more about the airline’s long-term health than one-off cash returns or stock buybacks, Sean Fenton, a fund manager at Sydney-based Tribeca Investment Partners, said before the earnings.

Net income in the half year climbed to A$688m from A$203m reported a year earlier, the company said. Revenue climbed 5 per cent to A$8.5bn, Qantas said.

Just two years ago, Mr Joyce laid out a transformation programme as losses widened and the stock hovered near a record low. Qantas was locked in a market share battle with Virgin Australia and the Australian government was refusing to guarantee Qantas’s junk-rated debt.

Mr Joyce pledged to chop A$2bn in costs, sell or delay the delivery of about 50 planes and axe about 5,000 workers. He has also pared back unprofitable international routes in favour of alliances with Emirates and American Airlines.

The cost-cutting programme delivered A$261m of benefits during the half-year, Qantas said on Tuesday. The airline has saved about A$1.4bn so far out of Joyce’s A$2bn target since 2014, it said.

Qantas forecast A$1bn capital expenditure for the year, which will rise to as much as A$4.5bn in the next three years, it said. It expects to increase capacity across the network by 5 per cent this year, it said.

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