Transport Airlines

Qantas’ profits double after Aussie airline drops half its overseas routes

Feb 22, 2013 12:18 am

Skift Take

Qantas is struggling to hold onto its 65 percent share of the domestic market, but its upcoming tie-up with Emirates should boost its overseas profits making it less reliant on competitive domestic routes.

— Samantha Shankman

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Peter Russell  / Flickr

A Qantas B747 on its way to Lord Howe Island located in the Tasman Sea between Australia and New Zealand. Peter Russell / Flickr


Qantas Airways Ltd., Australia’s largest carrier, said first-half profit more than doubled after receiving cash from canceling orders for Boeing Co. 787 jets and cutting losses on long-haul routes. The shares surged.

Net income rose to A$111 million ($114 million) in the six months ended Dec. 31 from A$42 million a year earlier, the Sydney-based carrier said in a statement today. Profit before tax and one-time items at A$223 million beat the A$212 million median of four analyst estimates compiled by Bloomberg.

Qantas shares rose as much as 5 percent, headed for their best performance in more than five months, as losses at the international unit shrank 65 percent after dropping unprofitable routes and retiring older planes. Chief Executive Officer Alan Joyce is tying up with Emirates on overseas flights and fighting to retain a 65 percent share of the domestic market as Singapore Airlines Ltd. ally Virgin Australia Holdings Ltd. adds services and upgrades jets.

“It could mark a turning point in the way the market perceives Qantas,” Peter Esho, chief market analyst at City Index Ltd., said by phone from Sydney. “They’re spending less cash, they’re losing less money, while ensuring the fleet is up to the competition.”

The first-half result includes A$125 million from the agreement negotiated with Boeing, the company said, limiting the impact of a A$106 million of one-time costs from firing workers and writing down the value of equipment. Industrial action, which resulted in management grounding Qantas’s global fleet for two days in October 2011, cost A$194 million last financial year.

Shares rise

“We have just started realizing the benefits of the changes we have made,” Joyce told a briefing in Sydney. “Those benefits will become greater next year.”

Qantas rose 8 cents to A$1.695 as of 11:15 a.m. in Sydney, the highest level since April 4.

The operating environment “remains challenging and volatile,” Qantas said. The airline didn’t provide a full-year forecast.

“In terms of the things they can control they look to be doing the right stuff,” Will Seddon, who helps manage about A$350 million in funds including Qantas stock at White Funds Management Pty. in Sydney, said by phone before the result. “They’ve got this issue of losing a whole load of money on international routes.” White owns Qantas stock.

Group revenue in the six-month period was A$8.2 billion, compared with A$8.05 billion a year earlier while earnings before interest and tax rose 12 percent to A$310 million.

International losses

The domestic division posted a 34 percent drop in earnings to A$218 million while losses on international routes narrowed to A$91 million from A$262 million a year earlier.

Budget unit Jetstar posted a 13 percent drop in earnings while profit from the frequent flier division rose 15 percent.

Qantas carried 24.7 million passengers in the six months, 4.3 percent more than a year earlier. Yields, the average price a passenger pays to fly a kilometer, fell 2.9 percent, the airline said in the statement today.

Qantas won provisional approval for its Emirates tie-up from Australia’s antitrust regulator on Dec. 20. The regulator proposed to review the deal after five years and set a minimum amount of capacity the carriers can add on routes between Australia and New Zealand.

The agreement will see the so-called “kangaroo route” between Australia and Europe shift from Singapore and Hong Kong to Emirates’ Dubai hub, and help the Australian airline save on fuel costs that account for about half of revenue for a typical flight to Europe.

Revamped schedule

“We remain confident in Qantas’s strategy of reducing costs and building alliances to turn around the international unit,” Matthew Spence, an analyst at Bank of America Corp.’s Merrill Lynch unit, wrote in a note to clients Feb. 1.

The carrier will use capacity freed up by the Emirates deal to reschedule its Asian arrival times in a bid to improve its connections and increase the appeal to business class passengers, Qantas said Feb. 4.

Qantas will also look at whether it will exercise options to buy as many as 50 Boeing 787-9 aircraft to add direct flights to Beijing, Delhi, and Mumbai. The airline has spent A$9 million upgrading lounges in Hong Kong and Singapore and is considering refurbishing its Airbus SAS A330 aircraft to include lie-flat beds in business class.

Domestic battle

Joyce has pledged to defend the carrier’s current 65 percent share of Australia’s domestic market, which he considers most lucrative. That’s meant adding new services during the first half as Virgin ramps up transcontinental routes and Tiger Airways Holdings Ltd. returns to full operations after flight restrictions imposed after a botched landing in 2011 were lifted.

Capacity on Qantas-branded domestic routes was 3.2 percent higher in November than a year earlier and 18 percent higher on the Jetstar low-cost network. That outstripped a 0.5 percent increase in passenger traffic at the main airline and 15 percent rise in traffic at the budget unit, according to regulatory data.

Group yield, a measure of the revenue earned per seat, per kilometer, would be lower in the first half as a result, Qantas said Nov. 30. When airlines increase capacity faster than the market demands, they have to cut prices to limit the number of empty seats.

An index of domestic business class airfares hit a 12-year low in December as Virgin’s attempt to break into the corporate travel market broke an effective monopoly Qantas had enjoyed on the trade since the collapse of Ansett Holdings Ltd. following the Sept. 11, 2001 attacks.

Qantas’s share of domestic corporate travel was 84 percent in the half after it renewed 40 major accounts and added 39 new clients, it said.

Virgin is selling business class tickets at about a 50 percent discount to Qantas between Sydney and Melbourne and 25 percent off between Sydney and Perth, Russell Shaw, an analyst at Macquarie Group Ltd. in Sydney, wrote in a note to clients Feb. 1.

Qantas has lifted advertised fares on the routes by 8 percent and 5.5 percent respectively, Shaw wrote, while increasing discounts on corporate accounts to the extent that yields have shrunk.

Editor: Robert Fenner and Anand Krishnamoorthy.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net. To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net.

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