Qantas Profit Rises on Boeing Cash and Long-Haul Revival

Qantas Airways Ltd. (QAN), Australia’s largest carrier, said first-half profit more than doubled after it took cash from canceling orders for Boeing Co. (BA) 787 jets and cut losses on long-haul routes. The shares hit a 10-month high.

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 reduced losses at its international unit by 65 percent after dropping unprofitable routes and retiring older planes amid a battle with Middle East and Asian carriers on long-haul services. An alliance with Emirates on overseas flights, due to begin April 1, will be a “killer combination,” Chief Executive Officer Alan Joyce said in an interview with Bloomberg Television.

“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 loss on international routes in the first half narrowed to A$91 million from A$262 million a year earlier, the company said. Qantas lost A$450 million on long-haul services last financial year amid a fight for passengers with Gulf carriers and fuel costs that ate up about half of revenue on a typical flight between Australia and London.

Emirates Alliance

Joyce has promised to return the division to profit by 2015 as part of a five-year turnaround plan announced in August 2011. The international alliance with Emirates may lift earnings by A$70 million to A$240 million a year once it’s fully implemented in 2014, Macquarie Group Ltd. analyst Russell Shaw wrote in a note to clients Feb. 1.

“Qantas’s international transformation should really start delivering in 2013,” Shaw wrote. “Investors have become increasingly positive” about management’s plans for the unit.

Qantas won provisional approval for its Emirates tie-up from Australia’s antitrust regulator on Dec. 20. The agreement will shift the so-called “kangaroo route” between Australia and Europe to Emirates’ Dubai hub from existing routes via Singapore and Hong Kong.

Demand on the route was running five times higher in the second week of sales than it had been a year earlier under Qantas’s former alliance with International Consolidated Airlines Group SA’s British Airways unit, Joyce said in an interview with Susan Li on Bloomberg Television.

‘Killer Combination’

“It’s off to a great start,” he said. “It’s only been three weeks and there’s probably been some pent-up demand but the combination of Qantas and Emirates together is, I think, a killer combination.”

Bookings to Milan and Barcelona, which now fly via a single stop in Dubai rather than two stops under the British Airways alliance, were up 17 times and 10 times respectively, he said.

Qantas rose 2.8 percent to A$1.66 at the close of trade in Sydney, the highest level since April 18.

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.

The domestic division posted a 34 percent drop in earnings to A$218 million. Budget unit Jetstar posted a 13 percent drop in earnings while profit from the frequent flier division rose 15 percent.

Boeing Agreement

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.

“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.”

The first-half result includes A$125 million received after Qantas canceled an order for 35 Boeing 787 Dreamliners in August, the company said, limiting the impact of A$106 million of one-time costs from firing workers and writing down the value of equipment.

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

Job cuts at investment banks and competition between carriers pushed the price of premium tickets between Asia and the U.S. to $5,827 in January, their lowest level since 2009. That may pick up if the global economy improves, Tony Webber, a former Qantas chief economist and managing director of Webber Quantitative Consulting Pty., said in a Jan. 17 interview.

Rising Demand

The prospects for demand on international routes are “generally improving and likely to continue to do so,” 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.

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.

It’s spent A$9 million refurbishing lounges in Hong Kong and Singapore and will upgrade interiors on 10 Airbus SAS A330-300s flying in the region from late 2014, with flat-bed seats in business class and new entertainment systems, the company said in a separate statement today.

Domestic Battle

It’s doing the same to 20 A330-200s on domestic routes, as well as buying five extra Boeing 737-800s and extending leases on two more, Qantas said.

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 second-ranked Virgin Australia Holdings Ltd. (VAH) ramps up transcontinental routes and Tiger Airways Holdings Ltd. (TGR) expands.

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 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.

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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