Qantas Airways Ltd., Australia’s biggest carrier, jumped the most in a year as it forecast a return to profit, after posting a record A$2.84 billion ($2.7 billion) annual loss.
The group will be profitable in the six months to December as an oversupply of seats subsides and a A$2 billion cost-cutting program starts to pay off, the Sydney-based airline said in a regulatory statement today.
The prospect of renewed profits provides breathing space for Chief Executive Officer Alan Joyce as he cuts 5,000 jobs amid a market share war that’s driven down ticket prices. He’s decided against selling part of Qantas’s loyalty program, its most profitable division, and is turning the loss-making international unit into a separate operating company.
“They seem like they may have turned the corner,” Sam Fimis, a private client adviser at Patersons Securities Ltd., said by phone from Melbourne. The forecast of a return to profit “gives traders and investors an excuse to have a look at the stock again.”
Qantas shares rose almost 7 percent to A$1.385 at the close in Sydney, taking this year’s gain to 26 percent. It was the best performer on the S&P/ASX 200 index today.
Net losses in the year ended June 30 were A$2.84 billion, driven by A$2.56 billion of writedowns to the company’s fleet as a result of the new structure for Qantas International. Losses before tax and one-time items were A$646 million, narrower than the A$763 million median of eight analyst estimates surveyed by Bloomberg News.
That picture will improve over the coming six months, Joyce told a media conference after the results. Qantas will see about A$300 million of benefits from its cost-cutting program in the period, while reduced depreciation costs as a result of the fleet writedown will save about A$200 million a year, the company said.
“It’s going to be a big challenge for them to return to profitability in such a short time frame,” Oliver Lamb, director of Pacific Aviation Consulting in Sydney, said by phone after the result. “Qantas has got to turn round profits in three areas and that’s not easy.”
Of its passenger units, only the Qantas domestic brand made money during the year. Losses before interest, tax, and one-time items doubled to A$497 million at Qantas International while budget carrier Jetstar turned to a A$116 million loss. Qantas Domestic made a A$30 million profit.
“It has absolutely been the most challenging environment that we’ve faced,and the results, as I’ve said, have been confronting,” Joyce told the media conference today. “This business will get back to profitability, subject to factors beyond our control.”
An oversupply of seat capacity on domestic and international routes is now easing. Domestic airlines in Australia, where Qantas has engaged in a market share war with Virgin Australia Holdings Ltd., boosted capacity at the slowest pace since 2012 in the year to June, according to government data.
Qantas isn’t growing its own capacity at all in the current quarter. Corporate fares hit a 31-month high in June.
Total revenue in the 12 months was A$15.35 billion, down 3 percent from A$15.9 billion a year earlier. Yield, a measure of revenue per seat per kilometer, fell to 10.02 Australian cents from 10.29 cents a year earlier. That’s the lowest level since it touched 9.8 cents in 1997, according to data compiled by Bloomberg.
The carrier lost both its investment-grade credit ratings over the past year, and a record first-half loss in February prompted the Irish-born CEO to take a paycut, sell or delay delivery of 50 planes, and lobby the government to remove foreign-ownership restrictions. The 5,000 job cuts represented more than one in seven of the company’s workers at the time.
Qantas has halted new Jetstar ventures while the group focuses on the transformation. The new holding structure for its international division will give it the option to “attract external investment and participate in partnership opportunities,” according to today’s statement.
The company will keep its Qantas Loyalty frequent flier program, which posted A$286 million of earnings, after a review found “insufficient justification” for a partial sale.
The 94-year-old airline, which posted net profit for 18 consecutive years after it was part-privatized in 1993, is also saving cash by cutting spending on planes and other capital equipment to A$1.5 billion over the next two years.
Australia’s international passenger traffic has risen by 20 percent over the past five years, to 32 million in the 12 months ended May, according to government data. Domestically, there were 58 million passengers, up about 12 percent over the same period.
International competitor capacity growth is expected to be
2.4 percent in the first half of the 2015 financial year and domestic market capacity growth is expected to be around 1 percent, both below recent trends, Qantas said today.
That is a “potential turning point for the stock” Mark Williams, an analyst at CIMB Group Holdings Bhd. in Sydney, wrote in a note to clients Aug. 5. “With operating conditions slowly improving as capacity growth subsides, yields should gradually begin to improve” over the year ahead.