Qantas Posts Record Profit on Joyce's Cuts and Cheaper Fuelby and
Airline announces stock buyback of as much as A$500 million
Shares fall 5% on concerns fuel price rise may dent profits
Qantas Airways Ltd. posted a record first-half profit and announced its second capital return in less than six months as Chief Executive Officer Alan Joyce’s cost-cutting program and lower fuel prices boost Australia’s largest airline.
Underlying pretax profit in the six months ended Dec. 31 more than doubled to A$921 million ($666 million) from A$367 million a year earlier, Qantas said in a statement Tuesday. Analysts expected an underlying profit of A$908.7 million, according to the average estimate compiled by Bloomberg.
Joyce said he has no plans to step down from the role that he’s held since 2008 as a A$2 billion turnaround program announced two years ago continues to bear fruit. The Sydney-based airline on Tuesday announced a stock buyback of as much as A$500 million, taking the capital return to more than A$1 billion since August.
Only two years ago the airline had widening losses, a stock near a record low and junk-rated debt. Investor confidence in Joyce’s ability to bring Qantas back on track helped the shares surge 29 percent in the past 12 months, outperforming a drop in the Australian benchmark index.
Shares fell 5 percent on Tuesday to A$3.79, the most in four months, after a gain in oil prices raised concerns that future profits may be dented. The S&P/ASX 200 Index declined 0.4 percent.
“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 Ltd., said by phone. “Also the fact the cost-cutting program 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$3.4 billion, the airline said. Qantas said it expects to reap A$450 million in benefits from Joyce’s turnaround in 2016.
Qantas boasted free cash flow of A$770 million in the six months ended Dec. 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, 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$688 million from A$203 million reported a year earlier, the company said. Revenue climbed 5 percent to A$8.5 billion, Qantas said.
Just two years ago, Qantas was locked in a market share battle with Virgin Australia Holdings Ltd. and the Australian government was refusing to guarantee the airline’s debt.
Joyce pledged to chop A$2 billion in costs, sell or delay the delivery of about 50 planes and ax about 5,000 workers. He has also pared back unprofitable international routes in favor of alliances with Emirates and American Airlines.
The cost-cutting program delivered A$261 million of benefits during the half-year, Qantas said Tuesday. The airline has saved about A$1.4 billion so far out of Joyce’s A$2 billion target since 2014, it said.
Qantas forecast A$1 billion capital expenditure for the year, which will rise to as much as A$4.5 billion in the next three years, it said. It expects to increase capacity across the network by 5 percent this year, it said.